## 1eurea2025009 ## Source details **Canonical URL:** [1eurea2025009](https://www.imf.org/-/media/files/publications/cr/2025/english/1eurea2025009.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1eurea2025009.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1eurea2025009.pdf.json) --- ### Executive summary and scope - Technical Note reviews functioning and effectiveness of regulation, supervision and systemic risk monitoring of investment funds in the Euro Area (EA). - Emphasis: valuation, segregation and safekeeping of fund assets, leverage, liquidity risk management and redemption of fund units. - Information current as of March 13, 2025; on-site work conducted during November 2024. ### Market overview — size, composition and flows - Global and regional asset figures (2023): - US net assets of investment funds in 2023: EUR 33.2 trillion. - European investment funds net assets in 2023: EUR 20.1 trillion. - Asia-Pacific net assets in 2023: EUR 8.9 trillion. - Asset-type composition (2023): - Equity funds: 32 per cent of fund assets. - Bond funds: 20 per cent. - Multi-asset funds: 20 per cent. - Other funds: 19 per cent. - MMFs: 9 per cent of the total. - Market shares and concentration: - Europe market share declined from 35 per cent in 2012 to 30 per cent by end 2023. - UCITS market share at end 2023: 64 per cent. - Leading domiciles among top ten: Luxembourg, Ireland, Germany and France; largest UCITS domicile in the EU: Luxembourg, followed by Ireland and France. - MMF market concentrated in Ireland, Luxembourg and France. - Largest domicile for AIFs: Luxembourg, followed by Germany, France and Ireland. - Managers majority-located in France, Spain and Luxembourg; high delegation to third countries (e.g., UK and US). - Investor base and flows: - Insurers and pension funds hold approximately 32 per cent of total fund assets; households are the next largest investor group. - Net flows (past five years): outside the EU averaged EUR 276 billion; cross-border funds sold in the EU: EUR 174 billion; domestic funds: EUR 196 billion. - EU MMFs denominated in USD and GBP are heavily held by foreign investors (78 and 93 per cent share of foreign investors, respectively). ### Institutional and regulatory framework - Institutional roles: - EC, Council and EP establish regulatory framework; NCAs supervise and enforce. - ESMA prepares draft technical standards, provides technical advice, and ensures supervisory convergence. - ESRB assesses potential systemic risks related to investment funds. - Single Rulebook structure: - Level 1: Directives — broad framework, transposed into national law. - Level 2: Implementing directives and regulations adopted by the EC. - Level 3: Guidelines (notably by ESMA); NCAs and market participants must notify ESMA within two months of publication of compliance or intent to comply. - Key distinctions: - AIFMD focuses primarily on Alternative Investment Fund Managers (AIFMs); UCITS targets funds marketed to retail investors. ### Recent reforms and implementation timelines - UCITS/AIF amendments: - Introduced liquidity risk management tools (LMTs) and reporting requirements; new legal basis for a UCITS reporting framework. - ESMA to develop RTS and Guidelines; reporting standards expected no earlier than end 2027 (ESMA to submit RTS/ITS by 16 April 2027). - ELTIF 2.0 (summary): - Eligible assets requirement amended to at least 55 per cent of ELTIF’s net assets (from 70%). - Leverage limits increased to 50 per cent for retail-marketed ELTIFs (from 30 per cent); borrowing up to 100% permitted for professional investors. - Redemptions: new requirements on redemption policy, LMTs, minimum holding periods and limits on total redemptions relative to UCITS-eligible assets. - MMF Regulation: - Reform of the MMF Regulation (MMFR) is a priority; current framework should better align with international policy developments and best practices. ESRB and ESMA recommendations should form the basis of reform. ### Liquidity risk management, LMTs, suspension powers and stress testing - LMTs: - Amended UCITS and AIFM Directives require managers of UCITS and open-ended AIFs to select at least two LMTs from a harmonized list (redemption gates and fees, extension of notice periods, swing pricing, dual pricing, anti-dilution levies, redemptions in kind subject to conditions). - ESMA developing RTS and Guidelines on LMT characteristics, calibration, governance and disclosure; final texts expected before April 2025. - Suspension and side pockets: - Directives allow temporary suspension of subscriptions and redemptions and activation of side pockets in exceptional circumstances; NCAs may require suspension when financial stability risks arise. - Dispute resolution: ESMA issues opinions where host and home NCAs disagree; home member state must inform ESMA and host NCA if it intends not to act in accordance with ESMA’s opinion; ESMA may publish non-compliance in certain circumstances. - Stress testing: - Managers required to conduct stress tests; frequency often manager-discretionary but ESMA recommends at least annually and quarterly or more frequent depending on fund characteristics. - MMFR requires stress tests at least bi-annually; MMF managers report results annually or quarterly depending on size of MMF. - ESMA July 2020 Guidelines promote convergence in liquidity stress-testing for AIFs and UCITS. ### Leverage framework and Article 25 AIFMD - UCITS leverage rules: - Derivative global exposure limited to 100 per cent of total net value; exposure via commitment or VaR methods. - Financial borrowing limited to 10% of NAV on a temporary basis. - VaR specifics: relative VaR limit of two times benchmark VaR; absolute VaR one-month at 99th level must be ≤ 20% of NAV. - AIFMD approach: - Managers required to set leverage limits per AIF; no maximum leverage set at EU level. - Leverage defined broadly and calculated via gross and commitment methods; overall leverage expressed as exposure/NAV ratio. - Article 25 powers and ESMA role: - Home NCAs can impose limits on leverage and other restrictions after notifying ESMA, ESRB and relevant NCAs. - ESMA issues advice on whether conditions for action are met; NCA must report if it intends to deviate from ESMA advice. - ESMA’s advisory power under Article 25 had been used in three instances: November 2022 (Central Bank of Ireland CRE AIF measures, 60 per cent leverage limit and minimum liquidity timeframes of typically 12 months’ notice); April 2024 (LDI fund measures by Luxembourg supervisor and Central Bank of Ireland), with ESMA support. ### Data gaps, reporting and systemic risk monitoring - Data fragmentation and limitations: - No harmonized UCITS reporting framework prior to Directive (EU) 2024/927; authorities relied on commercial data for UCITS risk assessment. - Data quality issues exist in the AIFM framework. - Multiple complex reporting frameworks and inadequate data sharing arrangements result in underused data and partial system-wide views. - Recommended data architecture and roles: - Move towards a single reporting framework enabling data accessibility between authorities. - New UCITS and updated AIFM reporting frameworks should provide sufficiently granular portfolio data and comparable information on leverage across funds. - ESMA should prioritize integrated collection of supervisory data, reduce duplications and inconsistencies, and improve standardization, efficient sharing and use of data. - Potential amendments to ESA Regulations should deliver swift progress on data sharing between ESAs, the ESRB, NCAs and the ECB, with ESMA becoming a central data hub. - ESMA data tools and quality: - ESMA has one reporting system for AIFMD and MMFR data and uses Databricks; scaling up required when reporting scope expands. - Data Quality Engagement Framework (DQEF) launched in 2019 (extended 2020) focuses on accuracy, timeliness, completeness and consistency. ### Supervision, ESMA convergence tools and resource needs - Supervisory convergence toolkit (selection and usage): - Q&As, Common Supervisory Actions (CSAs), Voluntary Supervisory Colleges (VSCs), Peer reviews, Breach of Union Law proceedings. - Examples: CSA on liquidity risk management for UCITS (2020) covered managers representing 95 per cent of AUM per MS in data collection; CSA on valuation (2022) found overall satisfactory compliance with some shortcomings. - Findings on ESMA governance and resources: - ESMA governance includes Board of Supervisors and Management Board; investment management policy unit of approximately nine staff; Data, Intelligence and Technology Department has a few staff for investment fund data/reporting. - Cross-sectoral supervisory convergence team of seven ESMA staff covers all sectors, translating into approximately one FTE for investment management matters. Project staffing typically involves one to two ESMA staff per project. - Observation: ESMA’s mandates and responsibilities have expanded while resources remain strained; recommendation to enhance ESMA’s IT and human capabilities to support oversight and intrusive convergence work. - Supervision recommendations: - Strengthen supervisory convergence framework: structured approach to new tools, compulsory NCA participation and clear follow-up expectations. (Timing: ST; Actors: EC, ESMA) - Enhance effectiveness of supervisory colleges: formal coordination by ESMA, compulsory participation of all affected NCAs, voluntary participation of third-country regulators where appropriate. (Timing: ST; Actors: EC, ESMA) - Consider consolidated supervision of cross-border fund management groups. (Timing: MT; Actor: EC) - Prioritize fragmented supervision areas including delegation and third-party risks. (Timing: I; Actor: ESMA) - Review NCA supervisory frameworks for compliance with AIFMD liquidity profile requirement. (Timing: MT; Actor: ESMA) - Continue use of Breach of Law powers for serious non-compliance. (Timing: MT; Actor: ESMA) - Strengthen ESMA resources for more effective use of convergence tools. (Timing: ST; Actor: EC) ### MMFs, COVID-19 stress episode and reform priorities - March 2020 observations: - Substantial outflows from some MMF types (LVNAV and VNAV); a few LVNAVs breached weekly liquidity requirements; no EU MMFs were compelled to activate fees, gates or suspend redemptions. - Central bank interventions (ECB and US Federal Reserve) included outright commercial paper purchases, lending facilities and extension of collateral eligibility; interventions bolstered liquidity and slowed redemptions. - Post-2020 international reassessments: - FSB October 2021 report and 2024 thematic review: MMFR created a safer framework but shortcomings remain. - ESRB Recommendation (2021) and ESMA Opinion (2022) recommended decoupling regulatory thresholds from activation of measures, removal of amortized cost accounting for LVNAVs, mandating at least one LMT for MMFs, enhancing liquidity buffers, and improving reporting and stress testing frameworks. - MMFR technical features (selected numeric parameters): - LVNAV amortized-cost collar: 20bps compared to mark-to-market/mark-to-model NAV; breaches require mark-to-market/mark-to-model for next pricing. - CNAV and LVNAV liquidity: at least 10 per cent daily maturing assets and 30 per cent weekly maturing assets; WAM ≤ 60 days; WAL ≤ 120 days. - VNAV MMFs: WAM ≤ 6 months and WAL ≤ 12 months; 7.5 per cent daily maturing and 15 per cent weekly maturing. - Activation thresholds for CNAV/LVNAV: weekly liquid assets < 30 per cent or net daily redemptions > 10 per cent trigger board assessment and potential LMT activation. - Reform recommendations (urgency emphasized): - Remove option to use amortized accounting for LVNAV funds. - Decouple liquidity thresholds from use of LMTs. - Strengthen liquidity buffers and allow partial release in stress. - Increase reporting frequency: at least monthly in normal times and daily in crisis for key indicators. - MMFR reform is urgent to align with US and UK reforms. ### Stress testing, system-wide exercises and resource implications - Mandates and practices: - ESMA mandate under Article 32 to initiate and coordinate EU-wide stress tests in cooperation with ESRB; MMFR mandates annual MMF stress test scenario design by ESMA and ESRB. - ESMA stress simulation framework (2019) and MMF stress test results (2023) indicate liquidity and credit risks can negatively affect MMFs, with particular concerns for LVNAV funds’ ability to preserve stable value. - System-wide liquidity stress testing: - ESRB-led liquidity stress test uses bottom-up and top-down approaches, complemented by ECB ISA; exercise covers banks, investment funds and insurance within the EU and revealed sectoral liquidity shortfalls and data gaps. - Limitations and resourcing: - Key limitation: lack of quality granular data for AIFs and UCITS stress testing. - Recommendation: develop a more structured approach to stress testing across UCITS, AIFs and MMFs; ESRB to develop system-wide stress tests in collaboration with ESAs. - ESMA human and IT resources need strengthening to scale up regular broader stress testing. ### Key findings and prioritized recommendations (summary from Table 1) - Single rulebook and reporting: - Use Regulations where possible to mitigate regulatory arbitrage and improve resilience and effectiveness. (Timing: MT; Actor: EC) - Ensure new UCITS/AIF reporting frameworks require sufficiently granular portfolio data and comparable information on leverage. (Timing: ST; Actor: ESMA) - Align AIF requirements for independence of depositaries with UCITS Directive. (Timing: MT; Actor: EC) - Require reporting of leverage under the commitment approach for all UCITS and AIFs. (Timing: ST; Actors: ESMA, EC) - Reform the MMF Regulation in line with international policy developments. (Timing: I; Actor: EC) - Supervision and convergence: - Strengthen convergence framework and supervisory colleges; consider consolidated supervision of cross-border groups; prioritize delegation and third-party risks; continue Breach of Law powers. (Timing: ST/MT/I; Actors: EC, ESMA) - Strengthen ESMA IT and human capabilities to support oversight. (Timing: ST; Actor: EC) - Systemic risk monitoring and macroprudential: - Revamp data sharing mechanisms across ESAs, ESRB, NCAs, CBs and ECB. (Timing: ST; Actor: EC) - Introduce a single reporting mechanism for fund-level data centralized at ESMA. (Timing: MT; Actors: EC, ESMA) - Introduce more structured and regular fund stress testing across types; continue system-wide exercises to identify vulnerabilities and interconnections. (Timing: MT; Actors: ESRB, ESAs, ECB) - Strengthen resources for enhanced stress testing and risk analysis under new reporting frameworks. (Timing: ST; Actor: EC) - Strengthen ESMA’s role regarding Article 25 AIFMD: enforce cross-border reciprocation and require NCAs to top-up measures; introduce similar provision under UCITS framework. (Timing: ST; Actor: EC) *Source: EXECUTIVE SUMMARY and selected sections (1eurea2025009), Technical Note prepared by Ms. Cristina Cuervo, Monetary and Capital Markets Department, IMF — information current as of March 13, 2025.* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### 1eurea2025009 - EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### Introduction - This Technical Note reviews the functioning and effectiveness of the regulation, supervision and systemic risk monitoring of investment funds in the Euro Area (EA). - Emphasis is placed on requirements with most direct relevance for financial stability: valuation, segregation and safekeeping of fund assets, leverage, liquidity risk management and redemption of fund units. - The information in this note is current as of March 13, 2025. On-site work supporting findings and conclusions was conducted during November 2024. ### Market Overview - Europe is the second largest asset management market globally but has experienced a gradual decline in market share: from 35 per cent in 2012 to 30 per cent by end 2023. - Global and regional market figures: - US net assets of investment funds in 2023: EUR 33.2 trillion. - European investment funds net assets in 2023: EUR 20.1 trillion. - Asia-Pacific net assets in 2023: EUR 8.9 trillion. - Asset-type composition (2023): - Equity funds: 32 per cent of fund assets. - Bond funds: 20 per cent. - Multi-asset funds: 20 per cent. - Other funds: 19 per cent. - MMFs: 9 per cent of the total. - UCITS and AIFs breakdown: UCITS market share at end 2023: 64 per cent. - Concentration and cross-border activity: - Several EA countries among top ten domiciles: Luxembourg, Ireland, Germany and France. - Luxembourg is the largest domicile for UCITS in the EU, followed by Ireland and France. - MMF market concentrated in Ireland, Luxembourg, and France. - Largest domicile for AIFs: Luxembourg, followed by Germany, France and Ireland. - Majority of managers located in France, Spain and Luxembourg. - High degree of delegation of portfolio management activities, including to third countries outside the EU (e.g., UK and US). - Investor base and cross-border flows: - Insurers and pension funds hold approximately 32 per cent of total fund assets; households are the next largest investor group. - Over the past five years, net flows of funds outside the EU averaged EUR 276 billion, compared with EUR 174 billion for cross-border funds sold in the EU and EUR 196 billion for domestic funds. - EU MMFs are significantly held by investors outside the EU, especially for EU-domiciled MMFs denominated in USD and GBP (78 and 93 per cent share of foreign investors, respectively). ### Institutional Framework - Regulatory design: - The European Commission (EC), the Council and the European Parliament (EP) establish the regulatory framework; National Competent Authorities (NCAs) supervise and enforce rules. - ESMA prepares draft technical standards for the EC, provides technical advice for Commission delegated acts, and ensures convergence of supervisory practices across the EA. - The ESRB assesses potential risks related to financial stability for investment funds. ### Regulatory Framework and Recent Reforms - Complexity and fragmentation: - The regulatory framework is complex and relatively fragmented despite recent reforms. Divergent interpretations by Member States and domestically regulated elements can create opportunities for regulatory arbitrage and affect resilience and effectiveness. - Key recent amendments and timelines: - Amendments to UCITS and AIFs Directives introduce liquidity risk management tools and reporting requirements, including Liquidity Risk Management Tools (LMTs) and a new legal basis for a UCITS reporting framework. - ESMA needs to develop Regulatory Technical Standards (RTS) and Guidelines to implement the reforms; reporting standards will not be in place until end 2027. - Money Market Funds (MMFs): - Reform of the MMF Regulation should be a priority. The current framework should be better aligned with international policy developments and best practices. ESRB recommendations and ESMA in-depth work should form the basis of reform. ### Data Gaps, Reporting and Systemic Risk Monitoring - Data fragmentation and limitations: - Lack of a harmonized reporting framework for UCITS is a significant limitation for oversight and systemic risk monitoring; authorities have used commercial data for analysis. - Data quality issues exist in the AIFM framework. - A multitude of complex reporting frameworks and inadequate data sharing arrangements between domestic and European authorities result in underused data and a partial view of system-wide risks. - Recommended data architecture and roles: - Authorities should move towards a single reporting framework enabling data accessibility between authorities. - New UCITS and updated AIFM reporting frameworks should provide sufficiently granular portfolio data and comparable information on leverage across funds for systemic risk monitoring. - ESMA should prioritize integrated collection of supervisory data, reduce duplications and inconsistencies across reporting frameworks, and improve standardization, efficient sharing and use of data. - Potential amendments to ESA Regulations should deliver swift progress on data sharing between the ESAs, the ESRB, NCAs and the ECB, with ESMA becoming a central data hub for investment funds data in the EU. ### Supervision, ESMA’s Role and Resources - Supervisory convergence: - ESMA has increased availability and use of supervisory convergence tools, including peer reviews, Common Supervisory Actions and Voluntary Supervisory Colleges for some asset management groups. - Recommendation: adopt a more structured and formal approach to newly incorporated tools, including compulsory participation of NCAs and clear expectations on follow-up engagement. - ESMA resource needs: - ESMA’s mandates have expanded (implementing regulation, multiple data/reporting initiatives, enhanced supervisory convergence, growing risk analysis). Current resource levels are strained. - Authorities should ensure ESMA’s IT and human capabilities are enhanced to support oversight of the market. - Supervision priorities: - Prioritize areas where supervision remains fragmented, including delegation and third-party risks. - Consider consolidated supervision of cross-border fund management groups for better visibility of risks across jurisdictions. - Review whether supervisory frameworks across NCAs ensure compliance with AIFMD requirement that the liquidity profile of AIF investments meets underlying obligations. - Continue to use Breach of Law powers for the most serious cases of non-compliance with Union legislation. ### Macroprudential Discussion and Article 25 AIFMD - Ongoing EU-level consultation: - The EC’s Targeted Consultation on a macroprudential framework for Non-Bank Financial Intermediation (NBFI) is discussing many of these issues. Responses highlight data fragmentation, resource constraints, urgency to reform MMF regulation, and need to enhance liquidity and leverage frameworks. - Article 25 AIFMD and recommended powers: - The mission recommends providing ESMA the ability to top up measures defined under Article 25 of the AIFMD and require cross-border reciprocation. Consider introducing a similar provision under the UCITS framework. ### Key Findings and Recommendations (summary from Table 1) - Single rulebook and reporting: - Mitigate regulatory arbitrage and improve resilience and effectiveness by using Regulations where possible. (Timing: MT; Actor: EC) - Ensure new reporting framework under UCITS and AIFs requires sufficiently granular portfolio data and sufficient and comparable information on leverage across funds, to adequately monitor systemic risks. (Timing: ST; Actor: ESMA) - Align AIF requirements for independence of depositaries with those of the UCITS Directive. (Timing: MT; Actor: EC) - Require the reporting of leverage under the commitment approach for all UCITS and AIFs. (Timing: ST; Actors: ESMA, EC) - Reform the MMF Regulation in line with international policy developments. (Timing: I; Actor: EC) - Supervision: - Strengthen supervisory convergence framework to ensure a more structured approach to some tools, including compulsory NCA participation and engagement in the follow up process. (Timing: ST; Actors: EC, ESMA) - Enhance effectiveness of supervisory colleges: formal coordination by ESMA, compulsory participation of all affected NCAs, voluntary participation of third-country regulators where appropriate. (Timing: ST; Actors: EC, ESMA) - Consider introduction of consolidated supervision of cross-border fund management groups. (Timing: MT; Actor: EC) - Prioritize fragmented supervision areas including delegation and third-party risks. (Timing: I; Actor: ESMA) - Review NCA supervisory frameworks for compliance with AIFMD liquidity profile requirement. (Timing: MT; Actor: ESMA) - Continue use of Breach of Law powers for serious non-compliance. (Timing: MT; Actor: ESMA) - Strengthen resources for more effective use of convergence tools. (Timing: ST; Actor: EC) - Systemic risk monitoring and macroprudential: - Revamp data sharing mechanisms for broad access across institutions (ESAs, ESRB, NCAs, CBs, ECB). (Timing: ST; Actor: EC) - Introduce a single reporting mechanism for fund-level data and centralize data collection at ESMA. (Timing: MT; Actors: EC, ESMA) - Introduce a more structured approach to fund stress testing across fund types, including more regular frequency of exercises. (Timing: MT; Actor: ESMA) - Continue developing system-wide stress tests to identify vulnerabilities in asset management groups, interconnections, risk of excessive price volatility and liquidity stress. (Timing: MT; Actors: ESRB, ESAs, ECB) - Strengthen resources for enhanced stress testing and risk analysis under new reporting frameworks. (Timing: ST; Actor: EC) - Continue risk monitoring ad-hoc exercises and stress simulations to mitigate data gaps and fragmentation. (Timing: I; Actor: ESMA) - Strengthen ESMA’s role regarding Article 25 of the AIFMD: enforce cross-border reciprocation and require NCAs to top-up measures defined by ESMA; introduce similar provision under UCITS framework. (Timing: ST; Actor: EC) *Source: EXECUTIVE SUMMARY (1eurea2025009), Technical Note prepared by Ms. Cristina Cuervo, Monetary and Capital Markets Department, IMF — information current as of March 13, 2025.* ### 6. The EC has the central responsibility in the development of financial markets ### 6. The EC has the central responsibility in the development of financial markets ### EU institutional roles and mandate for investment fund legislation - The European Commission (EC) - Drafts proposals for legislative acts (regulations and directives) that govern the investment fund sector. - Endorses draft technical standards and draws up Commission delegated acts for implementation of directives and regulations. - Monitors that EU laws are duly implemented and enforced in Member States (MS) through legislative, administrative and judicial mechanisms. - Co-legislators - The European Parliament (EP) and the Council co-legislate based on EC proposals by amending and adopting proposed regulations and directives and endorsing draft implementing legislation. - EC monitoring and enforcement process - Transposition deadline and notification: Directives provide a deadline by which MS must transpose provisions into national law. Once transposed, a MS must notify the EC, including details of national measures; the Commission compiles a transposition database. - Monitoring of transposition and compliance: The Commission systematically checks whether MS have transposed directives within their deadlines and whether transposition is correct; this includes examining MS interpretation versus text and intent of the directive. - Dialogue and cooperation: The EC engages in informal dialogue with a MS to seek clarification or early compliance and may publish implementation reports assessing transposition and highlighting best practices. - Infringement processes: If informal measures fail, the EC can launch formal infringement procedures that start with a Letter of Formal Notice and a Reasoned Opinion, followed by Referral to the Court of Justice of the EU and potential imposition of financial penalties by the Court. *Italic line: Source: 1eurea2025009 - 6. The EC has the central responsibility in the development of financial markets* ### ESMA’s role, governance, and internal teams - ESMA’s core responsibilities - Elaborates technical standards to be submitted to the EC for endorsement: regulatory technical standards (endorsed by EC via delegated acts) and implementing technical standards (endorsed by EC via implementing acts). - Conducts open consultations before submitting technical standards to the Commission. - Ensures convergence of supervisory practices across National Competent Authorities (NCAs) using a range of supervisory convergence tools. - ESMA governance - Board of Supervisors (BoS) - Guides ESMA’s work and has decision-making responsibility on matters including adoption of draft technical standards, guidelines, opinions, reports, and advice to EU institutions. - Supported by standing committees and working groups dealing with technical issues. - Composition: the ESMA Chair; heads of NCAs in the EU and the EEA responsible for securities regulation and supervision; non-voting representatives from the EC, the ESRB, the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Free Trade Association Surveillance Authority (EFTA Surveillance Authority). - Management Board - Ensures ESMA carries out its mission and performs assigned tasks in accordance with its regulation; focuses on multi-annual work program, budget and staff resource matters. - Composition: the Chair plus six members selected from the BoS; the Executive Director and a representative from the Commission attend as non-voting participants (except on budget matters where the Commission has a vote). - ESMA teams involved in investment fund regulation and supervisory convergence - Investment Management policy unit: sits within the Investor Protection and Sustainable Finance Department; approximately nine staff working on policy and supervisory convergence, including as rapporteurs to the Investment Management Standing Committee (IMSC). - Markets, Funds and Infrastructure team: covers cross-sector risks, risk analysis and publications (including stress testing exercises and simulations); acts as cooperation point with the ESRB with members in all relevant committees. - Convergence team (Conduct Supervision and Convergence Department): covers supervisory convergence work across all sectors, including fund management. - Data, Intelligence and Technology Department: a few staff working on data and reporting for investment funds, including integration of reporting frameworks under AIFMD and UCITS. *Italic line: Source: 1eurea2025009 - 6. The EC has the central responsibility in the development of financial markets* ### The Single Rulebook for investment funds — structure and main fund types - Two main types of collective investment schemes at EU level - UCITS: the main type of EU funds marketable to retail investors. - AIFs: collective investment schemes that are non-UCITS, generally marketed to professional investors in the EU; may be marketed to retail investors under national law if a MS permits, but then only domestically. - Single Rulebook composition and levels - Level 1: Directives (broad framework) — directives must be transposed into national legislation by MS. - Level 2: Implementing directives and regulations adopted by the EC. - Level 3: Guidelines (most importantly by ESMA); NCAs and market participants must make every effort to comply with ESMA’s guidelines and must notify ESMA within two months of publication of the guidelines of their compliance or intention to comply. - Reference: article 16 of Regulation 1095/2010 establishing ESMA (ESMA Regulation). - Differences in legislative approach - AIFMD focuses primarily on regulating Alternative Investment Fund Managers (AIFMs) rather than the funds themselves and also regulates activities by managers and funds based outside the EU. - UCITS framework targets funds marketed to retail investors and covers funds managed by EU management companies. - Several bespoke regimes exist for non-UCITS, including the European Long-Term Investment Fund (ELTIF) (summary in Appendix). *Italic line: Source: 1eurea2025009 - 6. The EC has the central responsibility in the development of financial markets* ### Box: ELTIF reform (summary of main reforms) - Background and objectives - ELTIF launched in 2015 with limited adoption; objective was to provide alternative funding for infrastructure and long-term projects, reducing reliance on bank lending and stock-exchange capital raising and fostering growth. - The Commission prioritized ELTIF uptake within the Capital Markets Union initiative. - Timeline and regulatory steps - EC proposed a revised ELTIF Regulation in November 2021. - The updated regulation, “ELTIF 2.0”, came into effect in January 2024 and was supplemented by Regulatory Technical Standards in October 2024. - Key reforms and numeric parameters - Eligible assets: ELTIFs must invest in (a) eligible investment assets and (b) UCITS eligible assets specified in the UCITS Directive; ELTIF 2.0 requires eligible assets to represent at least 55% of the ELTIF’s net assets (amended from 70%). - Leverage limits: increased to 50 per cent (increased from the previous limit of 30 per cent) of the fund's assets when marketed to retail investors; borrowing of up to 100% is permitted for ELTIFs targeting professional investors. - Borrowing conditions: NAV is the reference point for determining cash borrowing limits, replacing the previous capital reference; no longer a requirement that borrowing be used specifically for investing in eligible investment assets. - Redemptions and liquidity features: ELTIFs were generally close-ended; ELTIF 2.0 specifies how ELTIFs may offer redemptions before the end of life subject to conditions: - Requirements include an appropriate redemption policy and liquidity management tools (LMTs) compatible with long-term investment strategy, minimum holding periods before redemption, and limits on total redemptions relative to the ELTIF’s investments that qualify as UCITS-eligible assets. - Expected outcome - The increased flexibility has been praised by industry and an uptake in use of these vehicles can be expected. *Italic line: Source: 1eurea2025009 - 6. The EC has the central responsibility in the development of financial markets* ### Liquidity risk framework, LMTs, suspension powers, and stress testing - UCITS liquidity provisions - UCITS rulebook restricts types of assets UCITS can invest in, imposes concentration and control limits on assets issued by or deposits made with the same body, and limits counterparty risk and issuer concentration regarding derivatives. - Managers must establish and maintain an adequate and documented risk management policy identifying the UCITS’ risk profile including stress tests. - AIFM liquidity management requirements - AIFMs must employ appropriate risk management systems and procedures to monitor liquidity risk and ensure consistency between investment strategy, liquidity profile and redemption policy. - Delegated Regulations detail requirements for liquidity management systems, including implementing, maintaining and monitoring adequate limits for liquidity/illiquidity consistent with underlying obligations and redemption policy and determining actions if limits are exceeded. - Liquidity risk management tools (LMTs) - Amended UCITS and AIFM Directives require managers of UCITS and open-ended AIFs to select at least two LMTs from a harmonized list including: redemption gates and fees, extension of notice periods, swing pricing, dual pricing and anti-dilution levies, and redemptions in kind (only to meet redemptions requested by professional investors and subject to conditions). - Suspension of redemptions and side pockets - Amended Directives allow UCITS and AIFs to temporarily suspend subscriptions and redemptions and to activate side pockets in exceptional circumstances, taking into account unitholders’ interests. - NCAs may require suspension of redemptions and subscriptions based on financial stability risks. - Amended articles 84 and 50 of the UCITS and AIF Directives include requirements to communicate use of these powers to the NCA of the host Member State and a process for the host NCA to request the home NCA to activate suspension (at fund level for UCITS and manager level for AIFs). - Dispute resolution: where host and home NCAs disagree, ESMA must issue an opinion and communicate it to both NCAs; if the home member state intends not to act in accordance with ESMA’s opinion it shall inform ESMA and the host member state and explain reasons for non-compliance. In certain circumstances, and if there are financial stability risks, ESMA may publish the fact that the home member state authorities do not comply with its opinion. - ESMA technical work on LMTs - ESMA is developing Regulatory Technical Standards (RTS) and Guidelines regarding the use of LMTs: - RTS: further detail on characteristics of LMTs. - Guidelines: general principles on calibration, design and choice of tools, governance and disclosure with specific reference to each tool in the amending Directive. - ESMA has taken into consideration the IOSCO Guidance on Anti-dilution tools (December 2023) and ongoing IOSCO work on LMTs. - Consultation status and timeline: both the RTS and the Guidelines have already been published for consultation and ESMA expects to publish the final texts before April 2025. - Stress testing requirements and frequency - Requirements are imposed on managers; NCAs are not required by AIFM or UCITS Directives to carry out stress tests (although some NCAs do). - AIFs: Level 2 Regulation provides guidance on how stress tests should be carried out and leaves frequency to manager discretion; results are part of reporting requirements to NCAs. - UCITS: Article 40.2 of Level 2 UCITS Directive stipulates managers shall conduct periodic stress tests and scenario analysis; UCITS review includes stress testing results as part of data managers must report to NCAs periodically. - MMFR (Money Market Fund Regulation): stress tests must be conducted at a frequency considered appropriate in light of market conditions and envisaged portfolio changes, and at least bi-annually. Management companies must report vulnerabilities to the NCA; they must send results to the relevant NCA (annually or quarterly, depending on size of the MMF), which then share results with ESMA. - ESMA guidance and recommendations - July 2020 ESMA Guidelines on liquidity stress-testing in AIFs and UCITS: promote convergence in how NCAs supervise funds’ liquidity stress testing; provide guidance on stress-testing model design, risk understanding and governance. - ESMA notes stress tests should be carried out at least annually and recommends quarterly or more frequent use depending on fund characteristics, providing criteria for determining appropriate frequency. *Italic line: Source: 1eurea2025009 - 6. The EC has the central responsibility in the development of financial markets* ### 22. The EC has formally requested that ESMA provides technical advice on the EAD review. ### 1eurea2025009 - 22. The EC has formally requested that ESMA provides technical advice on the EAD review. ### ESMA Call for Evidence and IMSC response - The EC has formally requested that ESMA provides technical advice on the EAD review. - ESMA published a Call for Evidence in May 2024 to gather stakeholder insights on the manner and extent to which UCITS may have gained direct and indirect exposures to certain asset classes that may give rise to divergent interpretations and/or risk for retail investors. - ESMA has reviewed numerous responses from a broad range of stakeholders to the Call for Evidence and is in the process of identifying a way forward via its IMSC to submit a response to the Commission. ### Leverage in the Single Rulebook — overview and differences between UCITS and AIFs - UCITS Directive: - Limits a UCITS fund’s global exposure from derivative instruments to 100 percent of the total net value of the UCITS portfolio. - Global exposure must be calculated using either the commitment approach or the Value-at-Risk (VaR) method. - Financial leverage obtained through outright borrowings is limited to 10% of net asset value (NAV) and can be carried out only on a temporary basis. - VaR approach specifics: relative VaR — portfolio VaR should not be higher than two times the VaR of a reference unleveraged benchmark; absolute VaR — one-month VaR computed at the 99th level must be lower or equal to 20% of NAV. - AIFMD: - Requires managers to set leverage limits in respect of each AIF they manage but does not set maximum limits on leverage. - Defines leverage as “any method by which the AIFM increases the exposure of an AIF whether through borrowing of cash or securities, or leverage embedded in derivative positions or by any other means.” - Leverage must be calculated using two methods: the gross method and the commitment method. - Overall leverage of an AIF is expressed as a ratio between the exposure of the AIF and its NAV. ### AIF supervision and leverage-related macroprudential assessment - NCAs must undertake an assessment of leverage-related risks to financial stability based on regular data reported by managers (Article 24 AIFMD and developing regulation/measures). - AIF managers have regular reporting obligations to their home NCAs, who submit data reports to ESMA. - Article 25 AIFMD charges NCAs with assessing risks that the use of leverage by AIFs can entail and provides an avenue for imposing limits on the use of leverage. ### Risk management requirements applicable to UCITS management companies and AIFMs - UCITS management companies are required to employ a risk-management process enabling them to monitor and measure at any time the risk of positions and their contribution to the overall risk profile of the portfolio of a UCITS. - General requirements applicable regarding risk management also apply to leverage risks for both UCITS Management Companies and AIFMs. ### Loan Originating AIFs — Directive 2024/927 framework (Box 2) - Directive 2024/927 amended UCITS and AIFM Directives to introduce a framework for AIFMs that manage AIFs engaging in loan originating activities, addressing regulatory arbitrage and investor protection concerns. - Key rules and requirements introduced: - AIFMs managing loan-originating AIFs must have effective policies, procedures and processes for assessing credit risk and administering and monitoring their credit portfolio; proportionality and regular review required. - To contain interconnectedness risk, AIFMs should be required to diversify risk and subject exposure to certain limits when the borrower is a financial institution. - As a general rule, loan originating AIFs must be closed-ended; open-ended structures permitted if certain requirements are fulfilled, including a liquidity risk management system that minimizes liquidity mismatches, ensures fair treatment of investors and is subject to approval of and supervision by the relevant home NCA. ESMA is tasked with developing RTS to establish criteria for NCAs to determine whether loan-originating AIFs can use an open-ended structure. - Leverage limits for loan originating AIFs: - Managers must ensure that the leverage of a loan originating AIF does not exceed 175 per cent if the fund is open-ended or 300 per cent if it’s closed-ended. - The threshold expresses the ratio between the exposure of that AIF and its net asset value, and will be calculated according to the commitment method. - AIFs must retain 5 per cent of the notional value of each loan that the AIF has originated and subsequently transferred to third-parties; retain until maturity, or for at least eight years if the maturity of the loan is longer (or if it’s made to consumers, irrespective of maturity). - The framework prohibits “originate to distribute” strategies (preventing funds from originating loans solely to sell them to third-parties). - Member states may prohibit AIFs to originate loans to consumers or service such credits. ### Reporting — coverage, gaps, and harmonization - Data availability, quality and frequency at the EU level varies across AIFs, MMFs and UCITS; reporting requirements were developed with different levels of granularity. - AIFs: - Key reporting obligations set in the AIFMD and further developed by Level 2 and Level 3 measures. - Article 3 AIFMD: minimum reporting requirements for registered managers of AIFs. - Article 24 AIFMD: requires reporting of key items for authorized managers of AIFs managed or marketed in the EU, including risk profile, main asset categories, liquidity information and arrangements for managing liquidity. - Implementing Regulations detail reporting frequency (ranging between annually and quarterly depending on types of AIFs and AUM) and provide harmonized reporting templates. - ESMA published detailed Guidelines clarifying application to different managers and AIFs; data is collected by NCAs and submitted to ESMA. - UCITS: - Until the recent review, no harmonized reporting framework; some Member States established national-level reporting regimes with significant variation. - Directive (EU) 2024/927 introduced a harmonized reporting regime for UCITS, borrowing heavily from the AIFMD framework and adding requirements such as information on delegation arrangements and total leverage employed by funds. - ESMA mandated to draft RTS and ITS on details, standardization and reporting frequency/timing; these are to be submitted to the EC by 16 April 2027. - MMFs: - Harmonized reporting framework exists under MMFR (Article 37): quarterly reporting for MMFs over 100 million Euros and annually for the rest. - Reported information: assets held, portfolio indicators, results of stress tests, type and characteristics of the MMF, liabilities, investor information, subscription and redemption activity. - Level 2 measures developed reporting templates; NCAs collect and submit data to ESMA. - ESMA maintains a database of all MMFs established, managed or marketed in the EU; the ECB has access for statistical purposes only. - Footnote: In practice, the majority of MMFs report on a quarterly basis, with only a very small minority reporting annually. ### Depositaries — role and independence safeguards - Depositaries must be appointed for safekeeping and segregation of fund assets and carry out cashflow monitoring and oversight; one depositary per UCITS and AIF is required. - Depositary location requirement: generally required to have its registered office or a branch in the same country where the fund is domiciled. - Fund manager and depositary must enter into a detailed written agreement regulating the flow of information necessary to perform respective roles. - IOSCO Standards: assets must be entrusted to a third-party custodian that is functionally independent; AIFMs and UCITS management companies are prohibited from acting as a depositary. - Depositary must functionally and hierarchically separate depositary tasks from other potentially conflicting tasks and ensure conflicts of interest are identified, managed, monitored and disclosed to investors. - Group links between manager and depositary permitted, but UCITS-specific safeguards apply: - Justification if sought by investors/regulator, conflict of interest policies including disclosure, and independence of certain board members. - Where management company and depositary belong to the same group, at least one third of the members (or, if lower, two members) of the body in charge of supervisory functions in both manager and depositary are required to be independent. - AIFs have conflict of interest provisions but lack the more detailed UCITS safeguards (notably the requirement of independent directors). ### Delegation — principles, risks and recent strengthening - Delegation permitted under both UCITS and AIFM Directives, subject to conditions: disclosure to competent authority; must not prevent effectiveness of supervision; fund manager must monitor delegate activities on an ongoing basis. - Portfolio/investment management mandates generally given to entities authorized/registered for asset management and subject to prudential supervision by their home authorities. - Delegation to non-EU/EEA entity subject to cooperation arrangements between home and host supervisory authorities. - Regulatory focus: prevent “letter-box” entities; manager must not delegate to the extent it becomes a letter-box (lack of expertise/resources to supervise delegated tasks or delegation that substantially exceeds tasks performed by the AIFM). - A significant portion of EU-domiciled management companies delegate portfolio management to firms in other jurisdictions, with significant delegation to the UK and the US. - Delegation requirements were strengthened as part of the recent AIFMD/UCITS review, including on transparency and aligning UCITS delegation requirements with AIFMD. ### Money Market Funds (MMFs) — resilience, valuation, liquidity, and stress testing - MMFR introduced rules to make MMFs more resilient and limit contagion channels: rules on MMF denomination, ban on sponsoring entity support, investor base identification policies/procedures, portfolio composition rules (permissible assets, diversification, concentration, minimum liquidity). - Valuation: - Mark-to-market is preferred and MMFs must calculate and publish NAV daily. - CNAV and LVNAV MMFs may use amortized cost for certain assets under conditions. - LVNAV MMFs may keep their NAV as calculated using amortized cost within a collar range of 20bps compared to NAV using mark-to-mark/mark-to-model; if breaches collar, must use mark-to-market/mark-to-model for next redemption/subscription price calculation. - Liquidity and maturity constraints: - CNAV and LVNAV MMFs: at least 10 per cent of assets in daily maturing assets and 30 per cent in weekly maturing assets; Weighted Average Maturity (WAM) no more than 60 days; Weighted Average Liquidity (WAL) no more than 120 days. - Standard (VNAV) MMFs: WAM no more than 6 months and WAL no more than 12; 7.5 per cent of assets daily maturing and 15 per cent weekly maturing. - Use of LMTs and activation thresholds for CNAV and LVNAV: - CNAV and LVNAV may decide to activate liquidity gates, fees or suspend redemptions when weekly liquid assets fall below 30 per cent of total assets, and when net daily redemptions on a single day exceed 10 per cent of total assets. - Breach of thresholds requires immediate notification to the board, which must undertake a documented assessment and decide whether to apply one or more measures. - Stress testing: - MMFs must conduct regular stress tests to assess resilience to adverse market conditions and potential liquidity shortfalls. - Tests must simulate extreme but plausible stress situations (including significant redemption requests and market disruptions) and be documented, reviewed by management and reported to the relevant NCA. - MMFR requires stress tests at an appropriate frequency and at least bi-annually, with additional tests when significant portfolio or market changes occur. - Article 28 MMFR: ESMA produces updated guidelines on stress tests annually, including high-level principles and common reference parameters; managers report results to NCAs, who transmit them to ESMA. *Source: 1eurea2025009 - 22. The EC has formally requested that ESMA provides technical advice on the EAD review.* ### 43. The MMFR was put to the test during the market stress during the COVID-19 ### 43. The MMFR was put to the test during the market stress during the COVID-19 ### Market stress during COVID-19 and immediate policy interventions - Extent of stress on MMFs in Europe varied across jurisdictions according to market structure, MMF types, investor profiles, and underlying investments. - Major central bank measures that supported MMFs and short-term debt markets: - Outright purchases of commercial paper in both primary and secondary markets (ECB and US Federal Reserve). - Lending facilities for banks to acquire assets from MMFs (Federal Reserve). - Extension of eligibility of collateral for refinancing operations to include unsecured bank bonds (ECB). - Effects of interventions: - Bolstered liquidity and restored confidence in short-term debt markets. - Contributed to a slowdown in the rate of redemptions from MMFs. - March 2020 specifics: - Substantial outflows from some MMF types (LVNAV and VNAV). - No EU MMFs were compelled to activate redemption fees, gates, or suspend redemptions. - A few LVNAVs breached their weekly liquidity requirements. ### International regulatory reassessments and FSB work - The international regulatory community revisited MMF policy proposals following 2020 stress. - Financial Stability Board (FSB) outputs: - October 2021: FSB published a report on policy proposals to enhance MMF resilience, advising on liquidity risk management, usability of liquidity holdings in stress, enhanced stress testing frameworks, and advanced reporting requirements. - 2024: FSB published a thematic review focusing on MMF reforms in key jurisdictions (including the EU) and noted that while MMFR created a safer and more harmonized framework, shortcomings remained warranting further assessment. ### ESMA and ESRB reviews and recommended MMFR reforms - ESRB Recommendation (issued 2021) and ESMA Opinion (2022) recommended key reforms: - Decoupling regulatory thresholds from the use of suspensions, gates, and redemption fees for CNAV and LVNAV funds, noting that current ties may create first-mover incentives as liquidity approaches the regulatory threshold of 30 per cent and daily outflows exceed 10 per cent. - Removal of amortized cost accounting for LVNAVs (while retaining the LVNAV figure as an accounting concept). - Mandating at least one Liquidity Management Tool (LMT) for MMFs to manage redemptions and protect remaining investors during stress. - Enhancing liquidity buffers and adding regulatory wording to allow temporary partial release of liquidity ratios in stressed market conditions. - Improving reporting and stress testing frameworks, including: - Introducing daily reporting in crisis conditions on a certain number of key indicators. - Reducing the frequency of regular reporting to a monthly basis for larger funds. - Providing clearer frameworks for reporting stress testing results to ESMA and NCAs. ### EC 2023 evaluation of MMFR - The EC report (2023) assessed MMFR effectiveness and decided not to revisit the regulation immediately. - Findings: - MMFR enhanced market stability and liquidity during financial stress (notably March 2020). - MMFR generally achieved its objectives; safeguards passed the liquidity stress test of March 2020. - Areas identified for improvement: - Decoupling activation of liquidity risk management tools from liquidity buffers for CNAV funds. - Evaluating the need to increase liquidity buffers. - Enhancing supervision, stress testing, and reporting. - No immediate reforms were proposed, but ongoing reviews and potential future reforms were recommended. ### Findings and policy recommendations (summary) - Fragmentation and minimum-harmonization issues: - Certain regulatory areas remain left to Member States (e.g., valuation methodologies for UCITS and AIFs), producing divergence in practice (risk management, delegation of portfolio services). - AIFs remain partially captured, with product rules left to national discretion. - Recommended direction: - Move away from minimum harmonization where feasible by increasing use of regulations to reduce regulatory arbitrage and harmonize prescriptive requirements while retaining overarching principles in directives if needed. - Specific supportive actions: - Recent amendments to UCITS and AIFMD (liquidity risk management and reporting) are welcome and should help harmonize LMT availability and liquidity risk practices across UCITS and AIFs. - Assess whether funds that allocate significant portions to illiquid assets should create/redeem shares at lower frequency and/or require long notice or settlement periods, per 2021 FSB recommendations. - ESMA should review through supervisory convergence whether NCAs consistently ensure compliance with new AIFMD requirements on liquidity profiles and redemption terms. - Consider developing holistic indicators to measure unmitigated liquidity mismatches. - Reporting regime and data: - Adequacy of reporting introduced by UCITS/AIFMD amendments depends on Level 2 measures yet to be developed; data granularity for portfolio composition, measures of leverage, and reporting frequency will be key. - Depositary independence: - Strengthen independence requirements for depositaries and align the regime for UCITS and AIFs; ESMA should incorporate depositary independence into supervisory convergence work. - Leverage measurement: - Adopt a harmonized approach to measurement and reporting of leverage across funds; require UCITS using VaR to report leverage based on the commitment approach calculated using the same methodology for AIFs and UCITS to enable comparability and alignment with IOSCO recommendations. - Urgency for MMFR reform: - Reform of MMFR is an urgent priority to align with international policy developments (US and UK reforms noted). - Support ESRB and ESMA recommendations to: - Remove option to use amortized accounting for LVNAV funds. - Decouple liquidity thresholds from the use of LMTs. - Strengthen liquidity buffers and allow partial release in stress. - Increase frequency of reporting: at least monthly in normal times and daily in crisis. ### Supervision—institutional arrangements and ESMA’s supervisory convergence role - Supervisory architecture: - Primary supervisory responsibility rests with National Competent Authorities (NCAs); ESMA has a supervisory convergence mandate. - NCAs handle authorization, registration, supervision, enforcement, and licensing of fund managers and certain service providers. - Depositaries’ licensing and supervision may be shared across authorities due to overlapping CRD, MiFID, AIFMD/UCITS requirements. - ESMA’s mandate (Article 29 of ESMA Regulation) includes: - Providing opinions to competent authorities. - Promoting bilateral and multilateral exchange of information between NCAs. - Contributing to uniform supervisory standards for reporting and accounting. - Reviewing application of regulatory and implementing technical standards and proposing amendments. - Establishing sectoral and cross-sectoral training, personnel exchanges, and secondment schemes. - Supervisory convergence toolkit and approach: - ESMA has developed over 30 tools organized around five objectives: identify risks and prioritize; develop effective and consistent supervisory practices; undertake supervisory work; assess implementation and remediate; increase common knowledge. - Tool selection is outcome-focused and varies by tool; ESMA staff and groups choose tools based on risks and desired outcomes, with governance approval processes involving the Board of Supervisors (BoS). - Since 2020 ESMA uses a structured risk-based annual prioritization exercise (heatmap) to identify supervisory risks for the coming year; the heatmap is discussed by the Senior Supervisors Forum (SSF), steered by the Management Board, and approved by the Board of Supervisors in the third quarter of every year. *Source: 1eurea2025009 - 43. The MMFR was put to the test during the market stress during the COVID-19 (PDF chapter/section).* ### Box 3. Euro Area: Selected Supervisory Convergence Tools ### Box 3. Euro Area: Selected Supervisory Convergence Tools ### Overview of supervisory convergence tools - ESMA-led Q&As - Purpose: provide answers to technical questions to create a shared understanding of the practical application or implementation of the single rulebook to supervisors and market participants. - Process: the relevant ESMA group involving NCAs (e.g., the Investment Management Standing Committee, IMSC) may develop specific Q&As based on identified risks or misunderstandings and submit them for publication directly to the BoS. - Common Supervisory Actions (CSAs) - Purpose: more extensive convergence tool for NCAs concurrently performing supervisory work on a given risk or topic under a common supervisory methodology and parameters, then comparing results and discussing follow up work. - Process: IMSC identifies risks best addressed through a CSA, submits a proposal to the BoS, agrees on a common methodology and questionnaire, runs the CSA and submits the final report to the BoS for approval. - Voluntary Supervisory Colleges (VSCs) - Origin: created in 2019 for large broker dealers after Brexit; expanded since 2021 to firms with widespread presence across the EU in the investment management sector. - Format: VSCs meet twice a year to present recent and planned supervisory work, risk assessments of firms, findings and supervisory observations; supervised entities invited for part of meetings. - Role of ESMA: member and rapporteur; proposes areas of common interest based on risk priorities; promotes coordination and cooperation across NCAs. - Peer reviews - Types: discretionary (topics approved by the BoS upon proposal by the Management Board) or required by sectoral EU legislation. - Purpose and format: test whether supervision is carried out in line with expectations; resource-intensive; follow the Peer Review Methodology; can target all or a group of member states; include on-site visits and review of supervisory files. - Governance: carried out by an ad hoc Peer Review Committee composed by ESMA staff and NCA experts; requires publication of a formal assessment with NCAs formally graded on different areas. - Timeline: process usually spans a year and includes a formal follow up on shortcomings found after two years of conclusion. - Breach of Union Law - Purpose: remediation tool allowing ESMA to investigate and remedy alleged breaches of Union law. - Process: Enforcement Unit reviews complaints and referrals to determine admissibility, engages with concerned NCA, advises ESMA Chair on whether to initiate an investigation. - Experience: ESMA opened a formal investigation in relation to fund management activities once, in 2017; the affected NCA changed practice early and the investigation closed. ESMA has initiated assessment phases in relation to investment management on several occasions but without clear indications of breach of law. Complaints and procedures are regularly published by ESMA in its Annual Report. ### Risk prioritization, resourcing, and deployment - Risk prioritization exercise - Scope: ranks risks across six key sectors, including Investment Management. - Process owner: developed by the Supervisory Convergence team with input from ESMA policy teams, enforcement, and risk analysis. - Output: prioritizes a maximum of ten supervisory risks per sector, ranked across levels of priority; identifies areas of focus for prioritized risks. - Uses: - For sectoral supervisory convergence work: results shared with standing committees to prioritize and shape convergence work for the next year; annual call between the chair of the SSF and chair of each Standing Committee. - For cross-sectoral convergence work: used to identify the EU Strategic Supervisory Priorities and other transversal convergence projects (e.g., informs the bi-annual peer review plan). - For national supervision: shared with NCAs through ESMA’s collaboration platform; NCAs integrate common risks and supervisory priorities into their supervisory frameworks as needed. - ESMA supervisory convergence resourcing - Team size: a cross-sectoral supervisory convergence team of seven ESMA staff covers supervisory convergence work across all sectors under ESMA’s remit. - Investment management resourcing: translates into approximately one FTE for investment management matters. - Project staffing: depending on topic and tool, between one and two ESMA staff are involved in each project; regular collaboration with the risk team; works with the staff of the Investment Management Unit. ### Recent examples in investment management - CSA on liquidity risk management for UCITS (2020) - Participation: All 30 EU and EEA NCAs fully participated. - Sample coverage: data collection from UCITS managers representing 95 per cent of AUM per MS; interviewing of managers representing 50 per cent of AUM per MS. - Findings: acceptable level of compliance overall; low incidence of cases where NCAs found significant liquidity risks jeopardizing redemption capacity; key shortcomings affected a limited number of firms and included: - overreliance on the application of presumption of liquidity regarding listed securities and wrongful application to other instruments; - delegation of both portfolio management and liquidity risk management against UCITS rules; - lack of quality in liquidity risk management mechanisms and methodology. - Impact: findings provided background for amendment of LRM frameworks under the UCITS and AIFM Directives and informed ongoing discussion regarding potential review of the EAD. - CSA on valuation (2022) - Purpose: analyze NCAs’ supervisory approaches regarding asset valuation rules under the UCITS and AIFM Directives, focusing on managers of UCITS and open-ended AIFs investing in less-liquid assets (unlisted equities, unrated bonds, corporate debt, real estate, high yield bonds, emerging markets, listed equities that are not actively traded, bank loans). - Findings: overall satisfactory level of compliance with key provisions; a few NCAs identified shortcomings and vulnerabilities. - Follow up: most NCAs followed up bilaterally with entities showing shortcomings; a few intended enforcement actions; several NCAs noted findings would inform circulars to industry on best practices. - Additional context: following the Russian invasion of Ukraine, NCAs were invited to investigate fair valuation of Russian/Ukrainian and Belarusian assets; ESMA published a public statement in May 2022 promoting convergence on valuation of Russian, Belarusian, and Ukrainian assets, including use of LMTs such as side pockets where warranted. - Brexit-related exercises and peer review (context 2020–2022) - Tools deployed: Opinion publication followed by a peer review across relevant sectors including investment management to check adherence to legal requirements and ESMA opinions regarding authorization of Brexit-related relocations. - Peer review conclusion: none of the four NCAs assessed met supervisory expectations in relation to delegation arrangements in the scope of relocation; none performed a comprehensive review of delegation arrangements, including objective reasons for delegation and compliance with due diligence requirements. - Timeline: peer review published in December 2022; follow up with NCAs expected in due course. - Cross-cutting work: ESMA identified third-party outsourcing as a priority and is developing cross-cutting principles for all relevant sectors under its remit; principles to be approved by the BoS and expected to be made public in 2025. - Voluntary Supervisory Colleges (VSCs) for complex cross-border investment management groups - Number and timing: currently three VSCs for complex cross-border investment management groups; first two created end 2021 and most recent in 2024. - Format and governance: coordinated by ESMA; involve all home NCAs of relevant firms on a voluntary basis; established on basis of a Cooperation Arrangement; meet twice a year (supervisory call and full day meeting); supervised entities invited to part of the meeting. - Current usage: VSCs are relatively recent and have mostly served as forums for information exchange; no joint supervisory action had been undertaken under them as of the time of the FSAP mission. ### Publication, follow up, and perceptions - Publication and follow up - ESMA publishes results of tools deployed and follows up on recommendations with NCAs. - Follow-up intensity varies by tool: CSAs’ high-level recommendations allow for less specific tracking than peer reviews; CSAs follow up usually via discussions with NCAs. - Convergence reports and recommendations are published on ESMA’s website; peer reviews published in their entirety including NCA assessments and follow up reports. - ESMA carries out formal tracking of compliance with Guidelines and keeps a public record of NCAs’ compliance on the ESMA website. - Feedback from industry and NCAs - General view: tools are time consuming but valuable. - Industry preferences: increased use of VSCs and CSAs is mostly valued; CSAs provide guidance on supervisory expectations. - NCAs’ perspective: CSAs help NCAs understand expected convergence in supervisory approach. - Noted issues: some industry members reported questionnaires were sometimes tailored by NCAs, resulting in divergent responses across the same entity to different NCAs. - VSC benefits: provide group overview to NCAs and understanding of business models not revealed by individual supervision; valued opportunity for industry to address common issues. ### Statistics on the use of supervisory convergence tools by ESMA (Figure 1) - Tool — Year introduced — Total used — For fund management - Guidelines — 2012 — 97 — 23 - Peer reviews1 — 2011 — 41 — 6 - Supervisory briefings — 2011 — 40 — 9 - USSPs — 2021 — 4 — 2 - VSCs2 — 2020 — 13 — 7 - Q&As3 — 2022 — 68 — 6 - Opinions — 2011 — 259 — 12 - CSAs — 2019 — 9 — 3 Notes associated with the statistics: - 1 The numbers include both peer reviews and follow ups and consider the ongoing peer reviews being undertaken by ESMA. - 2 The numbers refer to the full year VSC meetings. - 3 The Q&As tool was introduced in 2007 but figures are only available since 2022. ### Findings and policy recommendations - Strengthen the supervisory convergence framework - Observation: ESMA has stepped up convergence efforts and added valuable tools toward harmonization and common supervisory culture. Many impactful tools rely on NCAs providing input, technical expertise and staff on a voluntary basis; access to supervisory information is limited and enforcement of findings is uneven. - Recommendation: adopt a more structured approach for newly created tools regarding expectations for NCA participation, sharing of supervisory information, cooperation where applicable, and engagement in follow up. ESMA should continue publishing comprehensive reports to provide valuable information and moral suasion toward common supervisory approaches. - Strengthen the VSC framework - Observation: VSCs covered initial stages focused on building understanding of group structure across NCAs. - Recommendation: develop a more coordinated approach including coordinated supervisory actions and onsite visits as needed; ensure formal coordination by ESMA and compulsory participation of all affected NCAs; consider desirability of requiring consolidated supervision at the group level for better visibility of risks. - Cross-border coordination: where activities are significantly delegated to the UK or the US (or there are significant group ties), participation of the relevant competent authorities of those jurisdictions is crucial. - Prioritize fragmented supervision areas - Observation: supervision remains fragmented in areas hindering identification and monitoring of risks, notably third-party risks and delegation. - Recommendation: continue and give prominence to ESMA work on third-party risks and delegation; develop preparatory tools for common principles for risk-based supervision across NCAs and ESMA, potentially followed by more intrusive exercises on risk-based supervisory practices. - Improve monitoring of NCA follow up and measure impact - Observation: follow up is uneven; peer reviews have formal follow up but CSAs and other tools have less structured tracking. - Recommendation: introduce a more structured process to monitor NCA follow up, mandate participation in follow up processes, set expectations for engagement and deliverables, and implement internal tracking of tools used, resources entailed and outcomes to measure cost-efficiency and impact. - Use formal powers where needed - Observation: less intrusive tools are persuasive, but Breach of Union Law actions have deterrent effect. - Recommendation: ESMA should continue to deploy Breach of Union Law actions and pursue formal processes for serious cases of breach of law or where other tools do not achieve desired outcomes. *Source: Box 3. Euro Area: Selected Supervisory Convergence Tools (content unit 1eurea2025009).* ### 73. To be able to carry out adequately intrusive supervisory convergence work, ESMA’s ### 1eurea2025009 - 73. To be able to carry out adequately intrusive supervisory convergence work, ESMA’s ### Strengthening ESMA resources for supervisory convergence - ESMA’s most effective tools for promoting supervisory convergence are "very resource-intensive, involving staff and resources over a long period of time." - To build on the "helpful extended toolkit developed," ESMA "needs to be given adequate resources." ### Systemic risk monitoring & macroprudential approach (overview) - This section reviews: - the institutional framework for systemic risk monitoring of investment funds at the EU level; - how monitoring is undertaken by different authorities; - data sharing arrangements; and - the current approach to stress testing of investment funds at the EU level. - It also reviews the EC consultation process on potential development of a macroprudential framework for Non-Bank Financial Intermediation (NBFI) in the EU and implications for investment funds. ### Institutional roles and cooperation - Shared responsibility: - Monitoring systemic risks from investment fund activities at the European level is a shared responsibility among ESMA and the ESRB in collaboration with NCAs. - The ESRB is the body responsible for macroprudential oversight at the EU level. - ESMA has financial stability among its objectives and is entrusted with "specific initiatives towards the identification and measurement of systemic risk" and collaboration with the ESRB and other ESAs. - ESRB structures: - ESRB work on investment funds is mostly carried out by the Non-Bank Financial Intermediation Expert Group (NBEG), co-chaired by ESMA. - NBEG prepares, in close collaboration with ESMA, the ESRB’s annual Non-Bank Financial Intermediation Risk Monitor covering the investment funds sector. - Other ESRB working groups (Analysis Working Group, Advisory Technical Committee) can involve investment fund issues. - ESMA internal structures: - Systemic risk monitoring of the investment fund sector at ESMA is channeled through the Risk Standing Committee (Article 32 of the ESMA Regulation mandates economic analysis, monitoring, assessing and measuring systemic risk). - The Risk Standing Committee is a permanent internal committee made up of representatives from each member of the BoS and includes, as observers, representatives of the EC, ESRB, EBA and EIOPA. - The Risk Standing Committee cooperates with NCAs on risk monitoring and analysis and approves outputs before publication. - Two working groups under the Risk Standing Committee: - Financial Stability and Risk Monitoring Working Group — risk monitoring activities, analysis and indicators for financial stability and orderly markets. - Investor Trends and Research Working Group — focus on consumers; innovation; and environmental, social and governance issues. ### ESMA publications and monitoring outputs - Regular publications: - Twice a year: Trends, Risks and Vulnerabilities report—Risk Monitor (includes key data and structural indicators on securities, markets, market participants and infrastructures for the EEA, EU and by Member State). - ESMA contributes to the ESA Joint Committee’s Report on Risks and Vulnerabilities in the EU (cross-sectoral focus). - Regular Market Reports on specific sectors — including annual AIFM and MMF reports. - Fund-sector monitoring data: - AIF and MMF monitoring is based on AIFMD and MMFR data collected by NCAs and shared with ESMA. - NCAs’ quarterly assessment results of risks posed by leveraged AIFs are reported to ESMA annually; the 2023 results and ESMA’s own assessment were published in the Article Assessing Risks Posed by Leveraged AIFs in the EU. - In the absence of a harmonized UCITS reporting framework, ESMA currently assesses UCITS risks using commercial data; newly amended framework will introduce UCITS reporting requirements enabling supervisory data analysis. ### Data sharing framework and cooperation - Legal and operational arrangements: - Home and host NCAs are required to share information as needed to carry out their supervisory work (articles 50 and 101 of the AIFM and UCITS Directives). - There is no overarching framework for automatic sharing across ESAs, ESRB and ECB; each legislative framework determines the basis for exchanges. - Specifics by framework: - UCITS and AIFMD (amended Directives): information gathered by NCAs under new reporting frameworks must be made available to other relevant NCAs, ESMA, EBA, EIOPA and the ESRB "whenever necessary for the purpose of carrying out their duties." - MMFR: Article 37 requires NCAs to submit all reported data to ESMA; the article provides the ECB access to the data, "for statistical purposes only." No specific provision to share data with the ESRB (though MMFs being UCITS or AIFs means sharing arrangements for those frameworks apply). - ESMA IT and data handling: - ESMA has one reporting system with two interfaces available for NCAs for both AIFMD and MMFR data and uses Databricks to review, aggregate and analyse the data. - The current framework "has proven to cover existing reporting and data analytics sufficiently but is likely to require upscaling" when reporting scope expands with the newly introduced reporting framework. - Data Quality Engagement Framework (DQEF): - Launched in 2019 for AIFMD data and extended to MMFR data in 2020. - Aims to detect quality shortcomings and identify corrections; sets procedures for NCAs and ESMA to verify and follow up on data quality across four dimensions: accuracy, timeliness, completeness and consistency. - Tests focus on completeness of reporting population; timeliness; selected fields such as NAV and AUM, leverage, investor profile and identifiers, risk measures, liquidity and portfolio indicators. - ESMA reports results back to NCAs and publishes results annually to further engage industry in data improvement. - ECB / central bank reporting: - Fund managers within the Eurosystem report data to their central banks to satisfy ECB statistical reporting obligations; in many MS reported data contains "line-by-line portfolio composition of each individual fund." - This data is aggregated at central bank level and reported to the ECB. - "There is no common framework for the sharing of this data with NCAs and most do not have access to this data from their respective central banks." There is also "no legal basis for the sharing of the ECB data with ESMA." - Complexity and reform initiatives: - A 2019 EC fitness check found the reporting framework "overly complex" with duplications, gaps, divergent definitions, standards and frequencies, and parallel national and EU reporting requirements. - As part of AIFMD and UCITSD review, ESMA has a mandate to study development of an integrated collection of supervisory data with objectives to: - reduce duplication and inconsistencies between reporting frameworks in asset-management and other financial industry sectors; and - improve data standardization and efficient sharing and use of data already reported within existing EU reporting frameworks. - ESMA must report to the EC by 16 April 2026 and has set up a dedicated task force with several workstreams, including consultation of authorities. - Broader initiative: EC legislative proposal (initiated in 2023 and in trialogue) to amend Regulations for each ESA and the ESRB to ensure access to data sharing across ESAs, the ESRB and the ECB. It is "unclear whether the initiative will be limited to providing the legal basis for broader data sharing, or if it will have a broader reach" toward a single reporting framework. ### ESMA’s Data Strategy (Box summary) - First data strategy issued in 2017 to enhance data governance, standardization, and reporting frameworks; created a Data Standing Committee to convene national authorities on cross-cutting reporting issues (MiFIR, EMIR, SFTR, AIFMD, MMFR). - Second Data Strategy covers 2023-2028, aligned with ESMA’s strategic priorities; aims to enhance ESMA’s role as a data hub through improved data accessibility, interoperability, and standardization, provide machine-readable information, support data-driven supervision, foster collaboration on data standards, and reduce reporting burdens. - ESMA has commenced scaling up data capabilities and implementing initial deliverables, planning to adapt the strategy as legislative or technological developments arise. ### Stress testing: mandate, frameworks and findings - Mandate and cooperation: - ESMA has a general mandate under Article 32 of its founding regulation "to initiate and coordinate EU-wide stress tests" in cooperation with the ESRB. - MMF Regulation mandates ESMA to design annually, in cooperation with the ESRB, a stress test scenario for MMF managers; the ESRB provides the adverse scenario for MMF stress-testing guidelines. - MMF stress testing: - Detailed stress testing framework requirement exists for MMFs, including regular reporting to ESMA of managers’ stress test results by NCAs. - ESMA is informed of reports and action plans for MMFs where vulnerabilities are found and submitted to the relevant NCA. - In 2023 ESMA published a report on first MMF stress test results under the ESMA Guidelines; findings indicate that "both liquidity and credit risks may negatively affect MMFs, particularly raising concerns about the ability of LVNAV funds to preserve their stable value." - Despite calibration to reflect March 2020 stress severity, different redemption and macroeconomic scenarios showed MMFs’ capacity to fulfill redemption requests. - Investment fund stress simulation framework: - ESMA published a stress simulation framework in 2019 describing building blocks and options for stress testers (e.g., calibration of redemption shocks, methods to assess resilience). - A UCITS bond fund case study showed most funds coped with proposed shocks but "pockets of vulnerabilities were identified, particularly for high yield funds, with up to 40 per cent of them experiencing a liquidity shortfall." - ESMA intends to carry out stress testing more systematically, but "timing, detail and scope" depend on availability of resources and adequate data; existing data quality and availability issues and limited resources have prevented regular exercises. - ESRB system-wide liquidity stress test: - ESRB developed a liquidity stress test covering the entire EU financial system, led by ESRB, using a two-leg desktop stress test approach: a bottom-up approach and the ESRB's balance sheet tool (top-down), complemented by the ECB’s Interconnected System-wide stress test Analytics (ISA) model. - The exercise covers banks, investment funds, and insurance corporations within the EU and involves "thirteen authorities including ESMA, EIOPA and the ECB/SSM," with the ESRB designing the adverse scenario and aggregating results. - The exercise revealed sectoral liquidity shortfalls, equity impacts from adverse financial conditions, and exposed data gaps and data sharing constraints across authorities; it will inform policy actions to strengthen systemic risk monitoring. - Other ad-hoc EU stress/testing initiatives: - 2020: ESRB with input from ESAs, ECB and Bank of England conducted scenario analysis on large-scale corporate bond downgrades estimating impacts on banks, insurance corporations, funds and markets. - 2022: ESRB assessed exposures of EU bond funds to interest rate risk. - 2023: ESRB analytically stressed liability-driven investment (LDI) funds using entity (AIFMD) and activity-based data (EMIR and SFTR). - 2024: ESMA undertook further work on resilience of GBP LDI funds to interest rate shocks. *Source: Excerpt from IMF content unit 1eurea2025009 (sections 73–92).* ### 93. The AIFMD introduced a monitoring framework, and provides competent authorities ### The AIFMD introduced a monitoring framework, and provides competent authorities ### Monitoring framework and Article 25 powers - Article 25 of the AIFMD charges NCAs with assessing risks from the use of leverage by an AIFM for the AIFs it manages. - Home NCAs, after notifying ESMA, the ESRB and competent NCAs for the relevant AIF/AIFs, can impose: - limits on the level of leverage that the AIFM can employ with respect to the AIFs it manages; and - other restrictions on management of the AIFs under its management, including liquidity-related measures. - ESMA’s formal convergence role under Article 25: - ESMA issues advice to the NCA of the home member state of the AIFM after receiving the notification, addressing whether conditions for action appear to be met, whether measures are appropriate, and their duration. - The relevant NCA must report to ESMA should it intend to deviate from ESMA’s advice. - ESMA may advise NCAs further to its independent analysis of AIFMD data reported by NCAs and after taking into account advice by the ESRB, upon determining that leverage employed by an AIFM or group of AIFMs poses a substantial risk to financial stability. If followed, ESMA must immediately inform the NCAs concerned, the ESRB and the EC. - As of the text, the ESMA advisory power under Article 25 “has not yet been used.” (Note: subsequent paragraphs document its use in specific cases.) ### ESMA guidelines and data considerations - In 2021, ESMA published Guidelines on the use of Article 25 to ensure common, uniform and consistent application, suggesting a two-step approach: 1. Identification of those AIFs more likely to pose risks to the financial system. 2. Evaluation of potential leverage-related systemic risks of the AIFs identified. - The Guidelines encourage using the best available data for risk indicators beyond AIFMD reporting data, including national supervisory data and third-party data when appropriate. - The Guidelines note the assessment should be done on a quarterly basis and provide guidance on calibration of limits and consideration of other appropriate measures. - ESMA’s role in stress testing and systemic monitoring is limited by data quality and fragmentation across AIFs, UCITS and MMFs. ### Instances of Article 25 use and ESMA advice - ESMA has issued advice further to NCAs’ action under Article 25 on three occasions: - November 2022: Central Bank of Ireland initiative to impose a leverage limit on AIFMs established in Ireland managing commercial real estate AIFs domiciled in Ireland. - Central Bank of Ireland findings: a cohort of funds had elevated levels of leverage (on average higher than equivalent real estate funds in Europe), some exposed to liquidity mismatches and with a large market footprint on the commercial real estate market. - Measures: a 60 per cent leverage limit on those funds, and guidelines on minimum liquidity timeframes that should typically extend to 12 months of notice. - ESMA issued advice supporting the measure proposed, timing for implementation and indefinite duration. - April 2024 (two Advice reports issued simultaneously): feedback on measures consulted by the Luxembourg supervisor and the Central Bank of Ireland for managers of LDI funds (following the gilt market crisis in late 2022). - ESMA supported the measures, timing and duration; it was informally involved in coordination despite Article 25 not providing explicit coordination powers for multi-NCA situations. - The Article 25 process allows NCAs to deviate from ESMA advice, provided they report the deviation; Article 25 does not grant ESMA explicit arbitration or coordination powers across NCAs. ### EC Consultation on a Macroprudential Framework for NBFI (May 2024) - Objectives of the Commission’s targeted consultation: - Seek stakeholders’ views on adequacy of macroprudential framework for NBFI without revisiting recent legislative agreements. - Focus on: (a) evaluating effectiveness of existing macroprudential tools and supervisory arrangements, (b) considering repurposing or reviewing existing microprudential and reporting tools, and (c) assessing possibility of introducing new macroprudential tools and tools to improve EU-wide coordination. - Consultation concentrates on key vulnerabilities: unmitigated liquidity mismatches, excessive leverage and interconnectedness, especially for investment funds. - Areas/questions covered include: - (i) MMFs: NCAs’ supervisory powers regarding liquidity buffers, reporting and stress testing; - (ii) enhancing supervisory framework on liquidity risks; - (iii) other potential tools beyond current ones to contain systemic risks from pockets of excessive leverage in open-ended funds; - (iv) introduction of system-wide stress tests for various NBFI sectors (including funds); - (v) EU-supervisory coordination, including a potential enhanced coordination mechanism for adoption of macroprudential measures and giving ESMA specific coordination powers regarding supervision of large asset management companies. ### Stakeholder responses and proposals - ESMA response highlights: - Enhancements to liquidity and leverage regulatory and supervisory framework for funds (including considering more prescriptiveness in relation to notice periods for ELTIFs and similar rules for funds investing in less liquid assets). - Need for a stronger and integrated reporting framework to assist risk monitoring and analysis. - Clearer powers (including for reciprocation) regarding the use of Article 25 of AIFMD. - Support for further work on system-wide stress testing. - ESRB and Eurosystem recommendations: - ESRB requests closing known gaps in regulatory framework and facilitating data sharing across authorities during the first half of the legislative term; address MMF vulnerabilities; progress work on vulnerabilities in investment funds including liquidity risk management enhancements, similar reporting and safeguards for excessively leveraged UCITS, and a potential reciprocity mechanism regarding Article 25. - Eurosystem encourages further revisions to liquidity risk management framework including introducing liquidity bucketing and a bigger role for authorities regarding the use of LMTs and a similar proposal on leverage for UCITS. - ESRB stresses the need for a system-wide approach, enhanced transparency in asset management activities and incorporation of macroprudential perspective in associated regulation. - Several NCAs have published reports/statements recognizing the value of existing microprudential tools as ex-ante systemic risk containment measures and proposing improvements (e.g., to LMTs and reporting). Many NCAs contemplate system-wide stress tests and certain reforms to the MMF Regulation. ### Key findings on framework gaps and implementation timelines - The current framework provides ESMA and the ESRB with structure to monitor and manage systemic risk in investment funds, but effectiveness is uneven across fund types due to data quality and availability differences across AIFs, UCITS and MMFs. - Recent UCITS and AIFMD review will mitigate some imbalances: - New reporting framework for UCITS and AIFs aims to provide consistency and improve data quality, enhance liquidity risk management frameworks, and give NCAs power to suspend redemption rights of open-ended funds based on financial stability risks. - Newly reporting data on delegation of activities of asset managers will provide a better view of delegation across borders. - ESMA has been given a deadline of end 2027 to develop Regulatory Technical Standards (including definition of reporting templates), so implementation will take several years. - Recommendations on data and reporting: - Ensure implementing regulations provide required granularity for systemic risk monitoring. - Reporting templates must consider the range of fund types and strategies covered by AIFMD and UCITS frameworks. - Updated framework should require managers to report monthly portfolio data on a granular enough manner and sufficient and comparable information on levels of leverage for both UCITS and AIFs. - Data on EU investment funds should be collected at a centralized level via ESMA acting as a data hub, allowing access to NCAs and domestic and EU authorities as needed, while avoiding redundancies and ensuring safety of information. - Stress testing limitations and recommendations: - Key limitation: lack of quality data for solid stress testing for AIFs and UCITS; MMFR provides a more prescriptive framework for ESMA’s role compared to UCITS and AIFM frameworks. - Call for a more structured approach to stress testing across UCITS, AIFs and MMFs, with ESMA collaborating with the ESRB to develop systematic and regular exercises. - System-wide stress tests should be developed by the ESRB in collaboration with the ESAs to better capture interconnectedness, vulnerabilities of asset management groups, correlated strategies, and capacity to generate excessive price volatility and liquidity stress. - ESMA’s human and IT resources need strengthening to scale up regular, broader stress testing. - ESMA should continue to minimize impact of data gaps via convergence and risk analysis efforts and ad-hoc topical exercises and stress simulations, with AIFMD data analysis continuing to monitor unmitigated liquidity mismatches (e.g., in real estate AIFs and ELTIFs). - Policy recommendations on Article 25 and UCITS: - Strengthen ESMA’s role in relation to Article 25: provide arbitration authority and tools to ensure cross-border reciprocation of measures. - ESMA, in consultation with the ESRB, should have power to: - (i) require NCAs to assess whether a measure taken by one NCA for funds managed out of one jurisdiction should also be applied to similar funds in another jurisdiction; and - (ii) require NCAs to top up the measures defined by them further to Article 25. - Introduce a similar tool for UCITS to impose additional measures where UCITS reach substantial levels of leverage, developed with powers for ESMA to top up measures and enforce reciprocation. *Source: 1eurea2025009 - 93. The AIFMD introduced a monitoring framework, and provides competent authorities* ### 115. Additionally, as part of the EU discussion on macroprudential frameworks, authorities ### 115. Additionally, as part of the EU discussion on macroprudential frameworks, authorities ### Macroprudential priorities and policy recommendations - Review the MMF Regulation to ensure that key vulnerabilities of these vehicles from a financial stability perspective are minimized (see Section on the Regulatory Framework). - Enhance VSC arrangements by: - Strengthening the coordination role of ESMA in relation to supervisory colleges for cross-border asset managers. - Expanding supervisory coordination activities. - Making participation compulsory. - Extending membership to relevant non-EU regulatory authorities as needed (See Supervision section for more details). - Ensure sufficient resources are allocated to EU authorities to enable a more comprehensive approach to systemic risk monitoring. ### Stakeholder proposals and supervisory monitoring - Authorities should consider proposals from responses to the EC consultation, especially suggestions to enhance liquidity risk management frameworks once amendments to the UCITS and AIFM Directives have been implemented. - Increased monitoring by ESMA regarding funds investing in less liquid assets is recommended. - An assessment of the recently introduced amendments to AIFMD and UCITS once the RTS, ITS and Guidelines have been implemented and in use will provide a better understanding of remaining risks and any needed enhancements to the framework. - Note: The Eurosystem and the ESRB have recommended related measures in their responses to the EC Consultation. The Eurosystem response to the EC Targeted Consultation proposes that UCITS using the VaR approach would be required to report their leverage under the commitment approach, in line with a recommendation of this TN. ### UCITS: Single Rulebook and legislative history - Six key revisions of Level 1 legislation for UCITS: - UCITS I (1985): product directive creating the first EU open-ended collective investment structure invested in transferable securities. - Revisions in 2001: (a) ‘Management’ Directive No 2001/107/EC introducing single EU status for UCITS management companies and a simplified prospectus; (b) ‘Product’ Directive No 2001/108/EC allowing UCITS to invest in a wider range of financial instruments including derivatives. - UCITS III package (adopted 2002, effective 2003): passport for management companies and wider investment scope. - UCITS IV Directive No 2009/65/EC (applicable on July 1, 2011): introduced Key Investor Information Document (KIID) and common frameworks for mergers and master-feeder structures. - UCITS V Directive No 2014/91/EU: amended 2009 version by defining depositaries’ tasks and liabilities, strengthening remuneration rules, and creating a common framework for sanctions. - Directive (EU) 2024/927: amended both the UCITS and AIFM Directives, introducing reforms to liquidity risk management and reporting. - Level 2 measures complementing UCITS Level 1 legislation include: - Commission Directive 207/16/EC (Eligible Assets Directive). - Commission Directive 2010/43/EU (organizational requirements, conflicts of interest, conduct of business, risk management, depositary-management company agreement content). - Commission Implementing Regulation (EU) 2016/1212 (technical standards for submission of information to ESMA). - Commission Delegated Regulation (EU) 2016/438 (depositaries’ obligations). - Commission Regulation (EU) No 583/2010 (content of the KIID). - Commission Regulation (EU) No 584/2010 (standard notification to a host member state competent authority and UCITS attestation, electronic communication, on-the-spot investigations, exchange of information). - Commission Directive 2010/42/EU (fund mergers and master-feeder structures). - Commission Delegated Regulation (EU) 2018/1619 of 12 July 2018 (amending Delegated Regulation (EU) 2016/438 as regards safe-keeping duties of depositaries). - Relevant Level 3 ESMA guidelines include (selection): - Guidelines on sound remunerations and policies. - Guidelines on ETFs and other UCITS issues. - Guidelines on risk measurement and the calculation of global exposure for certain types of structured UCITS. - Guidelines—Selection and presentation of performance scenarios in the KIID for structured UCITS. - Guideline on the methodology for the calculation of the synthetic risk and reward indicator in the KIID. - Guideline on the methodology for the calculation of the ongoing charges figure in KIID. - Guidelines—Risk Management principles for UCITS. - Supplementary frameworks: Sustainable Finance Disclosure Framework (SFDR) applies to UCITS and AIFMs to increase transparency on sustainability risks and impacts. ### AIFs: AIFMD framework, levels, and market structure - AIFMD (2011/61/EU) regulates activities related to the AIFs industry, covering heterogeneous fund subtypes including hedge funds, private equity funds, real estate funds, and non-UCITS bond and equity funds. - AIFMD scope covers: - EU fund managers that manage AIFs. - Fund managers (wherever domiciled) that manage AIFs established in the EU. - Fund managers (wherever domiciled) that market units of an AIF in the EU. - Dual regime: larger managers subject to full regulatory framework; smaller managers subject to a lighter framework including registration (not full licensing) and the same reporting requirements as larger managers. - Definition of “smaller” managers (Article 3 of AIFMD): (a) those managing AIFs portfolios using leverage with AUM below EUR 100 million; or (b) those managing portfolios of unleveraged AIFs whose AUM are below EUR 500 million. - Market concentration (ESMA’s 2023 AIF Market Report): - In 2022, AIFs with a NAV larger than EUR 1bn accounted for less than 4% of all AIFs but for 51% of the NAV. - Smaller AIFs (NAV lower than EUR 500mn) account for 93% of all AIFs but only 32% of the NAV. - Level 2 Regulations supplementing AIFMD include: - Commission Delegated Regulation (EU) No. 231/2013 (exemptions, general operating conditions, depositaries, leverage, transparency and supervision). - Commission Delegated Regulation (EU) No. 694/2014 (determining types of AIF managers). - Commission Implementing Regulation (EU) No. 447/2013 (on opt-in AIFMs). - Commission Implementing Regulation (EU) No. 448/2013 (procedure for establishing the member state of reference for non-EU fund managers). - ESMA Guidelines to NCAs include Guidelines on key concepts of AIFMD, reporting obligations, sound remuneration policies under AIFMD, and on Article 25. ### Bespoke regulatory frameworks for specific AIF types - EuVECA (European Venture Capital Fund) Regulation: - Offers a voluntary EU-wide marketing passport to qualifying fund managers, exempting them from certain AIFMD costs and requirements (e.g., appointing a depositary). - Qualification limits investments to certain asset types, such as equity instruments issued by, or loans granted to, qualifying portfolio undertakings that employ up to 499 people or are SMEs listed on SME growth markets. - EuSEF (European Social Entrepreneurship Fund): - Label to identify funds focusing on European social businesses. - EuSEF funds must adhere to specific investment policies, invest only in certain asset types, follow rules on portfolio composition, investment techniques, and own funds. - EuSEF funds do not require the appointment of a depositary. - ELTIF (European Long-term Investment Funds) Regulation: - Framework for AIFs enabling investors to support companies and projects requiring long-term capital. - ELTIF must be managed by an authorized EU AIFM. - ELTIFs have specific investment policy requirements, with at least 55 per cent of their capital required to be invested in eligible investments. - ELTIFs sold to retail investors are subject to specific diversification thresholds and concentration limits. - ELTIFs must appoint a depositary. ### Money Market Funds Regulation (MMFR) - MMFR enacted in 2017: Regulation (EU) 2017/1131 on MMFs. - Purpose: enhance the resilience of MMFs. - Introduced a harmonized definition of MMF and applies to all those funds managed and/or marketed from the EU, in addition to relevant AIFM and UCITS rules that apply based on registration as either AIFs or UCITS. *Source: 1eurea2025009 - 115. Additionally, as part of the EU discussion on macroprudential frameworks, authorities* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1eurea2025009.pdf_