Since their introduction in 1985, reporting guidelines for Undertakings for the Collective Investment in Transferable Securities (UCITS) have undergone several reforms to support the European Securities and Markets Authority’s (ESMA) objective to create a common regulatory and enforcement culture for the EU. But the changes made as a result of Brexit are not only supervisory but operational and administrative.
With the end of the transition period on December 31 2020, the United Kingdom is no longer a part of the EU and submission of UK data to ESMA had ended. The UK is now a third country, which significantly affects EU and UK UCITS firms as well as their respective management companies and institutional investors. UCTS explicitly states that as of January 1 2021, UK funds formerly entrenched as UCITS will no longer qualify.
One of the biggest impacts will be felt within the passporting regime. Previously, the UCITS passport was widely used for legal functioning. Holding it implied mutual recognition between the home member state and the host country (another EU member state) for carrying out transactions without additional authorization. Now, UCITS passports for UK entities cease to be applicable until firms re-domicile within the EU. All UK UCITS managers must become authorized as AIFMs for the registered jurisdiction in order to keep managing UK funds, and UK funds will not be allowed to be marketed in EU member states.
Not only have UK managers lost passporting rights in the EU, but EU managers and funds have lost passporting rights in the UK. This implies that investment mandates should be re-assessed by asset managers whether they are located in the UK or EU, in order to update investment management tenure agreements and fund documentation. Any organization intending to resume operating in the EU must ensure they hold appropriate authorization.
All of these changes have increased transaction costs and the need for investment staff to provide supervisory support and guidance. To monitor the change in costs and fees of UCITS across the EU, ESMA is initiating a Common Supervisory Action (CSA) with national competent authorities (NCAs). More information about the CSA is available here.
In addition to changes in passporting, Brexit has created a surge in delegation of portfolio management functions to non-EU entities or third parties. This gives UCITS access to more expertise and higher administrative efficiency, but it also raises operational and supervisory risks. More important, it raises questions about whether UCITS can be effectively managed by licensed AIFMs or UCITS management companies. As a result, ESMA is expected to issue legal clarifications with respect to supervisory convergence in an effort to ensure authorized AIFMs and UCITS management companies retain their rights in the EU.
Other solutions are emerging as well. For example, the Commission de Surveillance du Secteur Financier (CSSF) has explicitly devised UCITS master-feeder structures — in other words, UCITS feeder funds established in Luxembourg that invest in UCITS master funds established in the UK — that will be allowed to invest up to 30% of assets in UK UCITS master funds. Current UK UCITS will qualify as AIFs from a Luxembourg perspective as long as they meet the criteria, given they are no longer authorized under the UCITS Directive.
Most importantly, any UCITS authorized per Directive 2009/65/EC by the British authorities as of January 31 2021 marketing its units in Luxembourg is permitted to market to retail investors in Luxembourg only until July 31 2021 (based on the provisions of article 46 of the amended law of July 12 2013).
While many dynamics remain in flux, it is clear that the post-Brexit impact on UCITS is not yet fully settled and many changes await. IVP Regulatory Reporting (Raptor) can help with these challenges, providing compliance and reporting capabilities that cater to UCITS funds. Preconfigured rules include post-trade compliance breaches based on exposures, sectors, and 5-10 percent breaches, among others, noteand UCITS risk reporting for leveraged and unleveraged portfolios can address any CSSF filing needs.
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