Regulator and supervisor the European Securities and Markets Authority (ESMA) has now published its awaited advice to the European Commission (EC) on its review of the UCITS Eligible Assets Directive (EAD), in which it says its conceptual view is that some alternative assets such as catastrophe bonds may sit better under a different framework than UCITS.
Catastrophe bonds remain a relatively small component of the overall UCITS fund assets universe, which by ESMA’s numbers consist of more than €9 trillion of assets under management.
The insurance-linked securities (ILS) industry came together to respond to the ESMA call for evidence, to support its review of the Undertakings for Collective Investment in Transferable Securities (UCITS) Eligible Assets Directive (EAD), highlighting a wide-range of reasons the industry views catastrophe bonds as beneficial assets for investors and suitable assets for UCITS strategies.
It’s worth noting that there is a lot happening in European regulation around capital markets and securitization, which also has potential ramifications for rules under certain structures.
It’s important to highlight that ESMA cannot change any rules, it simply provides its advice to the European Commission and the Commission will then consider the advice, before any rule changes are made.
You can access ESMA’s final report which was published today here.
That could be a long process, after which any rule changes need to be made law and there will also be a transition period for any changes required to meet any new legislative environment.
But, the initial conclusion of ESMA seems to be that large-scale investments into catastrophe bonds, along with some other alternative asset classes, may sit better under an alternative investment framework, potentially more accessible to more investors, than within UCITS funds.
Which has led ESMA to call on the EC to explore the creation of “a new EU harmonised AIF product (next to EuVECA, EuSEF and ELTIF) dedicated to investments in those asset classes that would be deemed not eligible under the proposed revised UCITS framework.”
That would make a dedicated fund category and regulatory environment that is better-suited to alternatives, such as catastrophe bonds. But again, this would likely be some years away, given how fast EU rulemaking tends to move.
ESMA further said, “This could enable investors to safely access the desired investment strategies and products within another sound regulatory framework with adequate investor protection safeguards tailored to the product-specific risks, as opposed to accessing them via unregulated or less-regulated products. Such AIF product might address the potential investor demand for a “semi-liquid” product situated between UCITS and ELTIF, e.g. focused on private market or (re)insurance-type of asset classes, taking into account broader policy considerations in terms of their potential added value for the purposes of the SIU.
“ESMA therefore invites the European Commission to give consideration to these policy options, which would in turn alleviate the concerns raised by some stakeholders on the adverse impacts of applying a look-through approach.”
On the alternatives that may not be deemed as well-suited to the UCITS fund structure by ESMA, it says, “By way of example, many stakeholders highlighted the benefits of investments in commodities, catastrophe bonds and crypto-assets (see Annex IV for data and ESMA’s risk/economic analyses in this respect). However, conceptually, ESMA is of the view that large-scale investments in such alternative assets with their idiosyncratic risks would be better done under the AIFMD framework given its more suitable risk management, valuation and safekeeping provisions for such asset classes.”
ESMA also notes that it has no concerns about UCITS funds that allocate up to 10% indirectly to alternative assets.
The Authority also notes that these alternative assets, such as cat bonds, improve “risk diversification and generation of returns from uncorrelated assets.”
As we said, before any changes are made there would be a long transition period, a period to get rules into law and then further transition to enable investment managers and investors to come into line with any new structures, rules, or restrictions put in place.
This is important news for the catastrophe bond market, given the UCITS structure remains such a key component of it today.
As of the end of March 2025, almost $15.3 billion of cat bond risk capital came from UCITS strategies, so it is a meaningful proportion of the market, which is why the industry will analyse the ESMA report and likely also continue to lobby for a suitable outcome, especially where any new structure is being proposed (to ensure it is well-suited).
