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Funds and asset management regulatory news, 16 November 2020

FIG Bulletin

16 November 2020

Selected regulatory updates of interest to the funds and asset management sector. See also our Related Materials links for regulatory updates of broad application.

Performance fees in UCITS and certain types of AIFs: ESMA guidelines

The European Securities and Markets Authority (ESMA) has published the official translations for guidelines on performance fees in UCITS and certain types of alternative investment funds. The guidelines, which apply to fund managers and national competent authorities (NCAs), aim to promote convergence in the way that NCAs supervise performance fee structures and the circumstances in which performance fees can be paid.

The guidelines state that they apply from two months after the date of their publication on ESMA's website in all EU official languages (that is, 5 January 2021).

NCAs must notify ESMA whether they comply, or intend to comply, with the guidelines within this two-month period.

COVID-19: ESMA report on ESRB recommendation on liquidity risk in investment funds

On 12 November 2020, ESMA published a report in response to the European Systemic Risk Board's (ESRB) recommendation on liquidity risks in investment funds.

In May 2020, the ESRB published a recommendation on liquidity risks in investment funds that ESMA should coordinate with NCAs to undertake a focused piece of supervisory work with investment funds that have significant exposures to corporate debt and real estate assets to assess the preparedness of these two segments to potential future adverse shocks. The ESRB concluded that the sharp fall in asset prices observed at the onset of the COVID-19 pandemic was accompanied by significant redemptions from certain investment funds and a significant deterioration in financial market liquidity.

In its report, ESMA identifies five priority areas for action that would enhance the preparedness of these fund categories:

ongoing supervision of the alignment of the funds’ investment strategy, liquidity profile and redemption policy;
ongoing supervision of liquidity risk assessment;
the establishment and reporting of fund liquidity profiles;
an increase of the availability and use of liquidity management tools; and
the supervision of valuation processes in a context of valuation uncertainty.

ESMA will follow up with NCAs on the first, second and fifth of these policy areas to foster supervisory convergence amongst NCAs in how they supervise firms' compliance with their obligations in this area. However, ESMA considers that the increase of the availability of liquidity management tools in EU member states and further convergence in the establishment of liquidity profiles under the Alternative Investment Fund Managers Directive (AIFMD) are more fit to be taken forward in the context of the Commission's review of the AIFMD. More generally ESMA supports further initiatives to develop a macro-prudential toolkit for investment funds that could be developed by the ESRB in conjunction with ESMA and NCAs.

UCITS Directive and AIFMD: ESMA annual reports on penalties

ESMA has published its third annual report on penalties and measures issued under the UCITS Directive in 2019, and its first annual report on penalties and measures issued under the AIFMD in 2018 and 2019.

ESMA will continue its work to foster supervisory convergence in the application of the UCITS Directive and the AIFMD, and plans to issue reports on an annual basis for future reporting periods.