Following a formal mandate from the European Commission in June 2023, the European Securities and Markets Authority (ESMA) has issued its Final Report and technical advice on the review of the UCITS Eligible Assets Directive (UCITS EAD). This directive defines which assets UCITS funds are permitted to invest in, and the proposed changes aim to modernize and harmonize investment compliance across the EU.
Key Regulatory Proposals and Changes
1. Look-Through Requirements
ESMA recommends a look-through approach to determine asset eligibility for at least 90% of a UCITS portfolio. This aims to:
- Improve transparency of underlying exposures
- Ensure consistency in asset classification
2. Limited Exposure to Alternative Assets
UCITS funds may invest up to 10% of their portfolio in indirect exposure to alternative assets, provided:
- Liquidity and valuation safeguards are in place
- The goal is to enhance diversification and access uncorrelated return sources
3. Clarification of Key Concepts
ESMA proposes clearer definitions and eligibility criteria for:
- Transferable securities
- Money market instruments
- Financial derivatives and indices
- Ancillary liquid assets
- Efficient portfolio management techniques
4. Alignment with Other EU Legislation
To promote regulatory consistency, ESMA recommends harmonisation with:
- MiFID II
- DLT Pilot Regime
- Markets in Crypto-Assets Regulation (MiCA)
5. Retail Access to AIFs
ESMA suggests exploring a retail AIFM product and harmonising cross-border marketing rules to improve retail investor access to EU AIFs.
6. Supervisory Convergence
The proposals aim to reduce national divergence and promote regulatory harmonisation across EU member states.
What’s Next for Investment Compliance Teams?
The European Commission is expected to review ESMA’s advice in late 2025, potentially leading to regulatory updates in 2026. Compliance teams should:
- Monitor developments closely
- Assess portfolio exposure to alternative assets
- Prepare for enhanced transparency and reporting obligations
- Align internal policies with evolving EU legislation
How Funds-Axis Supports UCITS Compliance
At Funds-Axis, our Investment Compliance platform helps asset managers stay ahead of regulatory change by:
- Automating rule-based portfolio monitoring
- Supporting look-through analysis and eligibility checks
- Providing real-time alerts and audit trails
- Ensuring alignment with UCITS, MiFID II, and AIFMD requirements
Explore our UCITS Compliance Solutions
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Frequently Asked Questions
Q: What is the UCITS Eligible Assets Directive (UCITS EAD)?
It’s an EU directive that defines the types of assets UCITS funds can invest in, ensuring investor protection and market integrity.
Q: What are ESMA’s key recommendations in the 2025 Final Report?
ESMA proposes look-through requirements, limited alternative asset exposure, clearer definitions, and alignment with other EU regulations.
Q: How will these changes affect investment compliance?
Firms will need to enhance transparency, update eligibility checks, and prepare for harmonised supervisory expectations across the EU.
Source: ESMA Final Report – UCITS Eligible Assets Directive (ESMA34-2087785638-1548)
