consultation discussion

European regulators are considering expanding the kinds of assets that can be held in retail investment funds, possibly opening the door to funds holding crypto, catastrophe bonds and other sorts of novel assets.

The European Securities and Markets Authority (ESMA) launched a consultation on expanding the kinds of assets eligible to be held by core retail investment funds, known as UCITS, which account for 75% of retail investors’ collective investments (with approximately €13.6 trillion in assets under management as of Feb. 29).

These funds are generally restricted to investing in transferable securities and certain other liquid assets to ensure they meet ESMA’s investor protection principles, and to preserve the funds’ reputation as well-regulated and supervised retail investments.

The regulators said the purpose of the consultation is to solicit feedback on the possible risks and benefits of allowing these funds to gain exposure to a wider variety of asset classes.

Since the rules governing these funds were first adopted back in 2007, “the number and variety of financial instruments traded on financial markets has increased considerably, leading to uncertainty in determining whether some categories of assets are eligible for investment, in turn giving rise to divergent interpretations and market practices,” ESMA noted in its consultation.

The consultation paper specifically seeks input on expanding the list of eligible assets to riskier holdings, including crypto, cat bonds, emission allowances, structured loans, commodities and private equities.

Additionally, it noted that the regulatory environment has evolved in recent years. Notably, European regulators have adopted new rules for the emerging crypto sector.

Today’s consultation seeks specific feedback on how the implementation of that new regime impacts views on the kinds of crypto assets that should be eligible for retail funds.

ESMA noted that it is also particularly interested in stakeholder input on retail funds holding ETFs (and other exchange-traded products) that invest in crypto.

The consultation is open until Aug. 7.

Once the consultation is complete, ESMA will finalize its policy position, with a view to strengthening the regulation of UCITS and ensuring they operate “in the best interest of investors.”