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EC`s mission impossible for ESMA

On 26 September 2014, ESMA published a consultation paper on the technical advice to the European Commission on delegated acts required by the UCITS V directive.

The consultation paper covers advice on two topics:  the insolvency protection of UCITS assets when the depositary delegates custody functions to a third party and the independence requirements between the management/investment company and the depository.

Insolvency Protection

The advice on insolvency protection should not appear too controversial, since it generally follows the principle of assets segregation. In addition, should the third party be located outside the Union, a legal opinion would be required to confirm that UCITS assets are unavailable to the creditors of the third party in case of insolvency. Some of the principles set out in the IOSCO Recommendations Regarding the Protection of Client Assets are also incorporated in the advice.

Independence Requirements

ESMA considers that the independence requirements only relates to the relation between the management/investment company and the depository. Two categories of links are identified:

  • Common management/supervision
  • Cross-shareholdings/group inclusion

The former links would be plainly prohibited. The latter links prove more challenging to tackle. One drastic option would be to prohibit cross-shareholdings of 10% or more. Such rule would have a material impact on the existing shareholding structures of management/investment companies and depositories in Europe. A softer option would be to impose certain measures and arrangements for related entities.

The comments must be received by 24 October 2014, only 4 weeks after the publication. This is a short deadline indeed and ESMA recognises that it would normally aim for a three-month consultation period when dealing with the significant issues covered in the paper.

In fairness, EMSA was itself handed a Stakhanovite task by the European Commission. The request for advice was received on 3 July 2014, to be delivered by 15 October 2014. In spite of its best efforts, ESMA admitted it could not respect this deadline and aims to provide its advice by the end of November.

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