Highlights:

The CSSF has published Circular 24/847 regarding the ICT-related incident reporting framework and the notification of ICT-related incidents.

Luxembourg Market Update:

The aggregate net assets of Luxembourg-domiciled regulated investment funds – UCITS and Part II funds, SIFs and SICARs – amounted to €5,152bn at the end of November, up 2.88% from €5,008bn the previous month although down 0.27% from 12 months earlier, according to the CSSF. The financial regulator says the monthly increase was mostly down to rising prices in financial markets, which accounted for €153.57bn, while the sector saw net outflows of €9.24bn. The number of fund structures declined by 10 during the month to 3,293, including 2,155 umbrella structures containing 12,864 sub-funds. The number of active fund units totals 14,002 including 1,138 single-portfolio funds.

Alternative investment fund managers are increasingly establishing sub-funds of existing Reserved Alternative Investment Funds, rather than creating new separate legal structures, resulting in the number of new funds falling last year while more than 200 compartments of existing RAIFS were established. More than 2,500 RAIFs have been launched since the introduction of the regime in July 2016, with Swiss private bank Pictet Group launching the most vehicles in Luxembourg last year.

Regulatory Developments in and beyond Luxembourg:

22 November 2023: ESMA publishes explanatory notes concerning sustainable finance

ESMA has published three explanatory notes on key topics of the sustainable finance framework. These notes provide useful information on:

• The definition of sustainable investments;
• The application of do no significant harm (DNSH) requirements; and
• The use of estimates.

The note provides clarification, especially regarding the use of estimates:

• Which stakeholders may apply the concept of estimates/equivalent information;
• In which situations may such concepts of estimates be applied;
• Highlights the specific requirements within the framework for applying these concepts.

4 December 2023: ESAs published the Final Report on draft Regulatory Technical Standards on the Sustainable Finance Disclosure Regulation (SFDR)

Further to the consultation earlier this year, the ESAs published their final report on the draft amendments to the SFDR Regulatory Technical Standards (RTS). According to the report, the ESAs propose adding new social indicators and streamlining the framework for the disclosure of principal adverse impacts of investment decisions on the environment and society. The ESAs also suggest new product disclosures regarding “greenhouse gas emission reduction” targets.

In addition, the ESAs propose further technical revisions to the SFDR Delegated Regulation:

• Improvements to the disclosures on how sustainable investments “Do No Significant Harm” (DNSH) to the environment and society;
• Simplification of the pre-contractual and periodic disclosure templates for financial products; and
• Other technical adjustments concerning, among others, the treatment of derivatives, the calculation of sustainable investments, and provisions for financial products with underlying investment options.

In terms of next steps, the European Commission will review the draft RTS and decide whether to endorse them within three months. The ESAs inform that the draft RTS would be applied independently of the assessment of SFDR announced by the European Commission in September 2023 and before changes resulting from that assessment would be introduced.

8 December 2023: DORA - ESAs’ RTS/ITS consultation

The ESAs have issued the second batch of level 2 consultation on the digital operational resilience act (DORA). The package includes four RTS, one set of draft Implementing Technical Standards (ITS) and two sets of guidelines (GL). These policy instruments aim to ensure a consistent and harmonised legal framework in the areas of major ICT-related incident reporting, digital operational resilience testing, ICT third-party risk management and oversight on critical ICT third-party providers.

It comprises the following:

• GL on costs and losses caused by major ICT-related incidents;
• RTS and ITS on major incidents reporting;
• RTS on threat-led penetration testing (TLPT);
• RTS on subcontracting ICT services;
• GL on oversight cooperation and information exchange between ESAs and CAs;
• RTS on oversight harmonisation.

14 December 2023: ESMA guidelines on funds’ names using sustainability-related terms

ESMA has published an update on their work on guidelines for funds’ names using ESG or sustainability-related terms. In this statement, ESMA informed that they intend to postpone adopting of the guidelines to thoroughly assess the outcomes of the AIFMD and UCITS Directive reviews. ESMA is considering the following amendments in threshold and terms:

• Sustainability-related names: Discarding the proposed 50% threshold for sustainable investments in fund names, ESMA now suggests that funds using sustainability-related terms should:
  • Apply a minimum proportion of 80% of investments meeting the sustainable characteristics or objectives.
  • Apply the Paris-aligned Benchmark (PAB) exclusions.
  • Invest meaningfully in sustainable investments defined in Article 2(17) SFDR and reflecting the meaning of the fund’s name
• Transition-related terms: ESMA recommends funds with "transition" terms should apply the Climate Transition Benchmark (CTB) exclusions, in addition to the 80% threshold.
• Combined terms: For funds names combining environmental terms with "transition" terms, CTB exclusions should apply.
• Social and governance terms: ESMA suggest PAB exclusions could be too restrictive for Funds focusing on social or governance aspects. Meanwhile, PAB exclusions remain mandatory for funds with environmental terms.
• Measurability requirement for Impact and transition terms: Funds using "transition" or "impact" terms must ensure investments are either generating measurable social/environmental impact or are on a clear path to social/environmental transition.

Timing for application and compliance: Fund managers should align their funds with the guidelines within six months from the date of application of the guidelines (existing funds) or within six months of their application date (new funds).

18 December 2023: CSSF - Taxonomy Regulation Disclosures by Issuers

The CSSF has published a report on the results of a focused examination on corporate reporting practices regarding Taxonomy Regulation Disclosures by Issuers. As per the Taxonomy Regulation, nonfinancial issuers were required to disclose for the first time in 2023 (for the financial year 202) the taxonomy eligibility, as well as the alignment of their economic activities with the first two environmental objectives set out in the Taxonomy Regulation: climate change mitigation and climate change adaptation.

In 2023, the CSSF examined the taxonomy reporting to evaluate the quality of the disclosures provided by non-financial issuers under the new requirements of the Taxonomy Regulation. The report includes the summary of the main findings of this review.

The main findings by the CSSF are:

• The assessment of eligible and aligned economic activities;
• The reporting of quantitative information: use of the mandatory templates, KPIs reporting and calculation;
• The reporting of qualitative information: accounting policy, assessment of compliance, disclosure of relevant contextual information;
• The reporting on voluntary information on KPIs.

While reiterating that “ESMA has set the disclosures to be reported by issuers relating to Article 8 of the Taxonomy Regulation as its first priority when it comes to non-financial statements disclosure requirements”, the CSSF acknowledge that “this regulation is complex and that a certain learning and adaptation period is therefore expected.”

18 December 2023: ESMA reports on the costs and performance of EU retail investment products

ESMA has published its sixth market report on the costs and performance of EU retail investment products. It includes the following key findings:

• UCITS costs: Costs have declined, but investors should continue to consider fund fees carefully in their investment decisions. Although the costs of active equity funds have decreased, they still remained more expensive than passive funds and ETFs. As a result, their net performance, on average, was lower in comparison;
• Investment value and value-for-money: Investors paid around EUR 2,000 in costs for an investment in UCITS of EUR 10,000 over ten years. The returns of the market led to a net value of EUR 14,850 after this period, and to a net real value of EUR 13,500, when inflation is taken into account;
• ESG UCITS: In 2022, ESG funds underperformed their non-ESG equivalents on average, likely as a consequence of the energy crisis. However, ESG funds still outperformed their non-ESG counterparts on the three-year investment horizon. In 2022, ongoing costs of ESG funds were lower than or similar to the ongoing costs of non-ESG equivalents;
• Alternative Investment Funds (AIFs): As of the end of 2022, the market for AIFs continued to be dominated by professional investors, with the share of retail investors reaching around 14%. Retail investors invested mainly in funds of funds, “other” AIFs and real estate funds. Among those three fund categories, real estate was the only one with positive gross and net returns in 2022. However, real estate markets have faced significant challenges since 2022, which is likely to affect the performance of real estate funds going forward, especially considering the additional rise in interest rates in 2023.
• Structured Retail Products (SRPs): Costs, largely charged in the form of entry costs, rose for a majority of product types and issuers in 2022, although they varied substantially by payoff type and country. The analysis of performance scenarios shows that the returns of one in eight SRPs would be negative even in a moderate scenario.

2 January 2024: New methods of transmitting marketing notifications and de-notifications for UCITS

Following the communiqués published on 15 November 2023 and 13 December 2023, the CSSF would like to inform the supervised entities concerned that the eDesk module for cross-border marketing notifications and de-notifications is now available for Luxembourg-domiciled UCITS.

As a reminder, the supervised entities concerned are UCITS that, in accordance with Chapter 6 of the 2010 Law, wish to:

• market their shares in another Member State of the European Union (EU);
• de-notify arrangements made for marketing their shares in another EU Member State.

As of 2 January 2024, these entities must transmit notification and de-notification files to the CSSF either directly via the eDesk Portal or via the CSSF API solution (S3 technology). The subsequent monitoring of these procedures will be carried out exclusively via the eDesk Portal. Additional information and instructions can be found in the dedicated user guide: Guidelines on cross-border marketing notification and de-notification procedures.

Circulars CSSF 11/509 and CSSF 21/778 are hereby repealed.
For any questions, please contact the CSSF helpdesk at the following email address: edesk_opc@cssf.lu.

5 January 2024: CSSF issues Circular 24/847 on ICT-related incident reporting framework

The CSSF has published Circular 24/847 regarding the ICT-related incident reporting framework and the notification of ICT-related incidents. The Circular aims at detailing the process for classification and reporting of ICT-related incidents for all entities under CSSF supervision in accordance with financial sector regulatory frameworks and/or with the NIS Law. It specifies the expected delays to provide the initial notification, further to the occurrence of ICT-related incidents classified as major. The Circular is complemented by an FAQ.

The Circular will enter into force on 1 April 2024 but includes the provision of an additional two months delay in its application as it pertains to management companies and other investment companies.

10 January 2024: Revised European Long-Term Investment Fund (ELTIF) Regulation goes into effect

The amended ELTIF Regulation went into effect on 10 January 2024 but is accompanied by concerns from the asset management industry on the proposed content of the draft Regulatory Technical Standards (RTS) for the ELTIF Regulation, published by ESMA on 19 December 2023. The RTS now need to be endorsed and adopted by the European Commission.

Among these concerns, ESMA’s proposal would make semi-liquid ELTIFs unworkable in practice due to the required notice periods coupled with the mandatory liquidity allocations. The requirements laid out in the RTS would make these types of ELTIFs unattractive to both investors and asset managers.

22 January 2024: CSSF AML/CFT Conference for Specialised PFS

The CSSF held an online conference on highlighting the key AML/CFT issues for the sector. Representatives of the Luxembourg Ministry of Justice and the Luxembourg Financial Investigations Unit (FIU) were also amongst the speakers. The following topics were covered:

• Findings identified by the Specialised PFS department
• Best practices concerning cooperation with authorities
• Results of the FATF’s Mutual Evaluation 2023
• Insights from the FIU for Specialised PFS
• The CSSF’s expectations on AML/CFT outsourcing notifications

31 January 2024: New communication means for AIFM reporting

From 31 January 2024, an eDesk procedure will be available for alternative investment fund managers to transmit their AIFM reporting. This new communication mean enriches the API solution available since 02 November 2023 allowing professionals to exchange directly with the CSSF, without using the external transmission channels. A user guide provides information on this new transmission method. As a reminder, please note that transmission of AIFM reporting through external transmission channels will remain possible until 30 June 2024.

For further information, please contact:

Tobias Ettlin #ONEteam
‍#onewithyou‍

Disclaimer: This regulatory update has been prepared for clients of ONE group solutions and its subsidiaries for informational purposes and is not intended to be relied upon as professional advice. Please visit: https://www.one-gs.com/‍