The European Securities and Markets Authority (ESMA) has published its 2018 Work Programme (the Programme), which sets out ESMA’s priorities and areas of focus for 2018. Supervisory convergence and the assessment of risks are the two headline areas identified by ESMA. In the area of Investment Management, ESMA has identified a key objective of achieving measurable improvements in the level of convergence regarding the application by National Competent Authorities (NCAs) of EU legislation on investment management through the development of guidance and application of supervisory convergence tools.
As part of this overall review, ESMA will conduct a peer review on the Guidelines on ETFs and Other UCITS Issues (the Guidelines) which it originally published in 2012. The Guidelines cover a range of UCITS-related matters but crucially also introduced the first pan-European ETF specific rules for UCITS. These rules include:
- The use of the “UCITS ETF” identifier in the name of the UCITS;
- The requirement clearly to disclose in the prospectus, key investor information document and marketing communications the policy regarding portfolio transparency and where information (including any iNAV) may be obtained; and
- A focus on secondary market investors including the requirement to disclose specific risks in the prospectus and marketing communication of the UCITS ETF advising the secondary market investors that shares of the UCITS ETF are generally not redeemable from the UCITS ETF itself.
The Guidelines also contain requirements that are applicable across UCITs generally but impact UCITS ETFs in particular. For example, additional rules with respect to the eligibility of financial indices (and in particular commodity indices) were introduced together with new prospectus disclosure requirements.
The Programme will look to obtain the views of the various NCAs on the implementation of the Guidelines and will encourage an “exchange of supervisory experience”. Many of the rules and disclosure requirements included in the Guidelines are prescriptive and may not have led to supervisory divergence. However, there are areas within the Guidelines where the proposed exchange of supervisory experience may lead to further discussion within ESMA. For example, the Guidelines introduced a rule which allows a secondary market investor the option of redeeming shares directly with the UCITS ETF in circumstances where the stock exchange value of the shares of the UCITS ETF significantly varies from its net asset value. The Guidelines contain examples of scenarios where this may be applicable, such as cases of market disruption leading to the absence of a market maker. The UCITS ETF is required to disclose the process for this direct redemption option in its prospectus, as well as the potential costs involved. The experiences of the NCAs in respect of this particular provision will be of interest.