ESMA consults on draft regulatory technical standards for loan-originating AIFs

On 12 December 2024, ESMA published a consultation paper on draft regulatory technical standards (RTS) on open-ended loan-originating AIFs. The consultation takes place in the context of the newly introduced specific framework for loan origination activities under Directive (EU) 2024/927 amending the AIFMD and the UCITS Directive, also known as AIFMD II.

Background

AIFMD II imposes a closed-ended structure for loan-originating AIFs. By way of derogation, a loan-originating AIF may operate as open-ended provided that certain requirements are satisfied. These requirements include:

• a sound liquidity management system;
• the availability of liquid assets and stress testing; and
• an appropriate redemption policy in line with the liquidity profile of the AIF.

To ensure that the competent authorities apply these requirements consistently, ESMA was mandated to develop draft RTS to establish the criteria that must be considered.

The proposed draft RTS do not give a specific definition of open-ended AIFs for this purpose. Based on the general definition, open-ended AIFs are AIFs the shares or units of which are, at the request of any of its shareholders or unitholders, repurchased or redeemed prior to the commencement of its liquidation phase or wind-down, either directly or indirectly, out of the assets of the AIF and in accordance with the procedures and frequency set out in its rules or instruments of incorporation, prospectus or offering documents.

The liquidity management requirements for open-ended loan-originating AIFs must be read together with the general requirements for open-ended AIFs set out under AIFMD and the AIFMD Delegated Regulation, also known as AIFMR. The requirements set out in the proposed draft RTS are intended to provide specific parameters and elements that AIFMs must take into account when applying the general liquidity management framework under AIFMR to open-ended loan-originating AIFs.

Main requirements

• Sound liquidity management. AIFMs managing open-ended loan-originating AIFs must be able to demonstrate to the competent authorities of their home Member State that the AIF’s liquidity management system is compatible with its investment strategy and redemption policy. ESMA states in the consultation that AIFMs may not automatically set up an open-ended loan-originating AIF simply because they comply with the proposed draft RTS. However, the proposed draft RTS do not set specific procedural rules for this purpose, allowing Member States flexibility in how they implement their supervisory powers.
• Appropriate redemption policy. The proposed draft RTS outline the minimum list of factors that AIFMs must consider when establishing the redemption policy for an AIF. These factors are generally broad, including aspects such as redemption frequency, notice periods, the availability of liquidity management tools and the outcomes of liquidity stress tests.
• Availability of liquid assets. The proposed draft RTS also require that AIFMs determine the appropriate proportion of liquid assets of the AIF and include the factors that AIFMs must at least consider for this purpose. These factors include general parameters related to the liquidity terms, but also specific parameters relating to the loan portfolio, such as the repayment terms and schedules, targeted maturities of the loans, expected incoming cash flows, etc.

The proposed draft RTS provide that expected cash flows generated by the loans should be considered as liquid for this purpose, whereas other assets may be considered as liquid if they can be converted into cash over the duration of the notice period without significantly decreasing their value. The proposed draft RTS do not set a regulatory minimum for liquid assets, a matter on which ESMA is currently seeking industry feedback.

• Liquidity stress tests. The proposed draft RTS specify how AIFMs managing open-ended loan-originating AIFs must conduct liquidity stress tests. These tests must be carried out at least quarterly, unless otherwise justified, on both the assets and liabilities sides.
• Ongoing monitoring. As part of the requirement to maintain sound liquidity management, AIFMs are required to continuously monitor various parameters, including the level of liquid assets, anticipated cash flows, loan repayments, indicators of potential impairments, and leverage levels. The proposed draft RTS, however, do not mandate a specific frequency for performing these checks.

Next steps

The consultation represents the first stage in the development of the draft RTS. Annex IV of the consultation paper sets out ESMA’s proposal for the text and Annex I lists the questions that ESMA is asking stakeholders to answer. The consultation closes on 12 March 2025. Following this deadline, ESMA will consider the feedback received and intends to publish a final report and submit the draft RTS to the EU Commission by Q3/Q4 2025. The projected timeline already suggests a delay of several months to the completion of this part of the AIFMD II, as ESMA is required to submit the draft RTS for loan-originating AIFs to the EU Commission by 16 April 2025.