ESMA Finds Shortcomings in National Supervision of EPM by UCITS
ESMA published a report on the peer review on the guidelines on Exchange Traded Funds (ETFs) and other Undertakings for Collective Investments in Transferable Securities (UCITS) issues. ESMA found that national regulators need to improve their supervision of UCITS engaging in efficient portfolio management techniques (EPM). ESMA will follow up on the findings of this peer review in 24 months to assess the progress made by the national competent authorities.
This report presents findings regarding compliance of the assessed national competent authorities with the guidelines, identifies good practices of supervisory tools and measures that may be of interest to other national competent authorities, and highlights areas where follow-up policy work may be considered by ESMA to take into account changes in the regulatory framework and to address open questions concerning the application of the guidelines. The peer review assessed six national competent authorities from Estonia, France, Germany, Ireland, Luxembourg, and the United Kingdom. Based on the guidelines, besides identifying some good practices, ESMA found deficiencies in the national supervision of UCITS engaging in EPM. The findings of the peer review relate in particular to the supervisory practices regarding operational aspects of costs, fees, and revenues for EPM and collateral management issues. ESMA calls for national competent authorities to:
- Ensure a more systematic and formalized review of the required EPM disclosures, allowing investors to better understand funds’ EPM engagement, the risks involved, and the cost and fee policy concerning EPM. This finding is relevant for all reviewed national competent authorities and particularly for Estonia and the UK.
- Provide more comprehensive internal supervisory guidance on costs, fees, and revenues regarding EPM. This finding is relevant for all reviewed national competent authorities.
- Ensure that all net revenues from EPM are returned to the investors. This finding is particularly relevant for Germany and Luxembourg regarding revenue splits between investors, fund managers, and their service providers.
- Revise existing national exemptions to the guidelines on collateral requirements granted in the UK and Germany so that fund assets can only be used for EPM purposes where UCITS receive high-quality and liquid collateral, in accordance with the standards set out in the ESMA Guidelines.
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Keywords: Europe, EU, Securities, UCITS, ETFs, Guidelines, Peer Review, ESMA
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