Industry Updates

ESMA to probe UCITS rules for crypto and commodity funds

Following growing exposure to specialist asset classes

Theo Andrew

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The European Securities and Market Authority (ESMA) is assessing whether an update to UCITS rules is necessary given rising exposures to specialist asset classes such as crypto and commodities.

In a letter to the regulator, the European Commission instructed ESMA to gather data on the extent UCITS have been gaining direct or indirect exposure to more specialist asset classes since the rules were first introduced in 2007.

Following the review, which will consider characteristics including the availability of valuation, liquidity and safekeeping, ESMA will determine if any changes to the rules are currently required.

“ESMA is invited to gather data on the extent UCITS have gained direct and indirect exposures to certain asset categories that may give rise to divergent interpretations and/or risk for retail investors,” the European Commission wrote.

“ESMA should make a preliminary assessment of the impacts of the proposed regulatory adjustments, if any, taking into account the characteristics of the underlying market.”

Under the current rules, a commodity UCITS ETF can achieve indirect exposure by using swaps to invest in a diversified commodity index but is not able to directly in commodity futures.

The rules were updated in the 2013 Guidelines on ETFs and other UCITS issues, which said that commodity indices must be at least as diversified as indices comprised of corporate issuers.

This follows the 20/35 rule, which allows a maximum exposure of 20% to constituents, with the possibility of raising this limit to 35% for one of the constituents.

Sergey Dolomanov, partner at William Fry, said: “It appears that the European Commission would like to establish the extent to which UCITS have been gaining exposure to the more esoteric asset classes such as those listed in the examples that it provided and determine, based on the findings, whether any changes to the existing rules are required.”

The European Commission has given ESMA until 31 October 2024 to deliver its technical advice.

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