After AIFMD, Ucits rules to be aligned

The European Commission will extend new rules being developed for alternative investments to the Ucits framework for mutual funds, says Nadia Calviño, deputy director-general for the internal financial market and services.

Speaking to AsianInvestor on a recent visit to Hong Kong, Calviño says the EU is responding to commitments made at the G20. It has a few major initiatives to consider once it has finalised level-2 (i.e. implementation) rules to the Alternative Investment Funds Management Directive (AIFMD).

AIFMD is meant to go into effect by July 22, 2013, and will have an impact on Asia-based hedge funds seeking to raise assets from Europe-based investors.

It also addresses what the EU terms depositary institutions (i.e. custodian banks) and their liabilities should they delegate functions to third parties, notably sub-custodians.

The EU wants to ensure the tighter rules it puts in place for hedge funds and private equity are extended to Ucits.

“We are developing a package of rules reviewing the depositary rules in Ucits, intermediation of insurance products, and rules around structured products packaged for retail investors,” says Calviño. “We need to ensure that, having passed tighter rules around alternative investment funds, that there is no gap in the Ucits rules on investor protection.”

She says the reform is necessary to extend the Ucits brand.

“This reform will give more comfort to investors in Ucits products,” Calviño explains. “We will avoid gaps between AIFMD and Ucits regarding the role and function of a fund depository. This will include rules governing delegation of custody tasks.”

This could mean big changes for some Asia-based managers, custodians and intermediaries of mutual funds registered for sale in Luxembourg and Dublin.

In the alternatives space, Calviño says the biggest challenge for Asia-based fund managers seeking to sell into the EU is the gradual phasing-in of the marketing passport that applies to third-country managers.

“The new pan-European passport for alternative fund managers is a unique feature in EU legislation,” Calviño says. “At present not even EU operators have a cross-border marketing passport for non-Ucits funds.

"There is no precedent for an EU-wide marketing passport for operators established outside the EU. Even globally there is no precedent for a marketing passport that, with only one authorisation, spans 27 territories that form part of a regional zone.

"Therefore, the third-country passport requires proper preparation. This is why the passport will not be immediately available in July 2013, but rather with a two-year delay in 2015.”

Once the third-country passport is in place, rules on the third-country depositary that safe-keeps assets held by third-country funds will have to be respected as well, she says.

Earlier this year, a draft of level-2 implementing rules was leaked. These rules provide details on how funds calculate AUM and leverage, and the process for appointing custodians, among other things.

Although the EU is meant to rely on the European Securities and Market Authority (Esma) for advice on those rules, the draft-2 leak showed in many cases that the EU is likely to disregard many Esma suggestions. Those suggestions were often meant to make the AIFMD more palatable to managers and custodians.

However, Calviño says that while the EU is relying on Esma’s expertise to form its final draft rules, there are occasions when those recommendations violate the level-1 rule principles already passed as EU law.

“The level-1 basic principles are established in AIFMD. When drafting level-2 implementing rules we need to respect that legal framework. I think stakeholders are beginning to acknowledge this,” Calviño explains.

She declines to comment on the leaked draft rules, or on specific areas within level-2 rules.

Lawyers in Hong Kong say the EU provided too short a period to respond to the level-2 drafts. Calviño says the time-frame has been standard. But it is not slowing down or granting additional time either, as the law requires the EU to make AIFMD effective in July next year and the EU is on a tight schedule.

So whatever measures are being discussed are going to be close to the final result. The EU can only follow Esma advice to the extent that it is deemed compliant with the original, level-1 principles.

And after it has recast the structure for hedge funds and private equity, it is going to ensure the same standards for mutual funds. For the EU, this is a question of ensuring investor confidence in the Ucits brand. The impact on Asian managers using Ucits products is going to be big.