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European Commission proposes to harmonise UCITS and AIFMD rules

17 December 2021

The European Commission has set out proposals that will harmonise many aspects of UCITS funds and alternative investment funds (AIF).

The European Commission has put forward plans to harmonise several requirements governing UCITS and AIF managers covering areas such as delegation, liquidity risk management and reporting.

In late November, the European Commission published long-awaited draft proposals amending the AIFM and UCITS Directives, which are currently being scrutinised by the European Parliament and European Council.

The proposals will be negotiated with co-legislators. Once any amendments have been made and the final text is voted upon and published in the official journal, EU Member States will have 24 months to implement the proposals into national law.

In a nutshell, the initial proposals include some extra administration and supervision requirements for AIFMs and UCITS management company, but delegation (where a third party performs a service or a process for an AIFM or UCITS Management Company) of portfolio or risk management functions is expected to continue.

Up until now, the delegation rules for AIFMs have been more detailed than those applied to UCITS management companies. The new proposals will set out requirements for UCITS managers to comply with the same delegation rules and principles as those imposed on AIFMs.


The proposals aim to strengthen the conditions for setting up an UCITS Management Company or AIFM in the EU by requiring at least two full time conducting officer, with significant good repute and experience, based in the EU. The proposals also stipulate the need for more information on the individuals performing AIFM/ UCITS functions including:

  • A detailed description of each individual’s role, title and level of seniority
  • A description of such individual’s reporting lines and responsibilities within, and outside of, the AIFM/UCITS management company entity
  • An overview of the time allocated by the individual to each responsibility
  • A description of the technical and human resources that support the individual’s activities
  • Information on any delegation and sub-delegation arrangements, setting out a description of the human and technical resources used by the AIFM/ UCITS Management Company in monitoring and supervising the delegate

Delegated activities

Under the Commission’s proposals, the European Securities and Markets Authority (ESMA) will receive annual notifications from regulators, known as national competent authorities (NCAs), of delegation arrangements where an AIFM/UCITS Management Company delegates more risk or portfolio management to third-country entities, such as the UK, than it retains.

Other requirements include prior notification to the NCA before delegation becomes effective. The AIFM/UCITS Management Company will need to demonstrate that the delegate is qualified and capable. Furthermore, an AIFM/UCITS Management Company needs to be able to monitor the delegated activity effectively at any time, to give further instruction to the delegate.

Those provisions were already in the current Directives. However, it now clarifies that the rules apply to the functions and the services that are mentioned in the Annex of the respective Directives.

The proposals also seek to create alignment and reinforce regulations around the issue of so-called letterbox companies, where a company is present in a location in name only and carries out little or no activity there. Brexit has provided some of the impetus for the changes.

ESMA will conduct a peer review on the delegation regime and report to the Commission every two years, considering supervisory practices of individual NCAs in third-country delegation to assess what measures are being taken to ensure delegation arrangements do not become letterbox entities.

Loan origination (Only for AIF)

The draft proposals include an agreed framework for AIF originated loans that applies across all EU Member States, something that is not in place at the moment. AIFMs will need to implement effective policies and processes for the granting of credit, assessing credit risk, and administering and monitoring the relevant funds’ credit portfolio. They will need to ensure these policies and processes are reviewed at least annually and updated.

The Commission has also proposed that AIFMs must ensure that a loan to any single borrower does not exceed 20% of the fund’s capital when the borrower is an insurer or reinsurer, a credit institution, MiFID investment firm, financial conglomerate, a UCITS or another AIF.

In addition, AIFMs will be required to ensure a fund retains 5% of the notional value of loans it has originated and sold on the secondary market. If the notional value of originated loans exceeds 60% of the fund’s net asset value, the AIFM must require the fund is closed-ended.

Liquidity management tools

Finally, AIFMs managing open-ended funds and UCITS management companies will have to choose at least one appropriate liquidity management tool (LMT) under the new proposals, including suspension, redemption gates, notice periods, redemption fees, swing pricing, side pockets, redemption in kind and Anti-Dilution Levy. Each AIFM/UCITS Management Company will be required to implement detailed policies and procedures for the activation and deactivation of any LMTs.

AIFMs managing open-ended funds or UCITS Management Company will be able to temporarily suspend – in exceptional circumstances – repurchases or redemptions or use any other LMT where it is in the best interests of the remaining investors. NCAs will need to be notified of any activation or deactivation of an LMT.

Asset managers will also have to disclose more information to investors on the LMTs set out and the conditions of activation and deactivation.

NCAs may also request the activation or deactivation of the LMT. In order to solve the recent issues faced by supervisors in this matter, an escalation process is also set up between home and host NCAs. It is also important to note that for the AIF the request is performed by the Home NCA of the AIFM whereas for UCITS it is the Home NCA of the UCITS (the funds not the management company).

Increased disclosure (Only for AIF)

AIFMs will need to disclose to investors all direct and indirect fees and charges that were allocated to the AIF or any of its investments on a quarterly basis. They will also need to disclose details of any parent company, subsidiary or special purpose entity established in relation to the AIF’s investments by the AIFM, AIFM staff, or the AIFM’s direct or indirect affiliates.

Increased Reporting to NCAs

UCITS and AIFM will have to report information on the markets and instruments in which it trades on behalf of the AIF/UCITS it manages. Currently the requirement is limited to AIFMD and to the principal markets and instruments. It means the reporting for UCITS would be extended to cover not only the principal markets and instruments but all of them.


Including a depositary passport was considered as an option but was not deemed feasible given insufficient agreement on EU securities and insolvency laws. However, the proposals allow NCAs, in concentrated markets that have a lack of competitive supply of depositary services, to permit cross-border activities of depositary services on a cross-border basis. This is accompanied by an increased supervision from the NCA.

In addition, the proposals aim to clarify the relationship between the depositary and the Central Securities Depositaries (CSD). Currently the Issuer CSD is seen as a delegate of the depositary and due diligence should be performed. The proposals clearly state that the Issuer CSD is not a depositary’s delegate, and no ex-ante due diligence should be performed on the CSD as due diligence have been sufficiently vetting when seeking to be authorised as CSD.

In conclusion, the current proposals have been described as “evolution rather than revolution” by industry commentators. Furthermore, the proposals are far from being finalised and might evolve significantly as the negotiations with EU co-legislators get underway.

Apex Group offers a broad range of services that can help asset managers navigate these changes. Our subsidiary FundRock is a UCITS management company and AIFM offering solutions for Europe-based funds, with a long heritage refined over 80 years.

As a Super ManCo holding UCITS and AIFM licenses, our vast range of services include many relevant to the issues mentioned above, including: regulatory reporting (e.g. Solvency II, AIFMD); risk management, and liquidity risk services.

To find out more about how Apex Group can help you manage a shifting regulatory landscape, contact our team.

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