On 26 March 2024, Directive (EU) 2024/927 of the European Parliament and of the Council of 13 March 2024 amending Directive 2011/61/EU ("AIFMD") and Directive 2009/65/EC (the "UCITS Directive") as regards delegation arrangements, liquidity risk management, supervisory reporting, the provision of depositary and custody services and loan origination by alternative investment funds was published in the Official Journal of the EU (the “Directive”).  The Directive entered into force on 15 April 2024.  Member States now have until 16 April 2026 to transpose the Directive into national law.

Delegation:

The agreement states that an AIFM will be required to employ at least two persons full-time or engage two persons, who are not employed by the AIFM but nevertheless are committed to conduct that AIFM’s business on a full-time basis and who would be resident in the Union, thus ensuring the minimum, stable substance within the AIFM. According to the draft texts, fund managers will need to provide general information on the delegate and subdelegates such as: (i) a list and description of the activities which are delegated, and (ii) a description of periodic due diligence measures carried out to oversee, monitor and control the delegate. ESMA shall develop draft regulatory technical standards (RTS) specifying the “details of the information” and also “set out the appropriate level of standardisation” of the information to be reported.

In addition to this, quantitative information would also need to be reported by AIFMs to regulators. Fund managers would need to disclose the amount and percentage of the fund’s assets which are subject to delegation arrangements as well as the number of full-time employees to monitor the delegation arrangements.

Liquidity Management Tools:

The agreement sets out that an AIFM that manages an open-ended AIF must select at least two appropriate liquidity management tools from the list set out in Annex V of the Directive. ESMA is tasked with developing draft RTS to provide definitions and specify the characteristics of the LMTs set out in Annex V. The full list is as follows: (i) suspension of redemptions and subscriptions, (ii) redemption gates, (iii) extension of notice periods, (iv) redemption fees, (v) swing pricing, (vi) dual pricing, (vii) anti-dilution levy, (viii) redemptions in kind, and (ix) side pockets). ESMA is also tasked with developing RTS on selecting and using suitable LMTs by the AIFMs. National regulators are also empowered to require that an AIFM activates or deactivates a relevant LMT in certain circumstances.

Loan Origination Funds (LOFs): 

The new rules provide for a mixture of new restrictions to address financial stability concerns and provisions designed to support the growth of the European market. They include the following:

• Cross border lending: The new rules clarify that AIFMs are permitted to originate loans on behalf of AIFs, and that LOFs can lend on a cross-border basis within the EU.
• Leverage limits for LOFs:  Set at 175% for open-end LOFs and 300% for closed-end LOFs, expressed as the ratio between the exposure of the LOF and its net asset value, with the exposure calculated using the commitment method. Subscription line financing arrangements are excluded from the calculation and AIFMs are permitted to rectify any breaches of the limit to be rectified within an appropriate period of time and taking into account the needs of investors. These two provisions are modelled on the ELTIF Regulation.
• Retention requirements: LOFs selling loans they have originated will now be required to retain 5% of the notional value of the loan.  The new rules introduce limited derogations from this requirement.
• Liquidity profile of LOFs: LOFs will be required to have a closed-end structure unless they can demonstrate to supervisors that they have appropriate liquidity risk management practices in place to maintain an open-end structure.

Depositary services:

While the issue of a depositary passport has been discussed for some time, there is no such passport introduced here. Instead, what is put forward is an approach allowing depositaries to operate cross-border in certain situations. Member States will have the choice to authorize depositary services in another Member State, on a case-by-case basis if the national depositary market of the home Member State either: (i) consists of fewer than seven depositaries and none of those depositaries has assets safekept exceeding €1 billion, or (ii) the aggregate amount in that market of assets safekept does not exceed a certain amount.

Third-country provisions:

Amendments are made to provisions on marketing, authorisation and depositary services, updating the requirements for third country funds and fund managers not to be established in the jurisdictions identified as high-risk countries according to the latest AML and tax rules at EU level. This includes the requirement to fully comply with the standards laid down in Article 26 of the OECD Model Tax Convention on Income and on Capital and ensure that an effective exchange of information in tax matters including any multilateral tax agreements as well as the requirement that the third country is not mentioned in Annex I to the Council conclusions of 2020 on the revised EU list on non-cooperative jurisdictions for tax purposes.

The amendments to the UCITS Directive mirror those changes put forward to the AIFMD.

Download the full summary for a more complete discussion of the changes to both AIFMD and the UCITS Directive and the impacts for EU AIFMs, non-EU AIFMs, UCITS and UCITS management companies.

ESMA consultation papers on Liquidity Management Tools:

ESMA has issued two consultation papers. The first proposed draft RTS with further detail on the LMTs listed above. The second has guidelines for the use of LMTs. An AIMA summary of the proposals is available for members to download here.  AIMA's joint responses with the BAI are available here (draft guidelines and RTS).

ESMA consultation paper on Open-End Loan-Originating AIFs

On 12 December 2024, ESMA published it long-awaited consultation paper regarding its proposed RTS on open-end loan-originating AIFs under the AIFMD.  The RTS were originally due to be finalised by 16 April 2025, but ESMA now estimates that they will be finalised in 3Q/4Q 2025 instead.  Comments on the consultation draft are due 12 March 2025.  Please contact Danny O'Connell if you would like to contribute to AIMA's response.

Please contact Jennifer Wood, Danny O'Connell or Nick Smith with any questions regarding these requirements.

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  Jennifer Wood

  Managing Director, Global Head of Asset Management Regulation & Sound Practices

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  Danny O'Connell

  Director, EU and International Regulatory and Tax Policy

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  Nicholas Smith

  Managing Director, Private Credit, Alternative Credit Council