EFAMA slams ESMA’s call for regulation on derivative overlays

Regulation 700 x 450The European Fund and Asset Management Association has slammed the European Securities and Markets Authority’s call for Ucits share classes with derivative overlays to be deemed non-compliant as “a step back”.

Responding to the European Commission’s Capital Markets Union mid-term review consultation, EFAMA says the move – suggested by ESMA in February – “will oblige fund providers to phase out the offer of the relevant share classes, despite strong investor demand”.

In an announcement published today, EFAMA says: “The closure of certain share classes – for no apparent benefit and despite the fact that their relative derivative overlays are implemented in the same manner when compared to the permitted foreign currency hedged ones – will inevitably oblige asset managers to reinvest client assets into new Ucits structures, to be created ex-novo and bearing all the related authorisation, initial set-up, transaction and administration costs.”

EFAMA warns the existing Ucits funds with a variety of share classes would shrink as a result.

“For years, the European asset management industry and its investors have suffered from lower economies of scale vis-à-vis non-EU asset management companies, particularly those in the USA. Where a broad array of share classes based on the same underlying asset pool is allowed, fund administration and distribution costs are mutualised across a larger population of investors, delivering significant savings in terms of economies of scale to the benefit of investors.”

EFAMA has called for regulators to assist European Ucits managers by allowing the hedging of duration risks and the distribution of Ucits shares outside Europe.

“EFAMA requests that the Commission asks ESMA to reconsider its opinion in respect of the permissibility non-currency hedging overlays at share class level for UCITS to ensure the Commission’s objectives for CMU in respect of UCITS can be achieved.”