As the European Union drags its heels over the production of rules to go with the now-passed fifth Undertakings for Collective Investment in Transferable Securities Directive, it could be causing trouble for fund managers and depositaries.

Published in the Official Journal of the EU on 18 August 2014, the UCITS V directive empowers the European Commission, the nearest thing that the EU has to an executive branch, to pass further clarifying legislation. The delegated acts that it envisions, which the EU calls "Level 2 measures," had been expected in this quarter of 2015. They have, however, been delayed and are now expected in the second half of the year. When they arrive, they will dictate the kind of information that ought to appear in the contract between this-or-that fund and its depositary. As a result, it will now be more than a year after the publication of the so-called "Level 1 directive" before investment managers, funds and their depositaries know enough about the legal situation to renegotiate contracts under the new law.

Furthermore, the time between the publication of the "Level 2 measures" and 18 March 18 2016 - when UCITS V comes into effect - is short. The lessons learnt from AIFMD and other regulations is that the legal costs associated with such regulatory transitions can be quite noticeable. Short negotiation timeframes put a squeeze on the legal resources available to conclude contracts, and as a result drive up the overall costs. There are currently more than 36,000 UCITS funds. While many of these funds are organised in umbrella structures, and are therefore covered by a single contract, that number still gives a clear indication of the magnitude of the task ahead.

Investment managers, funds and depositaries could review template agreements ahead of the publication of Level 2. This approach, however, carries the risk of parties having to go back closer to actual publication and re-negotiate points that have already been reviewed, which could significantly add to the total effort required. The alternative approach is for the impacted parties to await further clarity in respect of the Level 2 measures, as well as the consultation and transposition processes in individual member states, ESMA’s guidelines on client asset segregation, and specific guidance to the market and depositary trade associations by regulatory authorities. Once there is greater legal certainty, firms will be better positioned to successfully conclude the necessary agreements in the short timeframe they will have available.