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24 October 2014

ESMA published responses to Consultation on delegated acts required by the UCITS V Directive

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Responses by AFG, EFAMA, EACB and ALFI.

French Asset Management Association (AFG)

AFG does not agree with the option proposed by ESMA to ensure the separation of the management bodies/bodies in charge of the supervisory functions of the Relevant Entities. To AFG, the notion of independence must be assessed in the action of the relevant entities, as stated at Level 1, not in the structural links of these entities.

From this perspective, the existing rules on the management of conflicts of interest, already tested for many years, are sufficient. In practice, very few examples of failures occurred, and in any case it would be disproportionate to impose to the whole European UCITS management industry a provision which aims to solve the very few cases which occurred in the past.

For instance in the US, where independent Directors have been existing for long, major failures occurred in many instances: late trading, market timing, etc. – as by definition independent Directors are not involved in the daily operations. And conversely in Europe, only very few failures occurred in entities without such independent Directors – introducing such a requirement would be disproportionate.

Full AFG response


European Fund and Asset Management Association (EFAMA)

Regarding the first issue presented in the consultation paper - i.e. that of the necessary steps to be taken by the depositary and by the third party to whom the safekeeping of assets has been delegated to ensure that in the event of insolvency of the third party, assets of a UCITS held by the third party in custody are unavailable for distribution among or realisation for the benefit of creditors of the third party - EFAMA is of the view that consistency with the corresponding measures under the AIFM Directive’s implementing measures remains paramount.

With regard to the definition of “management body” and the use of this notion throughout ESMA’s draft advice, there should be a distinction between executive and non-executive functions within the management body. In this regard, EFAMA would like to point out that, for instance, a universal banking model may allow for executive board members of a banking business to sit as non-executive directors on the board of the corporate group’s asset management arm.

Full EFAMA response


European Association of Co-operative Banks (EACB)

The EACB does not agree with the proposed steps to be taken by the depositary. A situation could arise where the only appropriate action is either to dispose of the financial instruments or to dispose of these securities or to convert them from a bearer form to a registered form.

If the depositary informs the Management Company or UCITS Board - if self-managed - accordingly and the later disregards this, the only remaining appropriate action is notifying the UCITS’s Competent Authority. The EACB would propose that this notification to the Competent Authority takes place simultaneously with the notification to the Management Company/UCITS Board is notified given the importance of UCITS.

Such notification to the UCITS’s Competent Authority should be sufficient to discharge the depositary of its liability, as the latter will have made all reasonable efforts. It is reasonable to expect the Competent Authority to have a responsibility to ensure that the Management Company/UCITS Board is acting in a manner that is not going to cause investor detriment or potentially create greater systemic risk. This approach also recognises the fact that it is the Management Company/UCITS Board who has responsibility for portfolio management and who ultimately will make the decision whether or not to act upon the alert from the depositary. In addition this approach is also consistent with the current arrangements for the roles and responsibilities of public agencies charged with overseeing markets including funds.

The EACB strongly recommends that ESMA develops guidelines for Management Company/UCITS Board and Competent Authorities on the action that should be taken in the event that the depositary makes a notification that it has become aware that the applicable insolvency laws no longer guarantees the segregation of UCITS assets in the event of the insolvency of the entity holding the financial instruments.

Full EACB response


Association of the Luxembourg Fund Industry (ALFI)

With regards to measures to be taken by the depositary and/or the investment company/management company in the best interest of the investors, once the depositary has informed the investment company or the management company on behalf of the UCITS that the segregation of the UCITS’ assets in the event of insolvency of the third party is no longer guaranteed in a given jurisdiction located outside the Union, a transfer of assets to another jurisdiction as suggested above is not a realistic protective measure according to ALFO.

This will typically not be feasible at all (e.g. the assets are ultimately held by a local CSD of which only local sub-custodians can be members) or at least not be feasible within the short delays required (a transfer of assets even within the same jurisdiction needs a certain time). Secondly, the assets are likely to be ultimately held in any case in the original jurisdiction because this will be required in order to trade the assets. Thirdly, the sub-custodian in the other jurisdiction will simply not be able and willing to safe-keep assets of another jurisdiction.

The measures the depositary can take are, in ALFI’s view, limited to the escalation procedure whereby the depositary would bring the issue to the attention of the management company/self-managed investment company. It is then up to the management company/self-managed investment company to decide whether or not it is in the best interest of the investors to maintain the relevant investments.

The issue may have to be escalated to the attention of the competent authorities of the fund and management company. Ultimately, the depositary will have no other choice than to terminate the depositary contract with the fund. The management company/self-managed investment company should then and until the new depositary has been appointed and the fund assets have been transferred to the new depositary be under a duty to take appropriate risk mitigating steps and in particular to abstain from actions that would increase the risk.

Full ALFI response


Full consultation paper

All responses


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