In the first part to this two part article, we looked at the Extending the range of information. We then analysed Conduct, Conflicts of Interest & Costs and finally we understood what Additional Services may be offered by Management Companies (“ManCOs”). In the second part of this article, we shall continue to delve into the upcoming changes as are being introduced by UCITS VI. We shall look into New Regulatory Reporting, Liquidity Management Tools, and Delegation Arrangements.
Delegation Requirements
UCITS VI makes it clear that delegation requirements are applicable to all services offered under Annex II of the UCITS Directive, including portfolio management, administration, and distribution, investment management services on financial instruments, and non-core services.
A ManCO must be able to objectively defend its whole delegation structure to the appropriate supervisory authorities in order to comply with AIFMD. The European Commission (“EC” or “Commission”) will enact delegated acts that outline the requirements for meeting the standards for delegation, such as meeting the objective reasons and passing the letter box test.
UCITS VI acknowledges that the ManCO may not always carry out the marketing of UCITS directly; instead, one or more distributors may do it on the ManCO’s behalf or independently. UCITS VI recognises the variety of distribution arrangements and makes a distinction between arrangements:
- in which a distributor acts on behalf of the ManCO, which should be regarded as delegation arrangements, and
- in which a distributor acts on its own behalf when marketing the UCITS under MiFID; or
- through investment products based on life insurance in line with the Insurance Distribution Directive.
The distributor’s appointment would fall under the delegation criteria in cases when the ManCO designates a distributor to market UCITS, including the common instances where a global distributor is selected. In view of UCITS VI, it is recommended that ManCOs re-evaluate their delegation agreements.
Regulatory Reporting
According to UCITS VI, a ManCO must provide frequent reports on the markets and instruments it trades on behalf of UCITS it oversees to the national competent authority of the UCITS home member state which shall include details about the:
- UCITS’s risk profile;
- liquidity management plans;
- outcomes of stress tests;
- information about delegation arrangements pertaining to risk or portfolio management; and
- a list of member states where the UCITS units are sold.
According to UCITS VI, ESMA must submit draft Regulatory Technical Standards (“RTS”) to the Commission by the 16th of April 2027, at the latest. It is important to note that if there are no technical standards, it is unclear what the Commission will expect during the 12-month period when the new rules are in effect, given that the RTS are not required to be submitted to the Commission until 12 months after the provisions of UCITS VI “go-live” date.
Liquidity Management Tools
The ManCO must choose and include at least two (2) of the Liquidity Management Tools (“LMT”) in the prospectus and, if required by law, in the articles of incorporation in order to allow UCITS to handle redemption pressures in times of market stress. This excludes items such as:
- suspension of subscriptions;
- repurchases;
- redemptions.
Also excluded are side pockets that can only be used in extraordinary circumstances.
By way of concession, a UCITS that complies with the Money Market Funds Regulation and is permitted as a money market fund simply needs to choose one LMT. UCITS that are exchange-traded funds (ETFs) are not given preferential status, despite the fact that using LMTs is less important because an ETF’s liquidity is largely determined by the liquidity of the secondary market on which it is traded.
By following the suggestions made by the Financial Stability Board (“FSB”) and the International Organisation of Securities Commission (“IOSCO”) ESMA is requiring ManCOs, to implement at least one quantitative-based LMT and one anti-dilution LMT. The ManCO must also take into consideration the investment strategy, redemption policy, liquidity profile, and market situations that could trigger the LMT.
A liquidity management system that reduces liquidity mismatches and guarantees investors are treated fairly is a requirement of UCITS VI for ManCOs. Anti-dilution LMTs contribute to the fair treatment mandate by assisting in avoiding the first-mover benefit, which is not addressed by quantitative LMTs.
Nicholas Warren
Head of Risk & Regulatory Compliance (Advisory)
Nicholas began his career at the Malta Financial Services Authority and has over 20 years’ experience in financial services and regulatory affairs. He leads the financial services arm at ARQ Group, supporting clients with the licensing of entities and ongoing regulatory and operational compliance.
His focus areas include investment services, funds, banking and EMIs. Over his career, he has built strong expertise in strategic management and operations. Nicholas is qualified in Banking & Finance, holds the ACCA qualification, and a master’s degree in Business Administration specialising in strategic planning. He also holds certificates in Islamic Finance.
