AIFMD review - Fine-tuning of the AIFMD framework and targeted harmonisation with the UCITS framework

In light of the growing role of alternative investment funds (AIFs) as financial intermediaries and further developments in the market since the AIFMD came into force in 2011, the EU Commission has published a proposal for targeted amendments to the AIFMD that acknowledges the directive’s role as a significant pillar of the Capital Markets Union (CMU). While fine-tuning the AIFMD framework, the EU Commission is simultaneously proposing a degree of harmonisation with the UCITS framework.


Earlier today, the EU Commission published a legislative proposal with targeted amendments to the AIFMD and the UCITS Directive. It forms part of a package of four proposals prepared by the EU Commission under its CMU 2.0 Action Plan.

While stating that the AIFMD has worked well and has largely achieved its objectives of establishing an effective supervisory framework for AIFMs, thereby ensuring high levels of investor protection and facilitating the creation of the EU AIFM market, the EU Commission is nonetheless proposing targeted amendments to fine-tune the AIFMD framework. As a number of issues highlighted in the review of the AIFMD are equally relevant for the activities of UCITS, the legislative proposal also aims to address these issues by aligning the requirements between the AIFMD and the UCITS Directive.

Key proposed amendments impacting both the AIFMD and the UCITS Directive

  • Ensuring that AIFMs and UCITS managers have substance. The EU Commission requires that AIFMs and UCITS managers have the necessary human and technical resources to carry out their functions and, where necessary, to supervise delegates. Here, the proposed text provides that at least two senior managers must be employed or conduct the business of the AIFM or UCITS manager on a full-time basis, and be resident in the EU. Managers must inform the national competent authorities about their human and technical resources when applying for an authorisation.

  • Ensuring that delegation arrangements adhere to the same standards across the EU. While acknowledging that the delegation model in the AIFMD and UCITS environment allows for the efficient management of investment portfolios and for sourcing the necessary expertise, the EU Commission aims to harmonise and further regulate the regime for both environments to create a common EU standard.

    In this regard, the proposed legislative text foresees the following:

    • Informing the home regulator. AIFMs and UCITS managers applying for an authorisation must provide the home regulator with information on arrangements made for the delegation or sub-delegation of functions and ancillary services to third parties, and a detailed description of the human and technical resources to be used by the AIFM or UCITS manager to monitor and control the delegate. Under the current framework, the home regulator is already required to provide this information to ESMA on a quarterly basis.

      In order to introduce the concept of the “letter-box entity” into the UCITS framework, the proposed text amending the UCITS Directive empowers the EU Commission to adopt respective delegated acts. Once the text has been adopted, UCITS managers will be required to justify their entire delegation structure based on objective reasons.

    • Delegation notice to ESMA. Once the text is adopted, AIFMs and UCITS managers will have to inform ESMA about their delegation arrangements where risk or portfolio management is delegated to third-country entities (delegation notifications). ESMA has the authority to develop draft regulatory technical standards (RTS) prescribing content, forms and procedures for the transmission of delegation notifications. Moreover, ESMA will be required to regularly report to the EU co-legislators with an analysis of market practices regarding delegation to entities located in third countries.

    • Peer reviews by ESMA. ESMA will closely supervise how national competent authorities will apply the delegation regime. ESMA is empowered to conduct a peer review on a regular basis, and at least every two years. The peer review analysis will focus on the measures taken by the local regulators to prevent the creation of letter-box entities.

  • Encouraging the proper use of harmonised liquidity management tools (LMTs). The text proposed by the EU Commission contains measures regarding the availability and use of LMTs by managers of open-ended AIFs and UCITS during times of market stress.
    • Harmonised minimum set of available LMTs. The proposal introduces the same minimum set of available LMTs. In particular, the following LMTs must be made available by Member States in their jurisdictions: (i) suspension of redemptions and subscriptions, (ii) gates, (iii) notice periods, (iv) redemption fees, (v) swing pricing, (vi) anti-dilution levy, (vii) redemptions in kind, and (viii) side-pockets. ESMA is tasked with developing draft RTS to provide definitions and to specify the characteristics of the harmonised set of LMTs.

    • Selection and use of LMTs. In addition to the suspension of redemptions, open-ended AIFs and UCITS will be required to choose at least one other LMT from the predefined set of LMTs. AIFMs and UCITS managers are required to establish procedures and conditions for the repurchase or redemption of units and the circumstances under which repurchase or redemption may be suspended, or other LMTs activated. ESMA is also empowered to develop draft RTS on selecting and using suitable LMTs by AIFMs and UCITS managers.

    • Notification on the activation or deactivation of LMTs. Once the text is adopted, AIFMs and UCITS managers will have to notify the competent authorities of the activation or deactivation of LMTs. The home regulator may also step in and require a manager to activate or deactivate a relevant LMT, in which case it will need to notify ESMA and the ESRB of its intention to do so. ESMA is empowered to develop RTS indicating when such intervention by the competent authorities would be warranted.

  • Streamlining reporting obligations. The proposed amendments aim to improve data collection and remove any inefficient reporting duplications that may exist under other pieces of EU or national legislation. In this regard, ESMA is empowered to develop draft RTS and to draft implementing technical standards (ITS) to replace the current supervisory reporting template as laid down in Annex IV of the AIFMD and supplemented by the AIFMR.

    With a view to better harmonisation, the UCITS Directive will be amended to introduce a periodic supervisory reporting obligation for UCITS managers. ESMA is tasked with producing a feasibility report on seeking efficiencies in the supervisory reporting space, and must provide information about the potential design of a supervisory reporting template for UCITS managers. On the basis of its findings, ESMA is required to develop RTS and draft ITS.

  • Clarification on the role of Central Securities Depositories (CSDs). The proposed text also brings CSDs into the custody chain, and clarifies that the use of a CSD is not to be considered as a delegation of the depositary’s custody functions.

Key amendments proposing changes to the AIFMD framework

  • Enabling better access to financing by harmonising the regulatory framework for AIFs that issue loans. The amendments proposed by the EU Commission aim to harmonise the legal and regulatory framework for loan origination AIFs within the EU, and to simultaneously promote loan origination AIFs to EU companies as an alternative source of financing. Read more_

  • Broadening the depositary market. With the aim of diluting the depositary concentration in certain national markets, the proposed text removes the requirement that a depositary be located in the home Member State of the appointing EU AIF. This requirement will be replaced by a cooperation requirement that depositaries cooperate not only with their competent authorities, but also with the competent authorities of the appointing EU AIF and the competent authorities of the AIFM managing the appointing EU AIF.

Next steps

Today’s publication of the legislative proposal has kicked off the legislative process. The EU Commission’s proposal is now under review by the EU Parliament and the Council of the EU. The text in its current version states that once it is adopted by the EU co-legislators, Member States will need to implement the adopted amendments within 24 months following their entry into force.

For further information, please reach out to your usual contact within the Fund Formation Group.

Related documents

  • To access the proposed directive amending the AIFMD and the UCITS Directive as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds, click here_
  • To access the Annexes to the proposed directive amending the AIFMD and the UCITS Directive as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds, click here_


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