Oisin McClenaghan
Partner | Legal
Ireland
Oisin McClenaghan
Partner
Ireland
No Content Set
Exception:
Website.Models.ViewModels.Components.General.Banners.BannerComponentVm
Key changes for UCITS: ESMA’s advice on the Eligible Assets Directive
ON THIS PAGE
The European Securities and Markets Authority (ESMA) has issued wide-ranging advice to the European Commission on the future of the UCITS Eligible Assets Directive (EAD), recommending greater flexibility in terms of what may go into the UCITS 10% "trash bucket", a stricter look-through approach to asset eligibility and new limits on indirect exposures to alternative assets.
The European Commission is not bound to take ESMA's advice. The commission is now expected to consider ESMA's advice and formulate its own proposed updates to the UCITS EAD. Early indications suggest that the European Commission may launch a consultation on any proposed updates in the coming months.
However, UCITS managers should review their existing portfolios in light of ESMA's advice to determine whether there is alignment or if adjustments may be needed.
Background
In June 2025, ESMA published its eagerly awaited technical advice to the European Commission on the review of the UCITS EAD.
ESMA's advice comes in response to the European Commission's formal request to ESMA in June 2023 to provide technical advice on the EAD. In particular, the European Commission asked ESMA to advise on the appropriateness, or otherwise, of the types of underlying assets UCITS are currently directly or indirectly gaining exposures to. This is part of a broader consideration by the European Commission as to whether the EAD requires updating, given it has been in force since 2007 in an unchanged form.
The next step is for the European Commission to consider the advice from ESMA, as well as possibly conducting a public consultation, before the European Commission will determine what changes - if any - should be made to the EAD.
Key takeaways for UCITS managers
ESMA's advice aims to clarify, harmonise and modernise the application of the EAD. Central among ESMA’s recommendations is the introduction of a mandatory “look-through” approach for determining asset eligibility. This would require UCITS managers to assess the underlying exposure of portfolio investments - such as structured or wrapper products - to ensure that generally at least 90% of the portfolio maintains exposure to eligible assets. While indirect exposures to certain alternative or non-traditional asset classes could be permitted, such as commodities, real estate and crypto, ESMA advocates for a strict aggregate cap of 10% on such holdings.
ESMA has also called for the removal of any automatic presumption of liquidity or negotiability for listed instruments, recommending that UCITS managers formally evaluate and document liquidity and tradability both at the asset and portfolio level on an ongoing basis.
Topic-by-topic summary of ESMA’s advice and takeaways on the EAD
| Topic | ESMA recommendation / takeaway |
| Transferable security definition |
Proposal for further clarity and alignment with MiFID II. |
| Regulatory harmonisation |
Potential move towards a directly applicable EU regulation to ensure consistency of application of the requirements in each Member State. An EU regulation is directly applicable in each member state, unlike a directive, which requires local enacting legislation, which can give rise to differences in implementation or gold-plating by EU member states. |
| Look-though requirement |
Mandatory look-through for all portfolio investments to the level of the final underlying of the investment, with at least 90% of the UCITS portfolio exposed to UCITS eligible assets. |
| "Trash bucket" |
A considerable expansion of the types of non-UCITS eligible assets which a UCITS may invest in on an ancillary basis is proposed by ESMA. ESMA recommends limiting indirect exposure to ineligible assets (for example, commodities, crypto-assets and real estate) at an aggregate of 10%. Extend "trash bucket" asset classes to include all UCITS eligible assets - that is, derivatives and units of open-ended AIFs. |
| Additional eligible asset classes |
Requires Level 1 changes - that is, updates to the UCITS Directive itself as opposed to the EAD. ESMA recognises that such advice is outside the scope of its advice. |
| No liquidity presumption |
No presumption of liquidity for listed instruments. |
| Financial indices |
Look-through to index constituents for eligibility; indices must be diversified and composed mainly of eligible assets. UCITS could invest in derivatives providing exposures to financial indices comprising assets that are not eligible for direct investment within the 10% limit, once sufficiently diversified. |
| Ancillary liquid assets |
No merit in prescribing a maximum amount of ancillary liquid assets which can be held by a UCITS. Counterparty 20% limit should apply to ancillary liquid assets as it does to deposits made with the same body. |
What should UCITS managers do next?
While the European Commission is not bound by ESMA's advice or any changes it proposes to the EAD that may not fully align with it, UCITS managers should review the advice as compared to their existing portfolios, in case alignment or adjustments may be needed.
It may also be worthwhile for UCITS managers to consider what enhancements could be made to their portfolios, or what new products could be launched, should some of the proposals in the advice end up in the final EAD revisions proposed by the European Commission.
How Ogier can help
Ogier’s Investment Funds team in Ireland advise on all legal and regulatory matters relating to the launch and maintenance of fund structures. For more information on our Investment Funds services, contact one of our dedicated team members below.
About Ogier
Ogier is a professional services firm with the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost-effective services to all our clients. We regularly win awards for the quality of our client service, our work and our people.
Disclaimer
This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.
Regulatory information can be found under Legal Notice
Sign up to receive updates and newsletters from us.
Sign up