Introduction
Earlier today (26 June 2025) the European Securities and Markets Authority ("ESMA") published its long-awaited Final Report ("Report") on the technical advice for the review of the UCITS Eligible Assets Directive ("EAD"). The Report follows from ESMA's June 2023 mandate from the European Commission (the "Commission") to provide technical advice on the review of the EAD, including analyses and policy proposals on how to amend the EAD and, if appropriate, also the UCITS Directive in the medium to long-term. It also aims to harmonise the implementation of the EAD across EU Member States and reflect market and regulatory changes since its publication in 2007. See our previous updates on the Commission's 2023 request to ESMA and ESMA's 2024 Call for Evidence.
In formulating its advice, ESMA conducted a comprehensive survey with National Competent Authorities ("NCAs") and received 63 responses to its Call for Evidence, which closed in August 2024.
Key Policy Proposals
ESMA has proposed a number of proposals to modernise the UCITS framework, to improve clarity, consistency, and investor protection and to address current divergence in national interpretations across Member States. These proposals include:
- Look-through Approach: ESMA is proposing a mandatory look-through approach to determine the eligibility of investments for at least 90% of the UCITS portfolio to enhance transparency. This means that asset classes should not be backed by, or linked to the performance of, other assets which may differ from those referred to in Article 50(1) of the UCITS Directive.
- Indirect Exposures: The advice proposes to permit indirect exposures to alternative assets, such as commodities, crypto-assets, and catastrophe bonds, up to 10% (subject to regulatory safeguards e.g. on liquidity, valuation, risks) with a view to improving risk diversification and generating returns from uncorrelated asset classes.
- Transferable Securities: ESMA's view is that further clarification and ideally simplifications are needed to improve clarity and supervisory convergence going forward. This includes aligning the requirements with MiFID II.
- Financial Indices: Must be diversified and subject to the look-through approach.
- AIF Investments: ESMA proposes a clear distinction between open- and closed-ended alternative investment funds ("AIFs").
- Ancillary Liquid Assets: Subject to a 20% counterparty limit.
- EPM Techniques: Enhances clarity on costs and closer SFTR alignment.
Transitional Provisions
ESMA recommends long transition periods for UCITS managers to adjust portfolios, if needed. The Report advises against grandfathering existing UCITS under the old rules to avoid creating a dual regulatory regime.
Specific Asset Classes Reviewed
The Report also includes an eligibility table detailing various asset classes under the proposed look-through approach. It also examines the reported benefits, risks, and indirect exposure mechanisms for various asset classes such as crypto-assets, CoCo bonds, catastrophe bonds, distressed securities, unlisted equities, REITs, SPACs, emission allowances, ETCs, ETNs, ABS/MBS, and more.
Clarifications
The Report removes the liquidity presumption and clarifies definitions for transferable securities and money market instruments. Harmonised criteria are provided for embedded derivatives and financial indices.
Legislative Drafting Proposals
ESMA has proposed amendments to the UCITS Directive and EAD to give effect to its advice to the Commission, which are included as an Appendix to the Report.
Cost-Benefit Analysis
The Report highlights the benefits of legal clarity, convergence, and investor protection. However, it also notes the costs associated with portfolio adjustments, especially for UCITS with alternative asset exposure.
Next Steps
In terms of next steps, the European Commission is now expected to take this technical advice into account as it reviews the EAD. Agreement on, and implementation of, the final changes to the EAD is still some time away and we expect the Commission to issue a consultation on the EAD early next year. In the meantime, UCITS managers can consider ESMA's proposals against their current portfolios to assess what, if any, changes may be required in the future, but no action is required to be taken at this time.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
