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Association of the Luxembourg Fund Industry 12, rue Erasme L-1468 Luxembourg-Kirchberg

ID number: 6182372280-83

REPLY to the European Commission Consultation Document on UCITS product rules, liquidity

management, depositary, money market funds and long term investments

Executive Summary: ALFI is the representative body of the 2.1 trillion Euro Luxembourg fund industry. It counts among its members not only investment funds but also a large variety of service providers of the financial sector. There are 3,872 undertakings for collective investment in Luxembourg, of which 2,458 are multiple compartment structures containing 11,505 compartments. With the 1,372 single-compartment UCIs, there are a total of 12,025 active compartments or sub-funds based in Luxembourg.

ALFI welcomes the European Commission Consultation Document on UCITS product rules, liquidity management, depositary, money market funds and long term investments. In the present response to this consultation we wish to develop the following views:

- In our opinion there is no need to review the scope of assets and exposures that are

deemed eligible for a UCITS fund or the extent of the existing framework for EPM

techniques.

- Regarding securities lending, we believe that there is no need to further extend the existing framework as it already features adequate requirements.

- With regard to OTC derivatives, a harmonized regime dealing with the counterparty risk

in connection with instruments and EPM transactions would mean better investor

protection. Concerning operational risks resulting from UCITS contracting with a single

counterparty, we believe that the current risk management requirements are appropriate.

- As to extraordinary liquidity management tools, ALFI believes there is no single

framework which could be effective across all types of UCITS. Exceptional cases to

suspend should be proposed by the fund managers and decided by the Board based on

recommendations by risk managers. A fixed set of criteria for such decision would not be

useful. Furthermore, time limits to trigger fund liquidation would also not be effective in

our view. We would like to underline that side-pockets should not be generally permitted

and should only be used as a last resort. Finally, regarding liquidity safeguards in ETF

secondary markets the topic is already adequately addressed in the current framework.

- On the issue of the Depositary passport, it must be underlined that whilst it is fair to say

that the UCITS V regulation can be considered as a major step forward to the

implementation of a Depositary Bank passport, ALFI is of the strong opinion that before

moving forward, the Commission should thoroughly assess and re-examine whether:

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• the existing UCITS EU Regulatory framework as well as the way the Fund industry stakeholders interact and interpret the regulation are effectively compatible with an EU passport for Depositary

and

• the implementation of a model where all the stakeholders (apart from the fund Regulator) could be located outside the domicile of the fund, potentially in three different jurisdictions, would have adverse consequences on investor protection.

We therefore recommend a prudent approach vis a vis the Depositary passport and do not see it as a major priority for the future development of the UCITS brand.

- Concerning money market funds, ALFI broadly supports the EFAMA position. The

reform of MMFs should mainly focus on the fund's internal liquidity risk. We agree that

certain incremental steps could be considered to further enhance these products’ ability to

resist pressure in times of crisis. However, we only see a further harmonization within the

UCITS regime. In the context of the discussion on additional regulation of CNAV, we

would like to underline that eliminating the ability to retain a constant NAV would eliminate

the ability to manage the fund so as to provide for yield stability and would put increased

pressure on the demand for bank deposits.

- On the topic of long term investments, ALFI welcomes the Commission’s proposal to

investigate the role that the investment fund industry could play in channeling retail

investor’s money towards the financing of long-term investments in Europe supporting

infrastructure and social development through the setup of a common framework for long-

term investments for retail investors. ALFI however believes that such framework should

be dealt with in a parallel and distinct regime from the UCITS regime.

ALFI also strongly believes that UCITS should be allowed to invest in Responsible Investing in general and in EuSEFs in particular, subject to some restriction, and would welcome a common framework to support long-term investing for retail investors in a parallel regime to the UCITS regime.

- Finally, with regard to UCITS IV improvement, and self-managed investment companies

in particular, ALFI is of the opinion that some level of consistency in the application of prudential rules for self-managed investment companies could be appropriate and that certain prudential rules contained in UCITS IV Management Company Directive applicable to management companies could be applied to self-managed investment companies. However, ALFI deems it of outmost importance that due consideration to the principle of proportionally is given in order to avoid significant organizational requirements and related costs and ensure that the SICAV model remains viable.

As regards master feeder structures, ALFI agrees that the scenario of the conversion of a feeder UCITS into an ordinary UCITS is comparable with the conversion of a UCITS into a feeder and cases where a master UCITS changes. Therefore, similar information standards ensuring consistency of the treatment of master-feeder structures should apply. ALFI would also like to suggest further improvements related to UCITS investments in

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feeder funds, the calculation of the percentage of investments not held in the master fund, the calculation of the global exposure at the level of the feeder fund, the applicable law to the agreements and the contribution in kind.

ALFI agrees with the suggestion to clarify the provisions on the timelines for mergers, and also with the proposal for an electronic notification of updates to the UCITS host Member State, the clarification that information on a share class is limited to share classes marketed in a host Member State, and the introduction of a regulator-to-regulator notification for any changes to the notification file. In addition we would recommend that the procedure to deregister a UCITS or a share class is foreseen.

Finally, we do not consider that a systematic alignment between the AIFMD and UCITS regime is needed in order to improve consistency of rules on the European asset management sector. An appropriate level of consistency should rather be encouraged if and when it is justified. In our view the AIFMD framework should be first digested and implemented before assessing whether to further harmonize the UCITS regime.

Box 1: Eligible assets

(1) Do you consider there is a need to review the scope of assets and exposures that are deemed eligible for a UCITS fund?

Based on the answer to the below detailed questions, we do not believe they should be reviewed.

(2) Do you consider that all investment strategies currently observed in the market place are in line with what investors expect of a product regulated by UCITS?

ALFI considers that UCITS provide a safe and transparent framework which gives the investor a lot of opportunities to invest in various assets. Further and similarly to ALFI’s position on the questions of "complex UCITS" and their distribution to retail investors (the “Answers”) in the context of ESMA’s consultation paper on draft guidelines for ETFs and other UCITS issues, ALFI strongly believes that the focus should not be on the complexity of the investment strategy as such, but rather on the management thereof through the setting-up of an appropriate RMP, as well as on the disclosure of potential additional risks implied thereby.

(3) Do you consider there is a need to further develop rules on the liquidity of eligible assets? What kind of rules could be envisaged? Please evaluate possible consequences for all stakeholders involved.

Liquidity is variable and depends on various contextual factors that might affect it: assets deemed to be liquid today might not be liquid anymore tomorrow (or vice versa) depending upon market conditions: ALFI’s view for the UCITS Directive is to remain “principles based” as it best allows regulators to adapt to changing circumstances. It hence belongs to the supervisory authorities to determine and implement monitoring measures aiming at ensuring that liquidity requirement is met consistently in the relevant market conditions. ALFI deems it worthwhile, in this respect, to recall that the liquidity requirement is to be

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applied to the whole portfolio of investments and not on an asset by asset basis, subject to market conditions, to enable UCITS to meet their redemption requests any time. Developing further liquidity rules would restrain possible investments. A consequence could be a shrinking attractiveness of UCITS which could shift investors into less regulated products. ALFI does not consider that there is a need to further align with AIFMD which gives more detailed requirements - in the context of less liquid funds that could be subject to gating, suspension, etc. - than UCITS IV regarding the appropriate liquidity management which must be implemented. Indeed, the UCITS regulatory framework already gives answers to several liquidity questions which minimize the risk of illiquidity of UCITS. Indeed, being principle based (i.e. imposing a liquidity result), UCITS is more protective of the investors than is specific detailed provisions were applied in order to achieve liquidity.

(4) What is the current market practice regarding the exposure to non-eligible assets? What is the estimated percentage of UCITS exposed to non-eligible assets and what is the average proportion of these assets in such a UCITS’ portfolio? Please describe the strategies used to gain exposure to non-eligible assets and the non-eligible assets involved. If you are an asset manager, please provide specific information to your business.

No comment - currently no figures available.

(5) Do you consider there is a need to further refine rules on exposure to non-eligible assets? What would be the consequences of the following measures for all stakeholders involved?

- Preventing exposure to certain non-eligible assets (e.g. by adopting a "look through" approach for transferable securities, investments in financial indices, or closed ended funds).

- Defining specific exposure limits and risk spreading rules (e.g. diversification) at the level of the underlying assets.

Initial backgrounds for the UCITS scope of eligible assets were based on three pillars, risk diversification, liquidity requirement and appropriate risk management. The ineligibility of certain assets (commodities, real estate) was not implied by the need to protect retail investors from specific inherent risks but rather to avoid liquidity management issues linked to those types of assets. In this respect, to the extent investment is done through a wrapping of the underlying ineligible assets, through which the UCITS gets exposure to such assets (by opposition to direct investment), the liquidity requirement is to be met at the level of the wrapping product itself. ALFI’s view is to remain “principles based” at the level of the UCITS Directive and it considers that, on a case by case basis, it may nonetheless appear to be appropriate that supervisory ineligible assets are adequately captured by the risk management function. We believe that retail investors shall be allowed to be exposed to such asset categories through the UCITS product that offers high level of investor protection in terms of risk diversification, liquidity and operational risk management. Should UCITS not be allowed to invest in such asset class, retail investors will inevitably be encouraged to switch to non-regulated products offering the same exposure without the investor protection framework (structured products for instance).

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(6) Do you see merit in distinguishing or limiting the scope of eligible derivatives based on the payoff of the derivative (e.g. plain vanilla vs. exotic derivatives)? If yes, what would be the consequences of introducing such a distinction? Do you see a need for other distinctions?

There is no necessity that derivative financial instruments be categorized and, if doing so, it might be difficult to determine where and how to draw the line to categorize them. Same reasoning may apply to a limitation of scope of eligible derivatives. Having said that, exotic derivative financial instruments usually require complex valuation systems and risk management processes. It is therefore important that such systems are calibrated to the nature and complexity of the instruments used (as required by existing guidelines).

(7) Do you consider that market risk is a consistent indicator of global exposure relating to derivative instruments? Which type of strategy employs VaR as a measure for global exposure? What is the proportion of funds using VaR to measure global exposure? What would be the consequence for different stakeholders of using only leverage (commitment method) as a measure of global exposure? If you are an asset manager, please provide also information specific to your business.

ALFI considers that it is important to keep VaR as a measure for global exposure as it ensures a consistent approach throughout various types of UCITS. ALFI recommends, on such basis, keeping VaR as a reference method for global exposure. It is indeed not advisable to impose different/more subjective calculation methods to adapt the multiple investment strategies of UCITS since this would imply discrepancies in the global exposure figures. ALFI supports the view that VaR combined with the other already existing UCITS measures in place as imposed by applicable EU regulation (such as the “leverage disclosure” based on the sum of notionals, imposed by ESMA Q&A regarding risk measurement and calculation of global exposure and counterparty risk of July 9, 2012 and the “cover rule” for transactions in financial derivative instruments and stress testing as imposed by ESMA in CESR Guidelines 10-788 of July 28, 2010) constitutes an adequate approach to ensure that fund managers do not leverage UCITS too much. The industry has also massively invested in VaR systems in order to meet the UCITS monitoring requirements. It would not seem appropriate to discard a significant investment imposed by the regulator to move to tailor made calculation methods which will never be a “one fits all” solution.

(8) Do you consider that the use of derivatives should be limited to instruments that are traded or would be required to be traded on multilateral platforms in accordance with the legislative proposal on MiFIR? What would be the consequences for different stakeholders of introducing such an obligation?

We do not have, to date, a clear picture of the derivative financial instruments that will be covered by MiFIR. In this context, ALFI’s view is that it is not possible, from an industry stand point, to limit non standardized derivative financial instruments to instruments that are traded or would be required to be traded on multilateral platforms in accordance with the legislative proposal on MiFIR. Indeed, that would exclude derivative financial instruments that are essential to certain strategies aiming at retail investors (notably to

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guaranteed or protected UCITS) such as asset swaps, TRS, etc., or largely used to hedge exposure such as foreign exchange contracts and swaps for instance.

Box 2, EPM techniques

(1) Please describe the types of transactions and instruments that are currently considered as EPM techniques. Please describe the types of transactions that, in your view, should be considered as EPM techniques.

In accordance with existing regulatory framework, securities lending, repurchase agreements and reverse repurchase agreements are considered as EPM techniques. We believe that such a list is appropriate.

(2) Do you consider there is a specific need to further address issues or risks related to the use of EPM techniques?

We believe that there is no need to further extend the existing framework as it already requires that: - such techniques do not change the risk profile of the fund (Article 11 of the Commission

directive 2007/16/CE of March 19, 2007); - they are adequately covered in the risk management system (Article 11 of the

Commission directive 2007/16/CE of March 19, 2007); - they are adequately covered by collateral; - the fund be able to meet at any time its redemption requests (Article 84 (1) of the UCITS

Directive). - they are economically appropriate and realized in a cost-effective way (Article 11 of the

Commission directive 2007/16/CE of March 19, 2007) The new ESMA guidelines specifically address the collateral risks and we do not believe that there is a need to further develop new rules. If we were to suggest one point in order to improve investors’ protection, we would mention that very often there is, in the UCITS reporting, a lack of clarity on the contribution of EPM to the fund objectives and how they are being used. More transparency would be welcome, provided that such clarity is provided in a way understandable to the investors and taking into consideration the concept of proportionality: transparency should mean that the investor understands the aim and use of EPM’s, how they are combined, why are they used and what is the outcome generated by such techniques, rather than a long list of risks, or a list of transactions or counterparties as it is the case today. We believe that the current approach for achieving transparency, i.e. requiring detailed lists of data to be disclosed, does not add value but is rather confusing most investors. Therefore, we suggest replacing enumerative detailed lists as required today with appropriate qualitative explanation of the strategy, that would be more meaningful for the investors.

(3) What is the current market practice regarding the use of EPM techniques: counterparties involved, volumes, liquidity constraints, revenues and revenue sharing arrangements?

No comment.

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(4) Please describe the type of policies generally in place for the use of EPM techniques. Are any limits applied to the amount of portfolio assets that may, at any given point in time, be the object of EPM techniques? Do you see any merit in prescribing limits to the amount of fund assets that may be subject to EPM? If yes, what would be the appropriate limit and what consequences would such limits have on all the stakeholders affected by such limits? If you are an asset manager, please provide also information specific to your business.

We do not see merits as the use of such techniques depends on the strategies pursued. As mentioned in our response in question 2, the existing framework adequately ensures that the EPM techniques do not alter the risk profile of the fund. Moreover, we anticipate that there will be further need to use such techniques in order to generate cash that will be required in order to post collateral in accordance with the new OTC derivatives systems requirements under EMIR.

(5) What is the current market practice regarding the collateral received in EPM?

In general, the market practice is that such transactions are fully or over-collateralized and mark-to-market on a daily basis. Collateral may include assets that would not be included in the fund’s investment policy: for instance, an equity fund may receive government bond as collateral, which is deemed appropriate as the UCITS does not intend to get market exposure through the collateral received but to realize promptly such collateral to re-acquire assets in case of counterparty default.

(6) Do you think that there is a need to define criteria on eligibility, liquidity, diversification and re-use of collateral?

Eligibility, liquidity, diversification and re-use of collateral are addressed in the new ESMA guidelines and we believe that there is no need to either go beyond nor to include such rules in a directive as it is critical to keep the possibility to adjust promptly such rules to market circumstances. We would like nevertheless to mention that we are concerned by some of rules imposed in the ESMA guidelines. These guidelines impose stricter rules than those applicable to UCITS assets in term of diversification. We believe that such rules should be aligned to those applicable to UCITS. Moreover, too strict rules on the re-use of collateral might be preventing funds to use cash generated by EPM transactions in order to post collateral required under the new OTC derivatives framework (EMIR) and may prevent UCITS funds to access derivatives transactions that are necessary to achieve their strategy.

(7) Do you see merits in prescribing mandatory haircuts on received collateral?

We believe that the requirement to impose a haircut policy, as mentioned in the ESMA guidelines is the right approach and we do not suggest any change to the framework in this regard.

(8) Do you see a need to apply liquidity considerations when deciding the term or duration of EPM transactions?

The current requirement to appreciate liquidity at the portfolio level and vis à vis of ability to meet redemption requests is the most appropriate from an investor protection stand point as

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currently foreseen in the Article 84 (1) of the UCITS Directive. We do not favor a rule based approach singling out each asset class or each type of transactions. Indeed, we believe that investors are better protected by a provision which is principle based and focus on the outcome for the investors than detailed provisions that may become quickly inappropriate given market circumstances or in the context of the UCITS strategy as a whole and may fail ensuring its intended objective.

(9) Do you think that EPM should be treated according to their economic substance for the purpose of assessment of risks arising from such transactions?

We believe that EPM techniques should be treated according to their economic substance for the purpose of assessing risks and compliance. Indeed, when funds assets are lent or subject to repo’s, the funds remain economically exposed to market movements on these assets and the risk management system should reflect this.

(10) Is the EPM counterparty allowed to re-use the assets provided by a UCITS as collateral? If so, to what extent?

ALFI believes that the rules are worth clarifying.

(11) Do you think that there is a need to define collateral provided by a UCITS?

The purpose of this question is unclear to ALFI.

(12) Do you think that there should be greater transparency on EPM techniques?

See question 2 of Box 2.

Box 3, OTC derivatives

(1) When assessing counterparty risk, do you see merit in clarifying the treatment of OTC derivatives cleared through central counterparties?

ALFI does not have, to date, a clear picture with sufficient granularity of (i) the financial derivative instruments that will be covered by MIFIR/EMIR and (ii) their treatment under MIFIR/EMIR.

(2) For OTC derivatives not cleared through central counterparties, do you think that collateral requirements should be consistent between the requirements for OTC and EPM transactions?

Collateral requirements should indeed be consistent between OTC financial derivative instruments and EPM transactions. ESMA (10-788 and 2012/474) already goes into that direction. A harmonized regime dealing with the counterparty risk in connection with financial derivative instruments and EPM transactions would mean better investor prospection and would have the merit of simplicity (i.e., single set of rules instead of two separate sets of rules).

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(3) Do you agree that there are specific or other operational risks resulting from UCITS contracting with a single counterparty? What measures could be envisaged?

No one model fits all situations. On the one hand, using several counterparties may facilitate switches from one counterparty to another if necessary. On the other hand, managing simultaneously several counterparties means additional work and increased risks of operational errors. Moreover, the best execution duty will come into play in the selection by the UCITS of a single or several counterparties. Such best execution duty may lead to the selection of one or several counterparties depending on the prevailing market circumstances. The volume, number and nature of OTC derivatives are also to be taken into consideration. It would not be appropriate to impose several counterparties to a UCITS entering to OTC derivative contracts for a very small percentage of its assets or a very limited number of transactions (for instance, one or very few foreign exchange contracts for hedging purposes). As one model cannot fit all situations, we believe that the current requirement imposing that operational risks are adequately captured by the risk management of the UCITS is the appropriate one.

(4) What is the current market practice in terms of frequency of calculation of counterparty risks and issuer concentration and valuation of UCITS assets?

The current market practice is to rely largely on daily valuations of the issuer risks, market risk, OTC financial derivative instruments, OTC counterparty risk and collateral posted under OTC financial derivative instruments and EPM transactions (even in circumstances where the NAV is not calculated on a daily basis for dealing purposes, meaning for processing subscription, conversion and redemption orders). Proper risk management requires indeed daily valuations of all assets, commitments and collaterals. Current applicable rules require a daily valuation of (i) the market risk/global exposure (intraday valuation is even required in some cases), (ii) OTC financial derivative instruments (art. 41(1)g) of the UCITS Directive) and (iii) the collateral posted in respect of OTC financial derivative instruments and EPM transactions (in accordance with the applicable Luxembourg rules).

(5) What would be the benefits and costs for all stakeholders involved of requiring calculation of counterparty risk and issuer concentration of the UCITS on at least daily basis?

See answer as for question No. 4 of Box 3.

(6) How could such a calculation be implemented for assets with less frequent valuation?

See answer as for question No. 4 of Box 3. Box 4: Extraordinary liquidity management tools

(1) What type of internal policies does a UCITS use in order to face liquidity constraints? If you are an asset manager, please provide also information specific to your business.

In most cases the internal policy is integrated into the general risk management policy. Liquidity risk related topics are associated with pre-investment due diligence and eligibility evaluations, the ongoing monitoring of the positions as well as rules in case significant redemption requests are made.

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(2) Do you see a need to further develop a common framework, as part of the UCITS Directive, for dealing with liquidity bottlenecks in exceptional cases?

We believe that the current market practice is evolving in this respect. A common framework would prevent the market to further develop alternative approaches at this stage. Some ways to manage liquidity risk in exceptional cases are described in ALFI’s guidelines on liquidity risk management paper. We believe that there is no single framework which could be effective and efficient across all types of UCITS.

(3) What would be the criteria needed to define the "exceptional case" referred to in Article 84(2)? Should the decision be based on quantitative and/or qualitative criteria? Should the occurrence of "exceptional cases" be left to the manager's self-assessment and/or should this be assessed by the competent authorities? Please give an indicative list of criteria.

According to Art. 84 (2), temporary suspension shall be provided only in exceptional cases where required and where suspension is justified with regards to the interest of the unit-holders. We believe that ‘exceptional cases’ to suspend should be proposed by the fund managers (or the management company as the case may be) and decided by the board based on the recommendations submitted by the risk managers. The fund manager (or the management company as the case may be) could use either quantitative or qualitative criteria whereas industry experience shows that often both are used. We also believe that a fix set of criteria is not useful as some criteria are more useful than others depending on the risk profile and the way the UCITS is managed. However, the suspension policy in exceptional cases should be disclosed by the fund in order to allow the investors to understand that there may be or may be no cases where such a temporary suspension could happen. Due to the complex issue, we believe that transparency is superior to specific rule settings.

(4) Regarding the temporary suspension of redemptions, should time limits be introduced that would require the fund to be liquidated once they are breached? If yes, what would such limits be? Please evaluate benefits and costs for all stakeholders involved.

We do not believe that time limits to trigger fund liquidation would be useful and effective. First, this would indicate that possible scenarios in the future are known as there might be specific events unknown today which cause necessary suspension beyond these hard limits. But if those limits are established, there might be no way out of liquidation. This means that there could be events in the future that will systematically trigger liquidation of a wide range of funds without a stopping mechanism. Second, if hard limits were required by regulation, they should be established by each fund depending on the respective risk appetite. Different fund types have different risk profiles leading to different liquidity risk profiles. Setting hard limits would mean that for some funds those limits are too narrow and for some other funds they are too wide. Hence, such pre-defined limits would result in inefficient portfolio management to the disadvantage of the investors. However, limits established by a fund should be subject to appropriate information to investors. Third, the costs of such limits will likely be significant. For example, a particular market could face temporary liquidity constraints, but the limits are set in a point of time when the market is recovering. In such cases, regulatory limits would damage investor value. Again, limits subject to a fund’s discretion and based on its risk profile combined with appropriate disclosures could reduce such a risk.

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(5) Regarding deferred redemption, would quantitative thresholds and time limits better ensure fairness between different investors? How would such a mechanism work and what would be the appropriate limits? Please evaluate benefits and costs for all the stakeholders involved.

Quantitative thresholds and hard time limits of and pre-defined limits for deferred redemptions have the same drawbacks as those described for time limits triggering forced liquidation (refer to (4)).

(6) What is the current market practice when using side pockets? What options might be considered for side pockets in the UCITS Directive? What measures should be developed to ensure that all investors' interests are protected? Please evaluate benefits and costs for all the stakeholders involved.

Side-pockets are generally not a tool which is widely used; they are also not allowed in Luxembourg. Moreover, side-pockets are also not deemed as an appropriate management tool under the UCITS regime for the reasons stated. If side-pockets are systematically allowed, it would create a hidden sub-regime within the UCITS regime which does generally not comply with the UCITS rules. We believe, side-pockets should not be generally permitted and may only be used as a last resort.

(7) Do you see a need for liquidity safeguards in ETF secondary markets? Should the ETF provider be directly involved in providing liquidity to secondary market investors? What would be the consequences for all the stakeholders involved? Do you see any other alternative?

ALFI believes that this topic is adequately covered by the combination of article 1.2 of the current UCITS Directive and "IX. Treatment of secondary market investors of UCITS ETFs" of the ESMA/2012/474 ("Guidelines on ETFs and other UCITS issues"). Indeed authorized participants ("APs") provide liquidity in secondary markets, under UCITS ETF supervision to ensure that the Stock Exchange Value of its units does not significantly vary from their net asset value. In addition to secondary trading, UCITS ETF or its Management Company offer direct redemptions, constantly or only in times of market upheaval after a market warning publication, as disclosed in the prospectus of the fund. ALFI believes that similar requirements should apply to other listed retail products such as non-UCITS ETFs or certificates sold to retail investors on a European Stock Exchange in order to ensure a level playing field between UCITS ETFs and these other products.

(8) Do you see a need for common rules (including time limits) for execution of redemption orders in normal circumstances, i.e. in other than exceptional cases? If so, what would such rules be?

We currently do not see a need for those rules for various reasons: The current rules already require immediate redemption. Any delay may indicate and trigger an exceptional case for a fund as each UCITS should be able to redeem at any time without delay in normal circumstance. We believe this principle is sufficiently enough established in the current rules. Furthermore, normal circumstances are complementary to exceptional

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circumstances which should be defined on a fund by fund basis in line with its risk profile. In other words, for a clear cut, normal cases should be defined in a complementary sense to exceptional cases. Hence, the equivalent reasoning is valid for normal cases as described above. Overall, we believe the current rules are sufficient.

Box 5: Depositary passport

Preamble ALFI welcomes the Commission’s consultation paper on the UCITS Depositary function and considers this consultative approach as a very important step since Depositories play a crucial role in the value chain of the Fund industry, not limited to the processing and operational aspects, but also through their supervisory function and ultimately, in the overall investors protection. The question of the European Passport for the Depositary function was broached during the previous EU Commission consultations dated 2009 and 2010 respectively and the overall consensus was that the harmonization of the status, role, liability regime and market practice was an unconditional pre-requisite before implementing such a European passport for UCITS. Since then, the EU Commission has issued the UCITS V text proposal aiming at addressing this harmonization issue using the principles applicable to the Depositary function as set by the Directive on Alternative Investment Fund Managers. Whilst it is fair to say to that the UCITS V regulation can be considered as a major step forward to the implementation of a Depositary Bank passport, ALFI is of the strong opinion that before moving forward, the Commission should thoroughly assess and re-examine whether:

• the existing (e.g. UCITS IV) and future EU Regulatory framework (e.g. UCITS V) as well as the way the Fund industry stakeholders (e.g. Management Companies, Depositaries, Regulators…) interact and interpret the regulation are effectively compatible with an EU passport for Depositary

• the implementation of a model where all the stakeholders (apart from the fund Regulator) could be located outside the domicile of the fund, potentially in three different jurisdictions, would have adverse consequences on investor protection

The fact that the UCITS and its Depositary must be located in the same Member State has to-date not been perceived to be an impediment for the development of the UCITS brand. Assuming the costs element is the main driver for implementing the Depositary Bank passport, it is important to note that over the last decade, Depositary Bank fees have remained stable or even decreased due to investments in technology, outsourcing to lower cost centers, leverage expertise accumulated over the years… whereas the complexity of the product has significantly increased. In addition, one should note as well that the Depositary Bank fee’s contribution to the funds Total Expense Ratios (“TER”) is marginal and in the range of a couple of basis points. Therefore, ALFI strongly encourages, in the first place, all the stakeholders to debate and challenge their expectations on the potential of the passport to further reduce the costs whilst maintaining an adequate investor protection. ALFI believes that the final impact may fall short such expectations and that spreading key functions over several geographies might act against investors’ interests. That explains why ALFI has always adopted a prudent approach vis a vis the

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Depositary passport and does not see it as a major priority for the future development of the UCITS brand. Reply to questions in Box 5: (1) What advantages and drawbacks would a Depositary passport create, in your view, from the perspective of: the Depositary (turnover, jobs, organization, operational complexities, economies of scale …), the fund (costs, cross-border activity, enforcement of its rights …), the competent authorities (supervisory effectiveness and complexity …), and the investor (level of investor protection)?

The main potential argument in favour of a European passport for Depositary lies essentially in the opportunity for the Management Company and/or the fund to leverage established relationships and existing infrastructures located in a given EU country for domestic products in order to develop a more centralized operating model.

The resulting costs savings associated with the potential economies of scale from the Depositary passport service are still to be proven considering that the Depositary Bank’s operating models can / are already largely, for the safekeeping function, based on delegation of the associated tasks outside the domicile of the Fund. The underlying investors are already benefiting from the savings today. Whilst the rationale for a more global safekeeping model was not entirely costs driven (Fund promoter, especially for UCITS, are increasingly looking for global service model and players to service their products), the financial parameter remains a key driver.

Besides the pure financial aspects, we would like to draw the Commission’s attention on the following anticipated issues, potential drawbacks and areas of concerns:

• Specific EU regulations aiming at harmonising the regulatory framework (e.g. UCITS V,

AIFMD...) including the Depositary function, are not yet implemented and have

therefore not been satisfactorily tested or harmonized among the member states,

• The potential for having a fund in jurisdiction A, Depositary in jurisdiction B and

Manager in jurisdiction C raises significant concerns over coordination of regulatory

oversight. A clear hierarchy of controls and supervision would need to be established

so that it is clear to regulators, managers, depositaries and investors which regulatory

authority takes overall control especially in a crisis situation,

• We acknowledge that UCITS IV introduced a management company passport and that

they may have some merit in having the Depositary in the same jurisdiction as the

management company rather than in the fund domicile. However, to date, we believe

there are relatively few examples of an effective use of the management company

passport. Before introducing a Depositary passport, we recommend an analysis of the

success and feedback from regulators and market players in this regard,

• We believe that a prerequisite for an effective provision of Depositary services is the

cross border coordination of custody, insolvency and securities laws. Until those

initiatives have been successfully implemented, it appears premature to push forward a

Depositary passport as investors in different UCITS in the same jurisdiction could run

with the risk of being subject to different regulatory outcomes and treatment dependent

on the location of the Depositary,

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• Tax considerations also need to be taken into account especially for non-corporate

funds as locating the Depositary outside the jurisdictions of the fund could potentially

change national tax authorities’ treatment of a Fund,

• ESMA’s role in coordinating the supervision of any cross border provision of services is

essential. Given ESMA’s current and projected future workload any extension of

oversight will need to be matched by appropriate resources at ESMA,

• Considering that non EU countries, especially Asia (such as Hong Kong, Taiwan and

Korea), are key contributors to the growth of the UCITS products, we recommend to

analyse the compatibility of a Depositary Bank passport with their local regulatory

framework; already today the passport for management companies has revealed

reluctance and sensitivity of most Asian regulators,

• The historical UCITS centres have built over the last 25 years a very specific expertise

and experience in Depositary activities which will not necessarily exist in all the EU

countries since the latter did not have the same exposure to UCITS products,

• The multiplication of domiciles and operating centres will inevitably create practical

challenges and additional costs such as additional reporting and oversight among the

different jurisdiction including audit, regulators, translation, coordination between the

different sites...),

• The Depositary passport could even harm on-going efforts to reduce systemic risk

since Depositaries might decide to consolidate all of their activities into a single

domicile / under a single legal entity to benefit from economies of scale which will

inevitably lead to a higher concentration of risks (credit, operational...),

• Last but not least, in the current UCITS IV environment, the Depositary is potentially

the “last man standing” in the domicile of the Fund and the more recent UCITS V and

AIFM regulation emphasize the image of the Depositary acting as an extended arm of

the local Regulator. The implementation of the Depositary passport could in that

context be a very sensitive topic for the investors themselves in the context of their own

protection.

(2) If you are a fund manager or a Depositary, do you encounter problems stemming from the regulatory requirement that the Depositary and the fund need to be located in the same Member State? If you are a competent authority, would you encounter problems linked to the dispersion of supervisory functions and responsibilities? If yes, please give details and describe the costs (financial and non-financial) associated with these burdens as well as possible issues that a separation of fund and Depositary might create in terms of regulatory oversight and supervisory cooperation.

Based on our experience, the requirement for the fund and Depositary to be located in the same Member State does not raise concerns and actually is proven to be quite efficient as it contributes to an effective control and supervision of the UCITS.

We strongly believe that the dispersion of the supervisory functions will definitely complicate the supervision of the fund for the reasons highlighted in question 1 and could be detrimental to the investors, especially in case of crisis situation. Efforts required in terms of coordination, sharing of information, harmonization of both regulatory and market practice, acquisition of the expertise… will inevitably lead to costs increase, slow down the time to market of the product and ultimately increase risks to investors.

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(3) In case a Depositary passport were to be introduced, what areas do you think might require further harmonization (e.g. calculation of NAV, definition of a Depositary’s tasks and permitted activities, conduct of business rules, supervision, harmonization or approximation of capital requirements for depositaries…)?

As emphasized in our general remarks above, ALFI holds the view that the harmonization of the UCITS Depositary regime across all EU Member States is an essential pre-requisite for a UCITS Depositary passport. The purpose of such harmonization is to ensure that all UCITS investors enjoy the same level of protection and to avoid possibilities of regulatory arbitrage.

The UCITS V legislative proposal presented by the Commission and currently examined by the Council and the European Parliament constitutes a step in the right direction as it covers key topics such as eligibility requirements, appropriate conduct of business rules, scope of the safekeeping function, delegation… This said, it is at this stage very difficult to assess the effectiveness of such regulation in the absence of Level 2 provisions and practical and concrete experience. To the contrary, we do not see the need in this context for a harmonisation of the NAV calculation as it is usually not part of the Depositary functions.

(4) Should the Depositary be subject to a fully-fledged authorization regime specific to depositaries or is reliance on other EU regulatory frameworks (e.g. credit institutions or investment firms) sufficient in case a passport for Depositary functions was to be introduced?

Considering the Depositary is playing a key role in the supervision of the fund’s activities and investors’ protection, a fully-fledged authorization regime appears to be appropriate until the Policy Makers and EU Regulators are satisfied that the Depositary Bank function across the EU is fully harmonized.

(5) Are there specific issues to address for the supervision of a UCITS where the Depositary is not located in the same jurisdiction?

ALFI believes this question is best answered by the competent authorities. Generally speaking and as already highlighted in our preamble and in our answers to questions 1 and 2, having a UCITS and its Depositary located in two different countries is likely to complicate the supervision of these entities. Robust supervision by competent authorities, including thorough monitoring reviews, is key to maintaining worldwide confidence in UCITS products.

Box 6- 9: Money Market Funds

Preamble

ALFI believes that Money Market Funds (“MMFs”) have been through some reforms that have

strengthened their resilience, such as the CESR/ESMA guidelines on a common definition of

European MMFs. Hence, at this stage, the reform of MMFs should focus on the fund's internal

liquidity risk, including by requiring MMFs to adhere to certain liquidity requirements (such as by

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stipulating that a minimum amount of a fund's portfolio should mature within one day and within

five business days) and to know their clients by taking into account client concentration and client

segments, industry sectors and instruments, and market liquidity positions.

ALFI has worked closely with EFAMA and for the avoidance of repetition we broadly endorse the EFAMA positions and comments to the consultation and have only included below aspects we wish to ensure are considered.

Reply to questions in Box 6:

(1) What role do MMFs play in the management of liquidity for investors and in the financial markets generally? What are close alternatives for MMFs? Please give indicative figures and/or estimates of cross-elasticity of demand between MMFs and alternatives.

ALFI supports the comments from EFAMA.

(2) What type of investors are MMFs mostly targeting? Please give indicative figures.

ALFI supports the comments from EFAMA.

(3) What types of assets are MMFs mostly invested in? From what type of issuers? Please give indicative figures.

ALFI supports the comments from EFAMA .

(4) To what extent do MMFs engage in transactions such as repo and securities lending? What proportion of these transactions is open-ended and can be recalled at any time, and what proportion is fixed-term? What assets do MMFs accept as collateral in these transactions? Is the collateral marked-to-market daily and how often are margin calls made? Do MMFs engage in collateral swap (collateral upgrade/downgrade) trades on a fixed-term basis?

ALFI supports the comments from EFAMA.

(5) Do you agree that MMFs, individually or collectively, may represent a source of systemic risk ('runs' by investors, contagion, etc…) due to their central role in the short term funding market? Please explain.

ALFI supports the comments from EFAMA and would also like to note the following: ALFI welcomes the initiatives taken by ESMA in this area and would also specifically draw the Commission’s attention to recent steps taken in the US by the SEC around such funds. Addressing a risk of runs on money funds should be done by addressing the quality and liquidity of the underlying assets held by such funds. As an example, at the height of the crisis in 2008, USD-denominated constant NAV money market funds in Europe lost an aggregate of 32.5% in assets between 1 September and 30 September. Under the revised rule 2a-7, the liquidity requirements would mean that fully 30% of the underlying portfolio matures within 7 days and thus, even in such extreme circumstances, redemptions could have been met through portfolio maturity, thus minimizing both the risk of significant asset disposal by the funds impacting the financial system and the risk of capital loss to investors.

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We would further advocate that disclosure to investors is enhanced to stress the absence of any guarantee of capital preservation in both constant NAV and variable NAV money market funds. ALFI believes that the money market fund industry in Europe proved its current resilience through the height of the financial crisis when taken as a whole. We do, however, agree that in the context of systemic risk and financial stability, certain incremental steps could be considered to further enhance their ability to resist pressure in times of future crisis and to ensure a consistency of application across the industry. In addition, we have noted the recent IOSCO publication related to money market funds and in this regard, we would have the following comments to make on the content of the Green Paper: The 5 key risks highlighted by IOSCO are aligned to a large extent with the concerns highlighted in the Green Paper: 1. Susceptibility to runs – we believe this is most appropriately addressed through ensuring the liquidity requirements of money funds are such that significant redemptions can be met as and when needed and again commend the work done by ESMA on setting, for example, weighted average maturity (WAM) and weighted average life (WAL) restrictions for money market funds. We point to the steps taken by the SEC in their efforts to enhance the rule 2a-7 as guidance for further enhancements in this area. 2. Contagion risk – to the extent that the above-suggested liquidity requirements are such that instruments held have a short-term maturity, there should be no need for a significant disposal of paper in the money markets and thus the risk of contagion is similarly reduced to an acceptable level. 3. Implicit guarantee of sponsors for return of capital. We accept that outside the fund industry, there may be a perception that such funds come with an implicit guarantee, but we believe this should be addressed through appropriate disclosure and risk warnings making it clear that no such guarantee exists and a risk of loss of capital is inherent in any investment. Any decision by a sponsor to thus support their money fund in times of crisis is solely a commercial decision taken in light of current circumstance. Investor feedback indicates that the lack of a guarantee is well understood amongst many investor types, but we accept that there may be segments where this is less well understood and should be addressed through disclosure. 4. Constant NAV funds causing an increased risk – the use of amortized cost accounting should be more seen as a technique to manage the fund to achieve a constant NAV rather than any specialized valuation methodology unique to money market funds. All such funds structured as UCITS strictly follow the valuation requirements of that regime. Maintaining the ability to manage the fund to a constant NAV remains an important element for money funds to be able to provide the valuable alternative funding mechanism referred to by M Barnier. Clients value the accounting and tax simplicity of the constant NAV product, together with the risk diversification and management aspects associated with the funds. Eliminating the ability to retain a constant NAV would eliminate the ability to manage the fund in such a manner as to provide for the yield stability sought by the end customer and would put significant increased pressure on the demand for bank deposits. In order to ensure proper and transparent management of the valuation process, similar regulation to that introduced by the SEC recently requiring monthly publication of the deviation to market value could be something worthy of consideration.

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5. Rating risk – risk of a down-grade of the fund or portfolio securities causing a run on the fund or a fire-sale of specific assets. ALFI maintains that appropriate liquidity and quality requirements, together with diligent credit analysis avoiding overreliance on ratings, at the level of the funds should serve to minimize the risk of such a down-grade and similarly ensure that in the event of such a down-grade, the fund should be able to meet any resultant redemption flows. Similarly, robust credit analysis procedures should ensure that the risk that a portfolio security down-grade would result in a fire-sale of assets would be minimal for such funds.

(6) Do you see a need for more detailed and harmonized regulation on MMFs at the EU level? If yes, should it be part of the UCITS Directive, of the AIFM Directive, of both Directives or a separate and self-standing instrument? Do you believe that EU rules on MMF should apply to all funds that are marketed as MMF or fall within the European Central Bank's definition?

ALFI supports the comments from EFAMA and would also like to note the following: As noted above, we believe Money Market regulation could be enhanced, but also believe that this should be done within the context of the UCITS regime. Any entity therefore operating outside the UCITS regime as a money fund – as defined by the ECB – would then be considered as a bank (or shadow bank) and regulated as such.

(7) Should a new framework distinguish between different types of MMFs, e.g.: maturity (short term MMF vs. MMF as in CESR guidelines) or asset type? Should other definitions and distinctions be included?

ALFI supports the EFAMA position.

Box 7:

(1) What factors do investors consider when they make a choice between CNAV and VNAV? Do some specific investment criteria or restrictions exist regarding both versions? Please develop.

ALFI supports the comments from EFAMA and would also like to note the following: Clients value the accounting and tax simplicity of CNAV funds and this, combined with the high regulatory safeguards around the products makes their usage by corporate and institutional treasurers compelling. Investing into a VNAV fund results in the fact that the fund will not be managed for stability and thus that such investment would be treated as an equity position within the constraints of many of the rules applied by treasurers. The assurance that the fund will be managed to maintain a stable yield/NAV enables such investors to align their cash management needs with a safe and professionally managed cash product. It should be stressed, however, that managing the fund to maintain stability in no way infers an inappropriate approach to valuation which remains consistent in nature with the VNAV funds. Indeed, an analysis of deviations from NAV since 2010 on CNAV funds in the US – following the SEC requirement to publish such deviation each month – has revealed no greater deviation than 1basis point – at a time when volatility in the money markets has remained acute.

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(2) Should CNAV MMFs be subject to additional regulation, their activities reduced or even phased out? What would the consequences of such a measure be for all stakeholders involved and how could a phase-out be implemented while avoiding disruptions in the supply of MMF?

ALFI supports the comments from EFAMA and would also like to note the following: The use of amortized cost accounting should be more seen as a technique to manage the fund to achieve a constant NAV rather than any specialized valuation methodology unique to money market funds. All such funds structured as UCITS strictly follow the valuation requirements of that regime. Maintaining the ability to manage the fund to a constant NAV remains an important element for money funds to be able to provide the valuable alternative funding mechanism referred to by Michel Barnier. Clients value the accounting and tax simplicity of the constant NAV product, together with the risk diversification and management aspects associated with the funds. Eliminating the ability to retain a constant NAV would eliminate the ability to manage the fund in such a manner as to provide for the yield stability sought by the end customer and would put significant increased pressure on the demand for bank deposits.

Ultimately, investors would find an alternative which may well result in a transfer of risk to them at a higher price, however, it remains unproven that such a move would have any impact on reducing any systemic risk inherent in the system and we would not advocate any form or prohibition or overregulation unless this can be established. We would however think it worthwhile considering whether introducing transparency to the CNAV process along the lines recently introduced by the SEC may be beneficial for such funds in Europe.

(3) Would you consider imposing capital buffers on CNAV funds as appropriate? What are the relevant types of buffers: shareholder funded, sponsor funded or other types? What would be the appropriate size of such buffers in order to absorb first losses? For each type of the buffer, what would be the benefits and costs of such a measure for all stakeholders involved?

ALFI supports the comments from EFAMA and would also like to note the following: Further, should any capital buffer be seen as necessary for money funds this should be introduced for both VNAV and CNAV funds.

(4) Should valuation methodologies other than mark-to-market be allowed in stressed market conditions? What are the relevant criteria to define "stressed market conditions"? What are your current policies to deal with such situations?

ALFI supports the comments from EFAMA and would also like to note the following: The use of AC valuation methodologies only remains appropriate to the extent there is a minimal deviation of resultant vale from market. As such, we believe that the current framework in place (requiring mark to market in the event of a significant deviation) remains adequate. In addition, further transparency around any difference may be beneficial.

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Box 8:

(1) Do you think that the current regulatory framework for UCITS investing in money market instruments is sufficient to prevent liquidity bottlenecks such as those that have arisen during the recent financial crisis? If not, what solutions would you propose?

ALFI supports the comments from EFAMA and would also like to note the following: ALFI welcomes the initiatives taken by ESMA in this area and would also specifically draw the Commission’s attention to the recent steps taken in the US by the SEC around such funds. Addressing a risk of runs on money funds should be done by addressing the quality and liquidity of the underlying assets held by such funds. As an example, at the height of the crisis in 2008, USD-denominated constant NAV money market funds in Europe lost an aggregate of 32.5% in assets between 1 September and 30 September. Under the revised rule 2a-7, the liquidity requirements would mean that fully 30% of the underlying portfolio matures within 7 days and thus, even in such extreme circumstances, redemptions could have been met through portfolio maturity, thus minimizing both the risk of significant asset disposal by the funds impacting the financial system and the risk of capital loss to investors. We would further advocate that disclosure to investors is enhanced to stress the absence of any guarantee of capital preservation in both constant NAV and variable NAV money market funds. As such, ALFI believes enhancing the current regime in line with the above is the preferred approach addressing both the concerns of the Commission and ensuring a valuable contributor to the capital markets remains viable.

(2) Do you think that imposing a liquidity fee on those investors that redeem first would be an effective solution? How should such a mechanism work? What, if any, would be the consequences, including in terms of investors' confidence?

ALFI supports the comments from EFAMA and would also like to note the following: Under a number of fund regimes in the EU, this possibility already exists – generally referred to as swing pricing or dilution levies. We consider the existing flexibility available in this regard to be sufficient where it exists and believe providing such flexibility across member states for all types of UCITS/funds should be considered.

(3) Different redemption restrictions may be envisaged: limits on share repurchases, redemption in kind, retention scenarios etc. Do you think that they represent viable solutions? How should they work concretely (length and proportion of assets concerned) and what would be the consequences, including in terms of investors' confidence?

ALFI supports the comments from EFAMA and would also like to note the following: Imposing regulatory restrictions on redemptions would we believe serve to change the nature of the money market fund and introduce an uncertainty of a “race to beat the limit” which would only serve to exacerbate the challenge of managing liquidity. Imposition of such restrictions would we think severely limit the attractiveness of such vehicles. In addition, flexibility already exists at the level of many funds – allowing funds the flexibility whilst avoiding requirements to act would be beneficial.

(4) Do you consider that adding liquidity constraints (overnight and weekly maturing securities) would be useful? How should such a mechanism work and what would be the proposed proportion of the assets that would have to comply with these constraints?

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What would be the consequences, including in terms of investors' confidence?

ALFI supports the comments from EFAMA and would also like to note the following: Without further analysis, we believe that the recent SEC requirements outlined in 1 above would be a good basis to consider application within EU money funds – their adoption having the added advantage of promoting consistency across what is a global business.

(5) Do you think that the 3 options (liquidity fees, redemption restrictions and liquidity constraints) are mutually exclusive or could be adopted together?

No comment.

(6) If you are a MMF manager, what is the weighted average maturity (WAM) and weighted average life (WAL) of the MMF you manage? What should be the appropriate limits on WAM and WAL?

ALFI supports the comments from EFAMA.

Box 9:

(1) Do you think that the definition of money market instruments (Article 2(1)(o) of the UCITS Directive and its clarification in Commission Directive 2007/16/EC16) should be reviewed? What changes would you consider?

(2) Should it be still possible for MMFs to be rated? What would be the consequences of a ban for all stakeholders involved?

(3) What would be the consequences of prohibiting investment criteria related to credit ratings?

(4) MMFs are deemed to invest in high quality assets. What would be the criteria needed for a proper internal assessment? Please give details as regards investment type, maturity, liquidity, type of issuers, yield etc.

Regarding box 9, ALFI supports the comments from EFAMA. Box 10: Long-term investments Preamble Investing on a long-term basis is generally perceived as a factor for growth for the economy. Although long term investing only offers returns over the long term, such investments may better contribute to the financing of new projects and expansion plans that normally require longer time horizons for completion. Besides the banks that provide borrowing facilities, private companies may also seek other sources of income in order to strengthen their capital. Investment funds can play a key role in channeling investor's money toward such financing. In addition, long-term investments can also contribute to the financing of infrastructure projects such as transportation, energy, health or education. Often financed with public money,

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infrastructure projects could benefit from new sources of financing, including private funding. This could increase the number and scale of projects launched, boosting growth and job creation. Such investments can offer investors stable and steady returns that can be uncorrelated with financial markets. Long-term investments share one common feature: a low level of liquidity. They are generally associated with long lock-up periods. This is why access to this type of investments is normally reserved for institutional investors only. Nonetheless, some EU Member States have already sought of facilitating access to long-term investments for retail investors, though a common approach to this has not emerged. Long-term investing therefore remains segmented with barriers regarding the free movement of capital across borders. A variety of asset types have been characterized as 'long-term', including direct investments into unlisted companies (early or mature stage), infrastructure projects, 'real' assets (real estate, other physical assets), and third-party managed funds making investments in unlisted companies. Since socially responsible investments are typically long-term in perspective, these represent a major category as well. In the future, such investments could include channeling money to the European Social Entrepreneurship Funds (EuSEF) envisaged in the recent proposal by the European Commission. Long-term investment funds open to retail investors may be an effective enhancement to the internal market. They could create new opportunities for deepening the European asset management industry and its contribution to growth, while offering new investment opportunities for investors. Steps towards encouraging long-term investment could also help reduce cyclical pressures in the capital markets. Promoting such funds could take several forms, including different legislative options; access to retail investors would of course entail high standards of investor protection, as is already the case for UCITS. Reply to questions in box 10: As a preliminary remark, the Commission's proposal focuses more on long-term investments in the sense of an asset class (i.e., the investment to which a manager will allocate capital) than it does to long-term investments in the sense of a retail financial product outcome. Whilst ALFI is in favor of long-term investments in Europe supporting infrastructure and social development, ALFI recommends being cautious about the juxtaposition of national and supranational policy objectives with retail investment for long-term outcomes, which are individual objectives. ALFI welcome the Commission’s proposal to investigate the role that the investment fund industry could play in channeling retail investor’s money towards the financing of long-term investments in Europe supporting infrastructure and social development through the setup of a common framework for long-term investments for retail investors. ALFI believe that such framework should be dealt with in a parallel and distinct regime from the UCITS regime.

(1) What options do retail investors currently have when wishing to invest in long-term assets? Do retail investors have an appetite for long-term investments? Do fund managers have an appetite for developing funds that enable retail investors to make long-term investments?

So far, retail investors have had limited direct access to long-term assets as defined by the Commission. Those assets are generally reserved for institutional and sophisticated

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investors only. However, retail investors have already limited and indirect access to the financing of long-term public or corporate infrastructure like projects through funds, such as UCITS funds, investing a minor portion of their assets in debt or other instruments issued by national and supranational institutions and governments and corporate issuers.

Retail investors do have an appetite for long-term investments in pursuit of their individual goals (retirement planning, house or children’s´ university financing, etc.).

Fund managers do have an appetite for developing funds that enable retail investors to seek long-term outcomes in pursuit of their individual goals.

Fund managers do have an appetite to invest in long-term assets in the interest of such retail investors as part of a well-diversified and risk-reward adjusted investment portfolio.

(2) Do you see a need to create a common framework dedicated to long-term investments for retail investors? Would targeted modifications of UCITS rules or a stand-alone initiative be more appropriate?

ALFI would welcome a common framework to support long-term investing for retail investors in a parallel regime to the UCITS regime, extending the liquidity profile of the product to better match the increased allocation of the portfolio to long-term asset classes and addressing some of the product limits on liquidity and risk.

A parallel regime may be preferable in terms of investor recognition of this product as being something different to UCITS and in the interest of clarity within the regulatory community and the industry as to what a UCITS product may do.

ALFI thinks that a longer dialogue between the Commission, the fund management industry and investor representatives is necessary before this matter can be decided.

(3) Do you agree with the above list of possible eligible assets? What other type of asset should be included? Please provide definitions and characteristics for each type of asset.

The Commission’s suggestion for eligible assets appear to be acceptable, but should not be exhaustive, provided that in the case of each investment, it is considered on its merits as a risk/reward proposition, as any investment should be, and that they form part of a diversified portfolio.

ALFI thinks that a longer dialogue between the Commission, the fund management industry and investor representatives is necessary before this matter can be decided.

(4) Should a secondary market for the assets be ensured? Should minimum liquidity constraints be introduced? Please give details.

A retail product - even if it has a long term objective - should provide its investors with a method to exit the product upon demand and be paid out in cash through:

(a) Direct redemption request to the product promoter This would be similar to the current UCITS regime and may be attractive to investors who know that they can redeem on demand upon reasonable conditions. Indeed, a product

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would probably be commercially unviable without it and on a point of principle a retail investor should not be irrevocably bound into a savings product. To support an undertaking's ability to take a suitably long-term view on its investments, such rights of exit may need to be at less frequent intervals than the UCITS regime imposes upon undertakings today, subject to advance notice and possible significant liquidity discount.

(b) Secondary market making ALFI believes that if (a) above should be mandatory subject to reasonable conditions, (b) should not be mandatory but should be permitted.

(5) What proportion of a fund's portfolio do you think should be dedicated to such assets? What would be the possible impacts?

The portion of a portfolio allocated to long-term assets would depend upon the fund's investment objective and the liquidity that it offers to its retail investors. The closer the objective and the more liquid the terms offered to the shareholder, the lower the allocation to long-term investments.

(6) What kind of diversification rules might be needed to avoid excessive concentration risks and ensure adequate liquidity? Please give indicative figures with possible impacts.

Diversification is an essential feature of funds’ investments whether they are long-term focused or not.

ALFI cannot offer an opinion on this question without considering the concepts of "excessive concentration”, "adequate liquidity" and the objective of the fund and its investors.

(7) Should the use of leverage or financial derivative instruments be banned? If not, what specific constraints on their use might be considered?

Leverage and derivatives can be important tools in achieving long-term investment objectives and in managing risk and ALFI believes that they must be available to the products being considered by this consultation on a case by case basis.

(8) Should a minimum lock-up period or other restrictions on exits be allowed? How might such measures be practically implemented?

Minimum lock-up may be a suitable technique in certain circumstances justified by the product. The term “lock-up” must be reasonable and comply with the objective of the fund and a retail customer base.

ALFI has mentioned liquidity facilities under (4) above. It seems inappropriately negative to consider them to be "restrictions" if they are a necessary and reasonable part of the product design.

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(9) To ensure high standards of investor protection, should parts of the UCITS framework be used, e.g. management company rules or Depositary requirements? What other parts of the UCITS framework are deemed necessary?

As indicated under (2) above, a parallel regime to the UCITS regime may be preferable in terms of investor recognition of this product as being something different to UCITS and in the interest of clarity within the regulatory community and the industry as to what a UCITS product may do.

However, ALFI recognizes the benefits of governance concepts such as the management company and Depository and believes that these concepts should be retained in the setup of a framework dedicated to funds investing in long-term assets together with provisions relating to risk management, liquidity management, organizational rules and other provisions supporting the investor protection principle.

ALFI thinks that a longer dialogue between the European Commission, the fund management industry and investor representatives is necessary before this matter can be decided.

(10) Regarding social investments only, would you support the possibility for UCITS funds to invest in units of EuSEF? If so, under what conditions and limits?

Separate form ALFI’s responses to question (1) to (9) which consider the value of long-term investments and the access of retail investors to long term investments, ALFI strongly believes that UCITS should be allowed to invest in Responsible Investing in general and in EuSEFs in particular, subject to some restrictions (i.e. up to 10% of its assets into EUSEF’s in accordance with the Article 50, 2, (a) of the UCITS Directive).

If a specific retail fund structure is created for long-term investments, as these would not be subject to the same liquidity constraints, ALFI would recommend to enable such structure to invest most of their assets into EUSEF’s provided that these investments are subject to appropriate risk diversification, risk management and liquidity requirements.

BOX 11: UCITS IV improvement, alignment with AIFMD

(1) Do you think that the identified areas (points 9.1 to 9.4 below) require further consideration and that options should be developed for amending the respective provisions? Please provide an answer on each separate topic with the possible costs / benefits of changes for each, considering the impact for all stakeholders involved.

9.1: self-managed investment companies:

As a preliminary remark, it should be stressed that there are major differences between the management company and a self-managed investment company. A standard self-managed investment company is regarded as a “product” which benefits from the product passport1 whereas a UCITS management company is a service provider to such product. In contrast to a UCITS management company, self-managed investment company’s scope of activity is restricted to one fund. In addition, a self-managed investment company may not engage in

1 Background paper {COM(2005) 314 final}, p.17.

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additional core activities, such as portfolio management or ancillary facilities and does not benefit from further freedom as regards cross-border services within the EU. The fact that a UCITS management company can provide other services and may engage in cross-border activity can render its business more complex. Furthermore, it shall be noted that a standard self-managed investment company operates on the basis of a delegation model (i.e. a scenario where a third party delegate performs certain functions on behalf of the self-managed investment company). The entities to whom a self-managed investment company delegates functions are properly regulated in their own capacity (e.g. under Markets in Financial Instruments Directive, as implemented in the EU Member States). Under current framework self-managed investment companies already are subject to prudential rules, based upon EU member state discretionary powers afforded by the UCITS IV Level 1 Directive2. In addition, we read from the Recital 5 of the UCITS IV Level 2 (Directive 2010/43/EU, hereinafter “UCITS IV Management Company Directive”) that the EU Member States implementing the UCITS IV Management Company Directive were afforded with an opportunity to apply the rules on administrative procedures and internal control mechanism to self-managed investment companies “as a matter of good practice (…) taking into account the principle of proportionality”. Given the current framework, the Member States might have taken different approaches in the applicability of prudential rules contained in UCITS IV Management Company Directive to self-managed investment companies. In light of the above, ALFI is of the opinion that some level of consistency in the application of prudential rules for self-managed investment companies could be appropriate and that certain prudential rules contained in UCITS IV Management Company Directive applicable to management companies could be applied to self-managed investment companies, as explained below. However, ALFI deems it of outmost importance that due consideration to the principle of proportionally is given in order to avoid significant organizational requirements and related costs and ensure that the SICAV model remains viable. Therefore, when considering the alignment of rules applicable to self-managed investment companies with those applicable to the UCITS management companies the Commission should take into account the differences between the management company and self-managed investment company, as outlined above, and give proper consideration to the UCITS delegation model. In doing so, each organizational rule should be considered individually as to its applicability to a self-managed investment company. This is viewed as consistent with the provision in Recital 5 of the UCITS IV Management Company Directive which provides that the Directive’s rules on administrative procedures and internal control mechanisms should apply to both UCITS management companies and self-managed investment companies, taking into account the principle of proportionality. ALFI considers in particular that the permanent compliance function and internal audit function, as contained in the UCITS IV Management Company Directive, are not appropriate for a self-managed investment company and that specific and proportionate rules in relation to compliance and internal audit should apply to self-managed investment companies. In particular, in cases where a self-managed UCITS fully delegates asset management activity it should be able to place more direct reliance on the policies and

2 Article 31, Directive 2009/65/EC.

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procedures applied by such delegate. 9.2: Master-Feeder-Structure:

Conversion of a feeder UCITS into an ordinary UCITS In terms of master-feeder structures, article 9.2 of the consultation raises the following issue: Article 64(1) of the UCITS Directive requires UCITS to provide information to investors in the following two cases: where an ordinary UCITS converts into a feeder UCITS, and where a master UCITS changes. However, this article does not cover a third possible scenario, that is, where a feeder UCITS converts into an ordinary UCITS. Such conversions lead to a significant change in the investment strategy. It can be argued that similar information standards should apply across all three scenarios.

ALFI agrees that the described third scenario (conversion of a feeder UCITS into an ordinary UCITS) is comparable with the two other scenarios. Therefore, similar information standards ensuring consistency of the treatment of master-feeder structures should apply. This would be to the benefit of unit-holders who receive information in the event of significant changes in the investment strategy. It is worthwhile to mention that such a change might require certain adaptations of the wordings of other articles, and the information to be provided to unit-holders could be similar, but not be the same, in particular in relation to the following points:

1. The date when the investment will exceed the limit applicable under article 55

paragraph 1.

Article 64 paragraph 1(c)3, for example, and consequently the reference to article 55

paragraph 1 would have to be adapted or omitted.

2. Prior approval of competent authorities

We think that article 64 paragraph 1(a) (provision of a statement that the competent

authorities of the feeder UCITS home Member State have approved the conversion)

shall not apply in the event of a conversion of an existing feeder UCITS into an ordinary

UCITS.

The purpose of the authorities’ approval pursuant to article 59 paragraph 3 is to ensure

compliance by the feeder UCITS, its Depositary and its auditor, as well as the master

UCITS, with all requirements set out in the Chapter VIII of the UCITS Directive, in

particular regarding the different information sharing agreements.

In the proposed third scenario, the converting UCITS is however no longer regulated

under the special master-feeder regime, but must rather comply with the standard

investment limitations and safeguards provided by article 1 paragraph 2(a), 50, 52, 55

and 56 paragraph 2(c) applying to all ordinary UCITS. Whereas such a conversion may

be considered to be a fundamental change of the converting UCITS’ investment policy,

3 Unless otherwise specified, articles refer to the UCITS Directive of 13 July 2009 (2009/65/EC)

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we believe that the disclosure requirements of article 64 paragraph 1(b), (c) and (d)

would suffice to protect investors’ interests in such cases.

3. Deadline for compliance with the new standard regime

According to what is provided in article 64 paragraph 3, we suggest that Member

States should ensure that feeder UCITS converting into ordinary UCITS do not change

their investment policies before the expiry of a period of 30 days from the provision of

information to investors.

Moreover, we think that a provision comparable to article 39 paragraph 6, which is applicable to fund mergers, should be introduced for the conversion of an existing feeder UCITS into an ordinary UCITS. A period of six months to fully comply with the standard investment diversification requirements set out, inter alia, in article 1 paragraph 2(a), 50, 52, 55 and 56 paragraph 2(c) would from our perspective be appropriate. In terms of possible costs, we think the impact of the proposed change would rather be minor as investors are usually anyway informed by information notices.

Further improvements concerning master-feeder structures The consultation paper invites stakeholders to give views on whether there are any other aspects of the current UCITS framework that need to be addressed. Considering master-feeder structures, ALFI would like to suggest the following further improvements of which the first point deserves priority:

1) Enabling UCITS investments in feeder funds – 10% rule to be amended

In accordance with article 50 paragraph 1(e)(iv), UCITS ("investing UCITS") are able to invest in another UCITS or other collective investment undertakings ("target UCITS/CIU") only if, inter alia, the target UCITS/CIU has terms that prohibit more than 10% of its value consisting of units of other CIU ("the 10% rule"). The reason for this provision was to limit circularity of investment. It was intended that UCITS are able to invest in feeder funds, as evidenced by the master-feeder provisions. But the 10% rule currently prevents UCITS, such as funds of funds, from investing in feeder funds as those necessarily invest more than 10% in another scheme (a feeder must invest at least 85% in the master). This rule is seriously hampering the development of master-feeder arrangements, with the consequent lack of realization of economies of scale (and, hence, benefits to consumers) which UCITS IV was meant to deliver.

ALFI is of the view that article 50 paragraph 1(e) should be amended in a way that it applies to investments into funds other than feeder UCITS and to add to article 50 feeder UCITS as another category of permissible investment. The purpose behind the 10% rule would still be given effect: it would still limit circularity of investment as a master UCITS must meet the 10% rule. Also, in order to make itself available as a master, a UCITS must not hold the units of a feeder UCITS (article 58 paragraph 3(c) of the UCITS Directive).

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ALFI does not believe that a “look through” to the underlying master might be a solution as it increases operational complexities in particular in case of multiple investors in a master and does not allow or minimizes economies of scale and cost efficiencies.

2) Calculation of the percentage of investments not held in the master fund

To be deemed a master-feeder UCITS structure under the 2010 Law, the feeder UCITS should invest at least 85% of its assets into a single master UCITS. A feeder UCITS may hold up to 15% of its assets in one or more of the following: - Ancillary liquid assets

- Financial derivative instruments, which may be used only for hedging purposes

- Moveable and immovable property which is essential for the direct pursuit of its

business, if the feeder UCITS is an investment company.

In calculating the 15% threshold, it is the view of ALFI that this should be determined by reference to the market value of the investments of the UCITS. Where derivative instruments are held, the market value is deemed to be the unrealized gain/loss on the instrument as opposed to the notional commitment under the contract.

3) Calculation of the global exposure at the level of the feeder fund

A risk management process must be employed which enables the UCITS to monitor and measure at any time all the material risk of its positions. The techniques and resources dedicated to the measurement of risks should commensurate the complexity of the investment strategy and to the extent to which derivative instruments are used. As the calculation, measurement and monitoring of the global exposure needs to be performed at least on a daily basis, it is the view of ALFI, that in calculating the global exposure of the feeder that no look through be applied to the global exposure of the master. The global exposure should be calculated by reference to the maximum authorized global exposure of the feeder only.

Our view complies with ESMA’s Questions and Answers on risk measurement and calculation of global exposure and counterparty risk for UCITS released (2012/429). Regarding the look-through approach for the determination of the global exposure of a UCITS investing in other funds, ESMA clarifies that such approach is not mandatory, and further specifies the conditions for such UCITS to treat the net asset value of a target fund as an equity instrument and use it as a substitute in the calculation of its global exposure.

4) Applicable law to the agreements

Regarding the information-sharing agreements between depositaries and auditors, ALFI thinks that lengthy discussions on the applicable law should be avoided by prescribing the law of the master’s home State. This is particularly the case for multiple feeders investing into a master. Such a change would contribute to further cost savings, complexities and help to reduce uncertainties.

5) Contribution in kind

Persisting uncertainties regarding tax implications when setting up cross-border pooling vehicles still prevents an unconditional use of master-feeder structures.

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Recital 10 of Commission Directive 2010/42/EU of 1 July 2010 provides that in order to save transaction costs and to avoid negative tax implications, the master UCITS and the feeder UCITS may wish to agree on a transfer of assets in kind, unless this is prohibited under national law or incompatible with the fund rules or instruments of incorporation of either the master UCITS or the feeder UCITS. It also states that the possibility of transferring assets in kind to the master UCITS should in particular help those feeder UCITS which have already been carrying on activities as a UCITS to avoid transaction costs arising from the sale of assets which both the feeder UCITS and the master UCITS have invested in. Moreover, article 9 (c) clarifies that the agreement between the master UCITS and the feeder UCITS, referred to in the first subparagraph of article 60 paragraph 1 of Directive 2009/65/EC, includes, if applicable, the terms on which any initial or subsequent transfer of assets in kind may be made from the feeder UCITS to the master UCITS. ALFI would like to emphasize the importance of achieving further harmonization regarding the terms by which such transfer of assets in kind could occur. There is still uncertainty about the most appropriate option of transferring assets from the feeder UCITS into the master UCITS.

9.3: Fund Merger:

In practice, it might raise a prejudice to the investors who remain locked in the UCITS and bear the market risk during the five working days period; a situation which might be very difficult for them considering their investment in a daily UCITS. In addition, most of the promoters and the UCITS’ statutory auditors are in position to confirm that the exchange ratio may be calculated on the last day on which shareholders may redeem/repurchase/convert their shares.

We believe that currently this article is not clear and may be subject to various interpretations as described below and shall be amended accordingly.

In accordance with a literal lecture of articles 43 (2), 45 (1) and 47 (1) of the UCITS Directive, shareholders of the merging and/or receiving UCITS have in principle the right to request redemption/repurchase/conversion of their shares free of charge for a period of at least 30 days upon information of the intended merger and until five working days before the date on which the exchange ratio is calculated.

We are of the opinion that the five working days period constitutes the maximum amount of time granted by the European legislator to the promoter of the merging and receiving UCITS to calculate the exchange ratio. Consequently, said period may as well be shortened or entirely waived by the promoter should it be possible, from a practical perspective, to proceed with the calculation of the exchange ratio and the merger within a shorter period of time.

We understand indeed from the preparatory works of the UCITS Directive, in particular from the draft report of the Committee on Economic and Monetary Affairs on the UCITS Directive proposal dated 19 September 2008, that this period has been provided for allowing the processing of orders from a practical perspective, without any obligation however to do so:

“To allow for processing of orders, the last redemption or re-purchasing of units might for technical reasons only be allowed until at maximum three days before the effective date of the merger”.

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From a subsequent draft report of the Committee on Economic and Monetary Affairs on the UCITS Directive proposal dated 10 December 2008, we understand that such period has been extended to five working days in the final version of the UCITS Directive for the same reasons.

There from we conclude that current article 45 (1) of the UCITS Directive may be interpreted as giving the promoter of the merging and receiving UCITS a mere possibility to temporarily suspend redemptions, repurchases and conversions during the five working days following the notice period (of at least 30 days) in order to dispose of sufficient time to calculate the exchange ratio and proceed with the merger.

This view is further supported by the fact that, in case of important adverse market fluctuations, said period would be detrimental to the interests of the UCITS’ shareholders. Shareholders of a daily UCITS would indeed be prevented by such provision from exiting the UCITS during these five working days, whereas the requested period may not even be required, from a practical perspective, to calculate the exchange ratio and to proceed with the merger.

9.4: Notification procedure:

ALFI agrees with the changes in the consultation namely:

• that the notification of an update to the UCITS host Member State should be in electronic form,

• to clarify that information on a share class is limited to share classes marketed in a host Member State, and

• to introduce a regulator-to-regulator notification for any changes to the notification file including the information on arrangements for marketing or marketing of a new share class.

Therefore, article 93 8. Could read as follows:

“In the event of a change in the information regarding the arrangements made for marketing communicated in the notification letter in accordance with paragraph 1, or a change regarding share classes to be marketed, the UCITS shall give notice thereof via an electronic means to the competent authorities of the home Member State before implementing the change. The home Member State shall ensure that the competent authorities of the UCITS host Member State are informed according to paragraph 3.”

ALFI believes that some additional cost would be borne by the home Member State competent authorities in each member state, therefore Luxembourg Ireland, Germany, France and the UK would bear incremental administrative cost. However, the savings to UCITS would be multiples of the cost incurred by the Member State competent authorities. Further it would allow for the Home Member state to follow the evolution in the marketing operations of its domestic UCITS funds. At present there is an open loop, whereby home Member State competent authorities may be aware that a UCITS has sought to passport its units in January and would not be aware that the UCITS has instructed the same host Member State competent authority to deregister in June.

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In addition, we would recommend that the procedure to deregister a UCITS or a share class is foreseen and documented in European regulation. To facilitate this, some minor amendments to the Notification Letter as set out in the Commission Regulation No 584/2010 should be made. Among these amendments we suggest to divide the table of compartments and share classes into three sections, existing notifications, new notifications, and instruction for deregistration.

9.5: Alignment with AIFMD: (2) Regarding point 9.5, do you consider that further alignment is needed in order to improve consistency of rules in the European asset management sector? If yes, which areas in the UCITS framework should be further harmonized so as to improve consistency between the AIFM Directive and the UCITS Directive? Please give details and the possible attached benefits and costs.

As a preliminary remark, it should be stressed that the AIFMD is a “manager” directive whereas the UCITS directive (“UCITSD”) is a “product” directive. Therefore, the objectives pursued by each piece of legislation and their respective governing rules are not and need not necessarily be exactly the same. Furthermore, unlike the UCITSD which targets retail investors, the AIFMD is aimed at professional investors. The UCITS and the AIFMD frameworks thus do not require the same level of protection. With respect to the assets concerned as well, UCITS provisions are tailored for open-ended investment funds that invest in financial instruments and other liquid financial assets, whereas AIF are not necessarily open-ended and generally invest in assets other than financial instruments.

For all the above reasons, we do not consider that a systematic alignment between the two regimes is needed in order to improve consistency of rules in the European asset management sector. Rather, an appropriate level of consistency should be encouraged if and when it is justified because e.g. the respective rules pursue the same objective, while at the same time taking due account of the differences between the regulated populations. This is precisely the approach taken by ESMA in its final report to the European Commission on possible implementing measures of the AIFMD issued on 16 November 2011 (“ESMA Final Report”). We believe that this approach should be maintained.

Finally, account must be taken of the fact that the AIFMD has not yet been transposed into national law and that the numerous delegated acts to be adopted in this context have not yet been issued by the European Commission. They shall first be digested and get into practice before assessing whether the UCITS framework should be further harmonized and aligned with the AIFMD.

In light of the above, please find below our specific answer in relation to each of the items mentioned under point 9.5:

1. Organization rules in the AIFMD as compared to the UCITS rules:

In this respect, there are currently no major differences between the two set of rules. In the context of the AIFMD’s implementing measures, ESMA’s Final Report further provides that it seeks to achieve an appropriate level of consistency between the UCITS and the MiFID regimes while taking into account the diversity of AIFs and the different types of assets they invest in. UCITS and MiFID rules have therefore already served as a regulatory model to the AIFMD with respect to the organizational rules, on the basis of the fact that many AIFMs

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are already authorized as management companies under the UCITSD or are already operating under the MiFID regime and hence the objective is to avoid that different regulatory standards apply in this context.

On the other hand, ESMA took account in its advice of the fact that UCITS provisions are aimed at the protection of retail investors while the AIFMD regulates the marketing of AIFs to professional investors. Also, since MiFID provisions often differentiate between retail and professional clients when it comes to duties of investment firms, ESMA has taken the view that the MiFID provisions are sometimes of greater utility for implementing measures, and has therefore based its advice on the respective MiFID provisions whenever their articulation of duties is more liberal as the services are provided for professional clients rather than for retail clients. Therefore the fact that some provisions are more detailed in the AIFMD than comparable ones in the UCITSD does not mean that they are appropriate in the context of the UCITSD.

Finally, to the extent that most of the organization rules under the AIFMD will be implemented through delegated acts which have not yet been officially adopted by the European Commission, it is premature to assess whether any specific areas in the UCITS framework should be further aligned with the AIFMD framework.

2. Delegation

In relation to delegation, different rules apply to a certain extent in the context of the UCITSD and the AIFMD. E.g. in the UCITSD the restrictions to delegation apply to delegation of investment management, whereas in the AIFMD they encompass both portfolio management and risk management. Obviously the reason for this difference is justified by the fact that the risk management function is a core function of the AIFM in the context of the AIFMD in contrast with the UCITSD.

However, when it comes to the letter box entity prohibition, the concept should be apprehended in the same manner under both regimes, i.e. the principle in both regimes should be that core functions can be delegated at the same time insofar as the AIFM /UCITS remains liable notwithstanding that fact that it has delegated these functions. This is the current approach taken in the UCITS framework and it should be maintained. In relation thereto, ESMA in its Final Report proposes appropriate criteria to consider that an AIFM becomes a letter-box entity, which could be expressly transposed in the UCITS framework. Indeed, ESMA Final report provides that:

“The AIFM would become a letter-box entity and could no longer be considered to be the manager of the AIF where:

1. The AIFM no longer retains the necessary expertise and resources to supervise the

delegated tasks effectively and manage the risks associated with the delegation; or 2. The AIFM no longer has the power to take decisions in key areas which fall under the

responsibility of the senior management or no longer has the power to perform senior management functions, in particular in relation to implementation of the general investment policy and investment strategies.”

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Imposing additional conditions on delegation as currently discussed within the context of the level 2 AIFMD measures prepared by the European Commission does not seem appropriate neither in the context of AIFM nor in the context of UCITS management companies.

There are also differences e.g. in relation to the delegation of function to third country delegates. Indeed, the UCITSD provides that cooperation with third country regulator has to be ensured (MoU with the CSSF) whereas in the context of the AIFMD cooperation arrangement has to be in place before the delegation starts, there are requirements as to the minimum content of the MoU, such as the right to information exchange and on-site inspections, and ESMA seeks to centrally negotiate multilateral MoU. In this regard, it is difficult to assess at this stage whether further alignment between the UCITSD and the AIFMD is needed as the AIFMD implementing measures have not yet been finalized nor issued by the European Commission and will first need to be digested in the context of the AIFMD. It is therefore premature to assess whether further alignment should be sought with respect to certain rules on delegation in the context of the UCITSD. However, it is worth mentioning that so far the rules applying to UCITS in relation thereto have proven efficient as they currently stand.

3. Valuation

Valuation in the context of the AIFMD and the type of assets concerned (e.g. real estate) is different than valuation in the context of a UCITS which generally targets liquid financial assets admitted or dealt in on regulated markets. For this reason, we do not believe that an alignment between the UCITS regime and the AIFMD is needed in relation thereto.

4. Risk and liquidity management rules

ESMA Final Report provides in relation to possible implementing measures on risk management that ESMA is seeking to achieve in its advice cross-sector consistency by taking into account relevant articles of the UCITSD while considering heterogeneous population of AIFs and AIFM. ESMA also provides in its Final Report that it considers it appropriate to focus on and to enhance the governance structures envisioned under the UCITS Directive to ensure that there are robust controls that ensure the risk profile disclosed to investors is aligned with the actual risk profile of the AIF. No further alignment should therefore be sought as to the risk management framework, as the AIFMD rules on risk management are already UCITS inspired and adapted to the alternative environment. As far as the specific and practical implementing measures are concerned, again as mentioned above the final delegated acts must first be issued and digested in order to assess from a practical perspective whether some of them could be beneficial to the UCITS framework and aligned accordingly. In relation to liquidity management, the heterogeneous and diverse nature of the population of AIFs within the scope of the AIFMD presents significant challenges, according to ESMA in its Final Report, to specifying the detailed mechanics or procedures for the management of liquidity. ESMA has therefore set out fundamental general requirements for all AIFMs which can be adapted to the diverse size and structure of the AIFM and to the nature of the AIF under management. In light of the generality of the rules in the context of the AIFMD due to the diversity of populations of AIFs, and to the extent that liquidity in the context of a UCITS is different than liquidity in the context of an alternative investment fund environment, we believe that no further alignment is needed in the UCITS framework.

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5. Reporting or calculation of leverage

The UCITSD rules and the AIFMD should not be strictly aligned in relation thereto as each regime targets different types of assets and strategies. In relation to leverage in particular, the UCITS IV regime already provides for rules adapted to sophisticated UCITS.

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