International Funds Legal Update | February 2024

Following the new year, the UK government has taken the next steps towards a new regime to enable the marketing of overseas funds to UK retail investors, while European Securities and Markets Authority (ESMA) has laid out its next supervisory steps and provided a comprehensive overview of policy focus for 2024.

Overseas UCITS pass the equivalent test and the TMPR is extended

The Overseas Funds Regime (OFR) enables specified funds, which the government has determined come from "equivalent" jurisdictions, to use a streamlined gateway to market to UK retail investors. An equivalent jurisdiction is one where the specified funds afford the same investor protection by the law and practice of the jurisdiction that is at least equivalent to that afforded to investors in comparable authorised UK schemes.

The UK government has found Undertakings for the Collective Investment in Transferable Securities (UCITS) from the European Economic Areas (EEA), including the European Union, equivalent under the OFR, as announced in a statement from Bim Afolami, the economic secretary to HM Treasury. EEA UCITS will not be required to comply with any additional UK requirements as part of the equivalence determination at this time.

For the equivalence decision to come into effect, secondary legislation needs to be passed. The decision does not include money market UCITS, as there is ongoing regulatory development in this area.

The government acknowledges that there are ongoing regulatory developments relating to sustainable disclosure requirements (SDRs) as well. The government intends to consult on whether to broaden the scope of the SDRs to include funds recognised under the OFR. At the end of November last year, the UK's Financial Conduct Authority (FCA) set out its long-awaited rules for SDRs and investment labels. However, although the FCA is keen to expand the SDR to overseas funds, this is HM Treasury prerogative.

The statement also announces that the temporary marketing permissions regime (TMPR) will be extended for another year until the end of 2026. The TMPR provides opted-in EEA investments funds that were being marketed in the UK via an EU-passport at the end of the Brexit transition period,  allowing them temporarily to continue to be marketed into the UK until they have another basis to do so. Most TMPR-funds are likely to gain access to the UK on a more permanent basis via the OFR.

ESMA has launched supervisory action on pre-trade controls

The ESMA has announced that it has launched a common supervisory action with national competent authorities (NCAs) regarding the implementation of pre-trade controls (PTCs) by investment firms using algorithmic trading techniques.

PTCs are used to carry out checks at "order entry" to limit and prevent sending erroneous orders to trading venues for execution. Since the May 2022 "flash crash" that caused the Dow Jones to around 9% of its value in minutes, ESMA has been gathering evidence from a sample of EU investment firms on the implementation of PTCs. ESMA and NCAs will now launch a supervisory action to gather further insights into how firms are using PTCs.

The supervisory action will address:

• The implementation of PTCs.
• Credit and risk limits and their interaction with PTCs.
• Monitoring and governance frameworks for PTCs.
• Implementation and monitoring of PTCs where trading activity is outsourced to third countries.

This will be carried out during the course of 2024.

ESMA announces its 2024 consultations

ESMA has published a helpful table providing an overview of the consultation papers it plans to publish in 2024 encompassing a wide range of topics. The consultations will include the following:

• AIFMD (The Alternative Investment Funds Directive); 2011/61/EU.
• The UCITS (Undertakings for the Collective Investment in Transferable Securities) Directive; 2009/65/EC.
• The MiFID (Markets in Financial Instruments Directive) II; 2014/65/EU.
• MiFIR (Markets in Financial Instruments Regulation); (EU) 600/2014.
• EMIR (European Market Infrastructure Regulation) on OTC derivative transactions, central counterparties and trade repositories; 648/2012.
• MiCA (Markets in Cryptoassets) Regulation; (EU) 2023/1114.
• DORA (Digital Operational Resilience Act) on digital operational resilience for the financial sector; (EU) 2022/2554.