The European Securities and Markets Agency (ESMA) has called for a review of the UCITS Directive to account for the central clearing of derivatives required under the European Market Infrastructure Regulation (EMIR).

The agency, charged with financial market regulation, said, given the impact of the EMIR regulations, the UCITS Directive should be amended to apply the same rules to derivatives that are centrally cleared or exchanged traded.

The European Commission has at the same time launched its review of EMIR to produce a general report on the state of the regulation to the European Parliament and Council.

Currently, the UCITS Directive allows investments in both exchanged-traded derivatives (ETD) and over-the-counter (OTC) derivatives, but only the latter are subject to counterparty risk-exposure limits.

Under the new EMIR regime, certain OTC have to be centrally cleared, which ESMA said raised questions about how the limits to counterparty risk should be calculated for OTC transactions that are centrally cleared, and whether the same rules for OTC trades should also be applied to ETDs.

Steven Maijoor, chair at ESMA, said the current UCITS regime needed to change, as it would be unable to account for the central clearing obligation in EMIR.

“ESMA, therefore, invites the EU institutions to consider amending the UCITS Directive to make it more compatible with the clearing obligation under EMIR,” he said.

The agency said counterparty risk limits should change to match the differing arrangements, and, under individual segregation, the UCITS regime should not apply risk limits but continue to do so under omnibus client segregation.

The UCITS Directive is currently on its fifth amendment as of July 2014.

The Commission review, to be undertaken via a stakeholder questionnaire, will focus on the delegated acts within EMIR, particularly the section that requires standard derivative contracts to be cleared through central counterparties and the reporting of trades to repositories.

In addition to the consultation, the Commission is to hold a public hearing on 29 May in Brussels.

Commissioner for Financial Services, Stability and Capital Markets Union, Jonathan Hill, announced the review of EMIR in Edinburgh earlier this year.

Pension funds have also been granted an additional two-year exemption from EMIR until August 2017 by the Commission over concerns it would dramatically affect funds’ investment models.

At the time, Hill said he understood the concerns of asking pension funds to clear derivatives centrally but said no alternative had yet been found.

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