ESMA recently conducted a review of six national regulators regarding how they regulate efficient portfolio management ("EPM") practices of UCITS they supervise, in the context of the requirements contained in ESMA’s Guidelines on ETFs and other UCITS issues (the "Guidelines").

ESMA reviewed national regulators from Estonia, France, Germany, Ireland, Luxembourg, and the United Kingdom.

The outcome of the review took the form of a Final Report published on 30 July. The report revealed both good practices and areas where improvements are needed.

Below are some observations on the Final Report, particularly from an Irish perspective:

•  ESMA noted that the Guidelines have been fully transposed into Irish law and that the Central Bank has issued supporting guidance and factored the requirements in the Guidelines into its UCITS application forms (these points were specifically highlighted by ESMA as good practices).
• ESMA says in the report that it "sees merit in [the Central Bank] formalising a systematic approach on reviewing costs, fees and revenues relating to EPM to prevent the risk of hidden revenues". 
• There was a recommendation that Risk Management Process documents ("RMPs") cover securities lending, repos and reverse repos in more detail.
• Reflecting on the nature of the Central Bank's PRISM process for supervision, there was a consideration to engage in more targeted supervision of UCITS employing "more complex strategies, including EPM".
• Not specific to the Central Bank, ESMA recommends that national regulators take steps to ensure that all net revenues from EPM are returned to the investors.
• The Final Report commented on a potential inconsistency between collateral arrangements under the Guidelines and the restrictions on reuse introduced by UCITS V.  UCITS that continue to operate arrangements of this nature should consider these further in the context of Article 22(7) of the UCITS Directive (as amended by UCITS V).

Maples and Calder have extensive expertise in the structuring, establishment and ongoing legal advisory work for UCITS using EPM, including some of the largest UCITS fund structures in Ireland.

Should you have questions, or if you would like to discuss the above, please contact [email protected] or [email protected].