How do Risk Management Principles for UCITS Relate to Transaction Reporting?

Undertakings for Collective Investment in Transferable Securities (UCITS) are EU-regulated investment funds designed to provide investor protection, liquidity and risk diversification. UCITS risk management principles do not directly impose transaction reporting obligations. However, they influence the Markets in Financial Instruments Regulation (MiFIR), the European Market Infrastructure Regulation (EMIR), and the Securities Financing Transaction Regulation (SFTR) reporting requirements by shaping regulatory oversight and transparency.

Key Risk Management Principles for UCITS

UCITS funds must adhere to strict risk management frameworks intended to safeguard investors and maintain financial stability. The main focus areas for these frameworks are:

• • • Liquidity Risk Management
    • Market and Counterparty Risk Management
    • Operational and Compliance Risk

Liquidity Risk

The Alternative Investment Fund Managers Directive (AIFMD) and the UCITS Directive (UCITSD) were amended on the 26th of March 2024 by the AIFMD II Amending Directive, introducing new requirements for liquidity risk management and fund oversight. Under these amendments, UCITS funds must incorporate at least one Liquidity Management Tool (LMT), such as redemption gates, notice periods or swing pricing to enhance investor protection and market stability.

Market and Counterparty Risk Management

UCITS fund management must monitor their exposure to derivatives and complex financial instruments by implementing stress testing, Value-atRisk (VaR) calculations and leverage limits. The European Securities and Markets Authority (ESMA) relies on transaction reporting to monitor risk exposure in the derivatives market, ensuring compliance with risk mitigation frameworks.

Operational and Compliance Risk

Effective operational and compliance management is critical for UCITS fund management companies to ensure investor protection and maintain market integrity. They often delegate certain functions, such as portfolio management or risk management to third parties. ESMA emphasises that even when functions are delegated, the UCITS management company retains full responsibility for compliance with the UCITSD. They must ensure that delegates have the necessary qualifications and are subject to effective supervision.

How UCITS Risk Management Principles Relate to Transaction Reporting

UCITS risk management principles indirectly shape MiFIR, EMIR and SFTR transaction reporting requirements by ensuring transparency into fund exposures, derivatives trading and risk mitigation measures.

ESMA uses transaction reports to assess systemic risks, particularly in derivatives and securities financing activities. UCITS management companies must ensure their transactions align with risk limits in the form of leverage caps or counterparty exposure.

UCITS risk management relies on regulatory transaction data to enhance risk oversight. Transaction reporting under MiFIR, EMIR and SFTR allows regulators to monitor fund stability and counterparty risk exposure, ensuring UCITS funds operate within defined risk frameworks and investor protection mandates.

Ensuring accurate and timely transaction reporting is essential for UCITs, hedge funds and investment firms to remain compliant with EMIR, MiFIR and SFTR. As regulatory frameworks continue to evolve, firms must implement reliable reporting solutions to reduce errors and maintain transparency.

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