Investment Management Client Alert May 2025

ESMA Publishes Final Reports on Liquidity Management Tools 

On 15 April 2025, the European Securities and Markets Authority (ESMA) published its final reports on the Regulatory Technical Standards (RTS) and the Guidelines on Liquidity Management Tools (Guidelines). The liquidity management tools (LMTs) were significantly amended by the Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD) review. ESMA has a mandate to develop the regulatory technical standards and guidelines and initiated a consultation on this in July 2024.

The RTS are intended to specify the characteristics of the nine LMTs that have been introduced by the AIFMD review. The Guidelines, which are to be read together with the RTS, also concern the selection, activation, and adjustment of the LMTs.

The Guidelines contain a breakdown of the LMTs into three categories: quantitative-based tools (e.g., redemption suspension and restriction), anti-dilution tools (e.g., redemption fees), and other tools (e.g., separating illiquid investments into so-called side pockets). Management companies should assess which LMTs are suitable for which fund types and in which (normal or stressed) market situations and provide a number of examples. 

Compared to the consultation, the RTS provide for greater flexibility in the design of the activation limits for redemption restrictions. The requirement for LMTs to be applied uniformly across all share classes has been removed (except for the case of suspension). The organizational requirements for a so-called LMT policy to be drawn up have also been removed from the Guidelines.

In principle, the European Commission has three months to adopt the RTS or submit proposals for amendments (15 July 2025). The RTS will enter into force 20 days after adoption by the European Commission, although no explicit date is specified for the applicability of the regulations in the RTS and Guidelines (the AIFMD review itself must be implemented by 16 April 2026). A 12-month transitional period applies to investment funds that already exist prior to the date of applicability of the RTS and Guidelines.

ESMA Publishes Final Report on MiFID II Best Execution Requirements

On 10 April 2025, ESMA published its final report on the RTS on best execution. The best execution requirements in the EU Markets in Financial Instruments Directive (MiFID II) were amended as part of the MiFID II review. ESMA has a mandate to develop the technical regulatory standards and initiated a consultation on this in July 2024.

Investment firms executing client orders must monitor the effectiveness of their order execution policy and arrangements and assess, among other things, whether execution venues are providing the best possible result for clients. The RTS should specify criteria to be taken into account when determining and assessing the effectiveness of the order execution policy.

The RTS stipulate that the selected trading venue must be regularly reviewed on the basis of alternative trading venues to ensure that the best possible result is achieved for the client. Compared to the consultation, the requirements for selecting the trading venue have been simplified (e.g., fewer selection criteria). 

The European Commission generally has three months to adopt the RTS or submit proposals for amendments (10 July 2025). The RTS enter into force 20 days after adoption by the European Commission. The RTS are applicable 18 months after entry into force. 

ESMA Consults RTS on ESG Rating Regulation

On 2 May 2025, ESMA published a consultation paper on draft RTS regarding various aspects of the European Environmental, Social, and Governance (ESG) Rating Regulation. 

The ESG Rating Regulation aims to contribute to the transparency and quality of ESG ratings by improving the integrity, transparency, comparability, responsibility, reliability, good governance, and independence of ESG ratings. 

The draft RTS defines information that ESG rating providers should provide in applications for authorization and recognition. In addition, the draft details the measures and safeguards that should be put in place to mitigate the risks of conflicts of interest for ESG rating providers when they also engage in activities other than issuing ESG ratings. Finally, the draft proposes information that ESG rating providers should disclose to the public, rated entities, and issuers of rated entities, as well as users of ESG ratings.

ESMA will review the consultation feedback received by 20 June 2025 and plans to publish a final report in October 2025.  

ESMA Publishes New Consolidated PRIIPs Q&A

On 5 May 2025, ESMA published an updated version of its Consolidated Questions and Answers (Q&A) on the PRIIPs Key Information Document (KID). Compared to the last version dated 15 March 2024, the document contains further clarifications regarding the definition of the class for the market risk measure (MRM class), the performance scenarios, and the calculation of the summary cost indicator. Regarding entry costs (e.g., issue premiums), for example, it is clarified that these are included in the assumed investment amount of EUR 10,000 (as per point 90 of Annex VI of Delegated Regulation (EU) 2017/653) and are not added on top. 

BaFin Consults on “Circular on Members of the Management Board and of Administrative and Supervisory Bodies pursuant to the German Banking Act (KWG)”

On 14 May 2025, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin) published a draft of a “Circular on Members of the Management Board and of Administrative and Supervisory Bodies pursuant to the German Banking Act” (also known as the “Fit and Proper” Circular) for consultation. The final circular is intended to replace the existing “Guidance Note on Managers in accordance with the KWG, ZAG and KAGB” and the “Guidance Note on Members of Administrative and Supervisory Bodies in accordance with the KWG and KAGB”. The aim of the new circular is to summarize the currently existing individual guidance notes for the future in order to avoid duplication and to implement common European guidelines, insofar as BaFin adopts these in its administrative practice. It also contains completion and administrative instructions and takes into account requirements from the German Risk Reduction Act (Risikoreduzierungsgesetz). The consultation is open for comments until 13 June 2025.

BaFin Consults on Ordinance to Simplify Holder Control Procedures and Certain Personal Notifications

On 20 May 2025, BaFin published a draft of an “Ordinance on the Simplification of Holder Control Procedures and Certain Personal Disclosures” for consultation. This ordinance is intended to simplify the holder control procedure in relation to credit institutions, financial services institutions, insurance companies, pension funds, and insurance holding companies in accordance with the German Holder Control Regulation Ordinance (Inhaberkontrollverordnung - InhKontrollV) and in relation to other financial companies to which the InhKontrollV applies accordingly with regard to the documents (e.g., certificates of good conduct) and declarations (e.g., CVs) to be submitted. Indirect acquirers who are not at the top of the acquiring group should, as a rule, no longer have to submit any documents beyond the notification of their intention to acquire, and, in the case of holder control proceedings relating to leasing and factoring institutions in liquidation, the submission of documents may be waived if necessary. Further simplifications focus on natural persons and the documents relating to their reliability. The consultation is open for comments until 5 June 2025. 

BaFin Plans Product Intervention With Regard to Trading in Turbo Certificates

BaFin announced on 21 May 2025 that it intends to restrict trading in turbo certificates by issuing a general ruling due to significant concerns for investor protection, and that it is now launching a consultation with affected market participants. Accordingly, the marketing, distribution, and sale of the products shall only be permitted under certain conditions in the future. In particular, a standardized risk warning is to be included, bonuses (e.g., reduced order fees) are no longer to be granted, and an extended appropriateness test is to be carried out. This was preceded by a market investigation by BaFin, which found that 74.2% of investors had suffered losses when trading these leveraged derivative products. The legal bases for this supervisory measure are Art. 42 of the European Markets in Financial Instruments Regulation (MiFIR) and § 15 (1), sentence 2, of the German Securities Trading Act (Wertpapierhandelsgesetz) in conjunction with Art. 42 MiFIR. Responses to the planned measure can be submitted to BaFin until 3 July 2025.