AIFMD II - European Commission proposed directive, November 2021 - Depositaries
The depositary role is vital for trust and confidence in the fund industry. The current AIFMD depositary regime is deemed to be effective concerning investor protection. However, the current regime may entail a lack of competition for depositary business in some member states - hence the creation of the possibility for the depositary to be established in a different member state from the AIF. These are the Commission’s proposed updates and additions.
The definition of central securities depositary is added by a reference to Regulation (EU) No 909/2014 (Central Securities Depositories Regulation).
The regulatory authorities of the home member state of an AIF or, in cases where AIFs are not regulated, regulatory authorities of the home member state of an AIFM, may allow a credit institution registered in the EU, authorised under Directive 2013/36/EU (Capital Requirements Directive), and established in another member state to be appointed as a depositary. This option is without prejudice to the full application of article 21 of the AIFMD incorporating the main provisions applicable to depositaries, except their place of establishment. This wording was already included in the transitional provisions of the existing AIFMD but with July 22, 2017, as an end date. In the Commission proposal, the end date of the transitional provision is deleted, meaning the appointment of such a depositary was already a possibility until 22 July 2017 under the current AIFMD . However, this wording would be the main provision in AIFMD II, without any end date.
A depositary established in a third country may be appointed as depositary of an AIF if:
- The third country is not at high risk of money laundering as defined by article 9 of the fourth AML Directive. As mentioned above, some jurisdictions have been recently added to this list by the European Commission, including the Cayman Islands, Jordan, and Morocco.
- The third country is not mentioned in appendix I to the Council conclusions of 2020 on the revised EU list of non-cooperative jurisdictions for tax purposes. As mentioned above, the Cayman Islands appears in appendix I, preventing the use of services provided by a depositary in the Cayman Islands. However, the Cayman Islands does not appear in the latest conclusions of the Council dated October 4, 2022. Therefore, attention should be paid to the final wording of AIFMD II regarding the Council conclusions of 2020 on the revised EU list of non-cooperative jurisdictions.
The requirement for the depositary to exercise due skill, care, and diligence in the selection, appointment, and monitoring of a delegate does not apply to a central securities depositary acting as an issuer CSD.
The provision of services by a CSD acting as an issuer CSD is not a delegation of the custody function.
Within 60 months after the entry into force of AIFMD II, the European Commission shall initiate a review which that includes an assessment of the appropriateness of complementing the AIFMD II with a depositary passport.
You can access a copy of the directive proposed by the European Commission here.
AIFMD II - The Council position - Distribution and national private placement regimes
There is no extension of the professional investor definition in the Council position.
The Council position does not refer to the Council conclusions of 2020 on the revised EU list on non-cooperative jurisdictions for tax purposes but only to the Council conclusions on the revised EU list on non-cooperative jurisdictions for tax purposes.
Access the European Council position of June 2022 here.
AIFMD II - The Council position - Delegation
Before the review by the European Commission of the functioning of the rules laid down in the AIFMD and experience acquired in applying them, ESMA shall provide a report analysing market practice regarding delegation and compliance with articles 7 (AIFM authorisation) and 20 (delegation of AIFM functions), based, inter alia, on data reported to regulatory authorities in accordance with point (d) of article 24(2) and on the exercise of its supervisory convergence powers. The difference between the Council position and the Commission proposal as well as the European Parliament draft report on this point is the absence of a time period stipulated for ESMA to provide such a report in the Council position.
Article 20 relating to delegation is also amended by the Council position, including the same amendments as those in the Commission proposal. However, the following addition in the Council position does not appear in the Commission proposal:
Where the marketing function is performed by one or multiple distributors that are acting on their own behalf and that market the AIF under Directive 2014/65/EU (MiFID II) or through insurance-based investment products in accordance with Directive 2016/97/EU (Insurance Distribution Directive), this should not be considered delegation subject to the requirements laid down in the above paragraphs irrespective of any distribution agreement between the AIFM and the distributor. This addition is broader than that included in the European Parliament draft report, since the performance of the marketing function would not be considered delegation irrespective of the existence of a distribution agreement between the distributors and the AIFM.
The Council position does not refer to a peer review of the application of the delegation regime, focusing on measures to prevent AIFMs that delegate portfolio management or risk management functions to independent entities in third countries from becoming letter-box entities. There is no new article 38a referred to in the Commission proposal.
Access the European Council position of June 2022 here.
AIFMD II - European Parliament draft report - Delegation
The European Parliament draft report has modified the Commission proposal by removing the reporting by national regulators to ESMA of situations in which an AIFM delegates more portfolio management or risk management functions than it retains. The second point of the delegation section in the Commission proposal is completely deleted in the European Parliament draft report, including the reference to draft RTS to be drawn up by ESMA and adopted by the Commission in relation to delegation notifications and their transmission.
Regarding reports analysing market practice regarding delegation to entities in third countries, the European Parliament draft report specifies only one report 12 months before the five-year review by the European Commission of the functioning of the rules laid down in the AIFMD and experience acquired in applying them.
If the marketing function is performed by one or multiple distributors not acting on behalf of the AIFM, under an agreement between the AIFM and these distributors, this function shall not be considered to constitute delegation subject to the delegation provisions of the AIFMD. The provisions relating to delegation (article 20 of the AIFMD) should not apply to such arrangements. This exemption is not included in the Commission proposal.
Access the draft report of 16 May 2022 from the European Parliament here.
AIFMD II - European Commission proposed directive, November 2021 - Delegation
The Commission proposal includes clarifications and additions, particularly in cases of delegation where an AIFM delegates more portfolio management or risk management functions to entities located in third countries than it retains.
The Commission proposal clarifies the application of the delegation requirements (article 20 of the current AIFMD) to all functions listed in appendix I and the ancillary services permitted under article 6(4).
Where an AIFM delegates more portfolio management or risk management functions to entities located in third countries than it retains, the regulatory authorities shall, on an annual basis, notify ESMA of all such delegations). Delegation notifications shall include the following information (note that this entire point is deleted from the European Parliament draft report):
- Information on the AIFM and the AIF concerned.
- Information on the delegate, specifying the delegate’s domicile and whether it is a regulated entity or not.
- A description of the delegated portfolio management and risk management functions.
- A description of the retained portfolio management and risk management functions.
- Any other information necessary to analyse the delegation arrangements.
- A description of the regulatory authorities’ supervisory activities, including desk-based reviews and on-site inspections and the results of such actions.
- Any details on cooperation between the regulatory authority of the AIFM and that of the delegate.
ESMA should draw up draft regulatory technical standards to determine the content of delegation notifications and standard forms, templates and procedures for the transmission of delegation notifications in a language customary in the financial sector. Powers are delegated to the European Commission to adopt the RTS.
ESMA shall provide regular reports, at least every two years, analysing market practice regarding delegation to entities located in third countries and compliance with articles 7 (application for authorisation) and 20 (delegation).
ESMA shall conduct a peer review analysis and provide a report on supervisory practices relating to delegation with a particular focus on preventing the creation of letterbox entities at least every two years.
You can access a copy of the directive proposed by the European Commission here.
AIFMD II - The Council position - Loan origination
Loan origination is the most detailed topic in the Council position, in which the amendments and additions to the AIFMD are somewhat different from those in the Commission proposal and the European Parliament draft report, although there is convergence on some provisions. The amendments and changes included in the Council position are as follows.
The Council position includes a new definition of capital: capital means aggregate capital contributions and uncalled committed capital, calculated according to amounts investable after the deduction of all fees, charges and expenses that are directly or indirectly borne by investors.
Other definitions include:
Loan origination means granting of loans by an AIF as the original lender.
A shareholder loan means an advance on the current account granted by an AIFs to an entity in which it holds directly or indirectly at least 5 % of the capital or voting rights, and which cannot be sold to third parties independently of the capital instruments held by the AIF in the entity.
A leveraged AIF means an AIF whose exposures are increased by the managing AIFM, through the borrowing of cash or securities, leverage embedded in derivative positions, or by any other means.
Regarding the implementation of effective policies, procedures and processes, AIFMs that perform loan origination or purchase loans from third parties shall also implement effective policies, procedures and processes for assessing credit risk and administering and monitoring their credit portfolio, keep those policies, procedures and processes up to date and effective, and review them regularly, at least once a year. The Council position refers to loan origination, as does the European Parliament draft report, but the Commission proposal does not. The Council position is the only one referring to the purchase of loans in this provision. Member states may determine that this requirement should not apply to the origination of shareholder loans, as in the European Parliament draft report but with different thresholds, provided that these shareholder loans:
- Do not exceed in aggregate 100% of the AIF’s capital, or
- Are granted to portfolio entities that acquire and manage real estate or participations in real estate companies, and in which the AIF directly or indirectly holds 100% of the capital or voting rights. This requirement should apply on a look-through basis to underlying assets controlled directly or indirectly by the AIF or the AIFM acting on the AIF’s behalf.
An AIFM shall ensure that loans (the singular is used in both the Commission proposal and European Parliament draft report) granted to any single borrower by an AIF it manages do not exceed 20% of the AIF’s capital where the borrower is one of the three types of entity mentioned in the Commission proposal and European Parliament draft report.
To determine compliance with this restriction, the AIFM should combine loans originated by the AIF it manages and the AIF’s loan exposures obtained through an SPV that originates loans for or on behalf of the AIF or AIFM in respect of the AIF. Neither the Commission proposal nor the European Parliament draft report refers to SPVs.
An AIFM shall ensure that the leverage of a loan originating AIF it manages represents no more than 150% of the AIF’s NAV. The leverage should be expressed as the ratio between the AIF’s exposure calculated according to the commitment method defined by delegated acts adopted by the European Commission and its NAV. Borrowing arrangements that are temporary in nature and are fully covered by contractual capital commitments from investors in the AIF should not be considered as constituting leverage for the purposes of this provision. The requirement shall apply to AIFs that gain exposure to a loan through an SPV which originates a loan for or on behalf of the AIF or of the AIFM in respect of the AIF. However, member states may determine that this restriction on leverage should not apply to AIFs whose lending activities consist solely of originating shareholder loans, provided that the loans:
- Do not exceed in aggregate 100% of the AIF’s capital, or
- Are granted to portfolio entities that acquire and manage real estate or participations in real estate companies and in which the AIF directly or indirectly holds 100% of the capital or voting rights. This requirement should apply on a look-through basis to underlying assets controlled directly or indirectly by the AIF or the AIFM acting on the AIF’s behalf. The private equity and real estate fund sector would welcome the adoption of this derogation in national law.
This provision relating to the leverage of loan originating AIFs is also new compared with the Commission proposal and the European Parliament draft report.
The investment limit of 20% should apply by the date specified in the rules or instruments of incorporation or prospectus of the AIF, but it should not exceed 24 months from the date on which the AIF first offers subscription to its shares. Neither the Commission proposal nor the European Parliament draft report mentions a limit for the application date of the investment limit.
The AIFM shall ensure that an AIF does not grant loans to:
- The AIFM or its staff.
- The AIF’s depositary and its delegates.
- An entity to which its AIFM has delegated functions under article 20 and the staff of this entity.
- An entity within the same group, meaning a parent undertaking and all its subsidiary undertakings, unless the entity is a financial undertaking that exclusively finances borrowers excluding those mentioned above. This list of entities is almost identical to that in the European Parliament draft report, but the third exception is exclusive to the Council position.
Member states may prohibit AIFs from granting loans to consumers on their territory, but this shall not affect the marketing of AIFs engaged in consumer lending in the EU. The consumer is defined by reference to article 3(a) of Directive 2008/48/EC (Consumer Credit Directive) as an individual who, in transactions covered by the directive, is acting for purposes outside their trade, business or profession. Neither the Commission proposal nor the European Parliament draft report offers such an option to member states.
An AIFM shall not manage an AIF whose investment strategy, as specified in its rules, instrument of incorporation and prospectus, is to originate loans or gain exposure to loans through an SPV that originates a loan for or on behalf of the AIF or AIFM in respect of the AIF, with the sole purpose of transferring the loans or exposures to third parties (originate-to-distribute). The same provision is included in the European Parliament draft report, except for the reference to originating loan SPVs, but not in the Commission proposal.
An AIFM shall ensure that the AIF it manages retains, for two years from the signature date or until maturity, whichever is shorter, 5% of the notional value of the loans it has originated, or purchased from an SPV that originates loans for or on behalf of the AIF or AIFM in respect of the AIF, and subsequently sold to third parties. This requirement does not apply where:
- The AIF starts selling assets to redeem investors' units or shares as part of the wind-down of the AIF.
- The borrower or any of its shareholders are subject to EU sanctions, or
- The sale of the loan is necessary for the AIF to avoid breaching one of its investment or diversification rules, where this potential breach would exist for reasons beyond the control of the AIF and of the AIFM that manages it, or as a result of the exercise of subscription or redemption rights.
The 5% minimum retention requirement is removed in the European Parliament draft report. The Commission proposal does not include any of the derogations provided above and does not limit such a requirement to two years.
The following transitional period is added: AIFMs, insofar as they manage AIFs that originate loans and that were constituted before the date of adoption of AFIMD II, may continue to manage these AIFs without complying with point (d) of article 15(3), paragraphs 4a to 4f of article 15 and article 16(2a) of the directive until five years after the date of adoption of AIFMD II. These articles relate to new provisions regarding loan originating AIFs. Loan-originating AIFs constituted before the date of adoption of AIFMD II and that do not raise additional capital shall be deemed to comply with these articles.
Access the European Council position of June 2022 here.
AIFMD II - European Parliament draft report - Loan origination
The European Parliament draft report has added two definitions:
Loan origination means the granting of loans by an AIF as the original lender. This definition is relatively narrow and funds acquiring mostly syndicated debt are excluded.
A shareholder loan is a loan granted by an AIF to an entity in which it holds directly or indirectly at least 5% of the capital or voting rights, where the loan cannot be sold to third parties independently of the investment held by the AIF in the same entity.
The European Parliament draft report refers to loan origination rather than loan granting activities. The requirements regarding effective, up-to-date and annually reviewed policies, procedures and processes for granting credit, assessing the credit risk and administering and monitoring their credit portfolio are the same as those included in the Commission proposal. However, the European Parliament draft report includes the exception that such requirements do not apply to shareholder loans that do not exceed in aggregate 150% of the NAV of the AIF.
The 20% limit of the AIF capital relating to certain types of borrowers is retained in the European Parliament draft report with the additions of commitments and overall subscriptions: “An AIFM shall ensure that a loan originated to any single borrower by the AIF it manages does not exceed 20% of the AIF’s capital or commitments or overall subscriptions where the borrower is one of the following: (…)”.
An entity within the same group as an AIFM cannot receive loans from loan originating AIFs managed by the AIFM. The restriction on loan origination to entities that are part of the same group as the AIFM may change the way some private equity-backed deals are structured, since the acquisition entity may be part of the group - in particular in US PE fund structures).
Delegates of a depositary are also prohibited from receiving loans from AIFs which have appointed such depositary. The Commission proposal refers only to the depositary, not its delegates.
The requirement to retain on an ongoing basis 5% of the notional value of loans originated by the AIF is removed in the European Parliament draft report.
AIFs should not follow an originate-to-distribute investment strategy, under which loans are originated with the sole purpose of transferring those loans to third parties. This is a different approach to risk retention than the Commission proposal, a general prohibition rather than a minimum retention requirement of 5% applicable to loans originated by the AIF and sold on the secondary market. This general prohibition does not prevent the trading of some loans on the secondary market, but the extent to which such trading is authorised would depend on the approach adopted by national regulators.
An AIF originating loans should be closed-ended if the AIFM is unable to demonstrate to the regulatory authorities of its home member state that the open-ended AIF has liquidity robustness regarding liquidity mismatches and long-term and illiquid loans – the European Commission will adopt the regulatory technical standards drafted by ESMA regarding demonstration of liquidity robustness for loan origination. This obligation may catch, for instance, AIFs with flexible and opportunistic strategies. The Commission proposal is more precise in requiring that an AIF be closed-ended if the notional value of its originated loans exceeds 60% of its NAV.
Access the draft report of 16 May 2022 from the European Parliament here.
AIFMD II - European Commission proposed directive, November 2021 - Loan origination
Since the growth of loan originating funds in the EU internal market is seen as a positive development, amendments and additions seek to remove unnecessary risk retention requirements and avoid creating product-specific rules. Favouring loan originating funds is also a means to increase financing to SMEs, green projects and other companies. The following changes and amendments to the AIFMD are included in the Commission proposal.
- AIFs have a right to originate loans and trade these loans on the secondary market.
- AIFMs and their staff cannot be granted loans from loan-originating AIFs they manage.
- AIFs’ depositaries are prohibited from receiving loans from AIFs they service.
Entities to which the AIFM has delegated one or more of its AIFM functions cannot receive loans originated by the AIF.
AIFs originating loans shall be closed-ended if the notional value of their originated loans exceeds 60% of its NAV.
For loan granting activities, the AIFM shall implement effective policies, procedures and processes for the granting of credit, assessing credit risk and administering and monitoring their credit portfolio, keep those policies, procedures and processes up to date and effective. and review them regularly, at least once a year.
An AIFM shall ensure that a loan granted to any single borrower by the AIF it manages does not exceed 20% of the AIF’s capital in cases where the borrower is one of the following:
- A financial undertaking within the meaning of article 13(25) of Directive 2009/138/EC (Solvency II).
- An AIF within the meaning of article 4(1), point (a), of the Solvency II directive.
A UCITS within the meaning of article 1(2) of Directive 2009/65/EC (UCITS IV).
This restriction is without prejudice to the thresholds, restrictions and conditions of the EUVECA, ELTIF and EUSEF regulations.
The investment limit of 20%:
- Applies by the date specified in the rules or instruments of incorporation of the AIF.
- Ceases to apply once the AIF starts to sell assets to redeem investors' units or shares after the end of its life.
- May be temporarily suspended for up to 12 months when the AIF raises additional capital or reduces its existing capital.
The application date of the investment limit shall be set in the rules or instruments of incorporation of the AIF, taking into consideration the particular features and characteristics of the assets in which the AIF is to invest. However, the application date of the investment limit, as specified in the rules or instruments of incorporation of the AIF, should not be later than halfway through the life of the AIF indicated in its constitutive documents. In exceptional circumstances, the regulatory authority of the AIFM, upon submission of a duly justified investment plan, may approve an extension of this time limit not exceeding one additional year.
AIFMs shall ensure that AIFs they manage retain, on an ongoing basis, 5% of the notional value of the loans they originate and subsequently sell on the secondary market. This requirement does not apply to loans the AIF has purchased on the secondary market.
You can access a copy of the directive proposed by the European Commission here.
AIFMD II - The Council position - Liquidity management tools
After assessing suitability with regard to the investment strategy pursued, the liquidity profile and redemption policy, an AIFM that manages an open-ended AIF should select at least two appropriate LMTs from the list set out in Appendix V, points 2 to 7 (i.e. redemption gates, notice periods, liquidity fees on redemption, swing and/or dual pricing, anti-dilution levy, and redemptions in kind) for possible use in the interests of the AIF’s investors. By way of derogation, the AIFM may select only one LMT from Appendix V points 2 to 7 for an AIF it manages, if that AIF is authorised as a money market fund according to Regulation (EU) 2017/1131. The Commission proposal and European Parliament draft report refer to only one LMT, among different lists of LMTs, without mentioning money market funds. By contrast, the Council position includes special provisions applying to the money market funds, and it is the only one to include dual pricing in appendix V.
Under the Commission proposal, the AIFM should implement detailed policies and procedures for the activation and deactivation of any selected LMT and the operational and administrative arrangements for using such a tool. However, the Council position requires the AIFM to communicate such a decision and relevant explanations to the regulatory authorities of the AIF’s home member state.
Redemption in kind, as referred to in Appendix V point 7, can be activated only to meet redemptions requested by professional investors and if the redemption in kind corresponds to a pro rata share of the assets held by the AIF. By way of derogation, the redemption in kind may not correspond to a pro rata share of the assets held by the AIF if that AIF is solely marketed to professional investors or whose investment policy is to replicate the composition of a particular stock or debt securities index, and additionally if that AIF is an exchange-traded fund as defined by MiFIR article 2(26). This provision is mentioned only in the Council position.
An AIFM that manages an open-ended AIF may, in the interest of its investors, temporarily suspend the repurchase or redemption of the AIF’s units or shares, or activate or deactivate other LMTs from the list set out in Appendix V points 2 to 7, and included in the fund rules or the articles of incorporation of the AIF. In the interest of AIF investors, to ensure subscriptions and redemptions are processed at a fair price, the AIFM may also activate side-pockets, as referred to in point 8 of Appendix V, in situations where the AIFM cannot ensure fair and accurate valuation of some assets or where some assets have become non-tradable. The temporary suspension and activation of side-pockets may be carried out only in exceptional cases where circumstances so require, and they are justified with regard to the interests of investors.
An AIFM should, without delay, notify the regulatory authorities of its home member state when activating or deactivating the suspension of redemptions and redemption gates referred to in points 1 and 2 of Appendix V. The Commission proposal provides for such notification in relation to three LMTs, and the European Parliament draft report requires notification for four LMTs.
An AIFM should notify the same regulatory authorities when activating or deactivating side-pockets, as referred to in point 8, in a reasonable timeframe before the activation or deactivation of this LMT. A member state may require notification from the AIFM to the regulatory authorities of the AIFM’s home member state when the AIFM decides to activate redemption in kind, extend the notice period or increase the liquidity fee, the cap of the swing factor of the swing pricing or the anti-dilution levy fee set out in the fund prospectus, or increase the bid-ask spread in dual pricing for liquidity management purposes. This wording is only included in the Council position.
The regulatory authorities of the AIFM’s home member state member should notify, without delay, the regulatory authorities of a host member state of the AIFM and ESMA of any notifications received under this paragraph and, if there are potential risks to the stability and integrity of the financial system, the European Systemic Risk Board. The approach of the Council position regarding notification of the ESRB is similar to that in the European Parliament draft report.
Member states should ensure that at least the LMTs set out in Appendix V are available to AIFMs managing open-ended AIFs, namely:
- Suspension of redemptions and subscriptions.
- Redemption gates are defined as partial, not full, as in the European Parliament draft report.
- Notice periods.
- Liquidity fees.
- Swing and/or dual pricing. Dual pricing only appears in the Council position.
- Anti-dilution levy.
- Redemption in kind.
- Side-pockets.
The Council position does not amend the power of regulatory authorities to require AIFMs to activate or deactivate certain LMTs. In contrast, it is amended in the Commission proposal and the European Parliament draft report. Therefore, article 46(2) point j is not modified in the Council position, meaning that the regulatory authorities may require suspension of the issue, repurchase or redemption of shares or units in the interest of shareholders/unitholders or the public, as it is already the case in the current version of the AIFMD.
ESMA should develop draft RTS to specify the characteristics of the LMTs set out in Appendix V, as included in the Commission proposal but deleted from the European Parliament draft report.
ESMA should draw up guidelines determining criteria for selecting and using appropriate LMTs by AIFMs for liquidity risk management, including proper disclosures to investors, considering the capability of such tools to reduce undue advantages for investors that redeem their investments first and to mitigate financial stability risks. The Commission proposal and the European Parliament draft report refer to draft RTS to be drawn up by ESMA, not guidelines. These guidelines should also indicate the circumstances in which side-pockets can be activated.
The power of ESMA to require the activation or deactivation of certain LMTs by non-EU AIFMs that are marketing AIFs that they manage within the union or EU AIFMs managing non-EU AIFs is not added by the Council position nor the European Parliament draft report, but it is by the Commission proposal.
Regarding the cooperation obligation, the Council position requires notification of the ESRB in various cases, but only if there are potential risks to the stability and integrity of the financial system. By contrast, the Commission proposal does not refer to the stability and integrity of the financial system. Although the Commission proposal requires ESMA to draw up draft RTS indicating in which situations the regulatory authorities may exercise the powers set out in Article 46(2) point (j), the Council position requires ESMA to draw up guidelines.
Access the European Council position of June 2022 here.
AIFMD II - EU Parliament draft report - Liquidity management tools
AIFMs of open-ended AIFs based in any member state are required to choose at least one LMT from the harmonised list set out in Appendix V under points 2, 3, 4, 5, 6 and 8) (i.e. redemption gates, notice periods, redemption fees, swing pricing, anti-dilution levy and side-pockets). The European Parliament draft report added the last three LMTs.
An AIFM that manages an open-ended AIF may, in the interest of the AIF’s investors, temporarily suspend the repurchase or redemption of the AIF’s shares or units or activate redemption gates, notice periods and redemption fees, swing pricing, anti-dilution levy or side-pockets if these LMTs are cited in the fund rules or the articles of incorporation of the AIFM. Similarly, the final three LMTs have been added by the European Parliament draft report.
An AIFM should promptly notify the regulatory authorities of its home member state when activating or deactivating one of the following LMTs in situations of liquidity stress: the suspension of redemptions and subscriptions, redemption gates, notice periods or redemption fees. The references to situations of liquidity stress and suspension of redemptions and subscriptions have been added by the European Parliament draft report. The regulatory authorities of the AIFM’s home member state should notify, without delay, the regulatory authorities of a host member state of the AIFM and ESMA. The European Systemic Risk Board should be notified only if there is a potential risk to the stability and integrity of the financial system. The restriction of the ESRB notification to such cases differs from the Commission proposal, a difference commensurate with ESRB’s mission.
The European Parliament draft report has deleted the draft RTS specifying the characteristics of the LMTs, replacing them with draft RTS from ESMA on the criteria to be used by regulatory authorities for determining whether an AIF demonstrates liquidity robustness.
The draft RTS from ESMA on criteria for the selection and use of suitable LMTs by AIFMs for liquidity risk management is maintained in the European Parliament draft report. However, the latter provides that the RTS should recognise that the primary responsibility for liquidity risk management remains with the AIFM. They would also allow adequate time for adaptation before they apply, in particular, for existing AIFs.
In exceptional circumstances and after consulting the AIFM, national regulators may require an AIFM to activate or deactivate an LMT, such as suspension of redemptions and subscriptions and redemption gates or another LMT selected by the AIFM as considered the most suitable given the type of open-ended AIF or group of open-ended AIFs concerned, if financial stability risks that necessitate this requirement, in the interest of investors. The European Parliament draft report refers only to the interest of investors, not the public. Moreover, this power given to regulators is restricted to exceptional circumstances and consultation of the AIFM, whereas they are not mentioned in the Commission proposal. The LMT to be activated or deactivated should be the most suitable considering the type of open-ended AIFs and if financial stability risks necessitate this requirement. These two criteria are cumulative in the European Parliament draft report. In contrast, in the Commission proposal, suitability to the type of open-ended AIFs and investor protection are alternative to financial stability risks. The similar power for ESMA included in the Commission proposal has been deleted in the European Parliament draft report.
The definition of redemption gates by the European Parliament draft report is similar to that in the Commission proposal. However, the temporary restriction of the right of shareholders to redeem their shares or units cannot be full, only partial, stipulating that investors can redeem a certain portion of their shares or units.
The redemption fee is defined as a pre-determined fee charged to investors when redeeming the fund’s units or shares. The European Parliament draft report requires a redemption fee to be pre-determined, whereas the Commission proposal does not.
The Commission proposal and the European Parliament draft report define the anti-dilution levy similarly. However, the European Parliament draft report adds the following requirement: calculation of the anti-dilution levy should consider ongoing liquidity costs and market conditions.
Access the draft report of 16 May 2022 from the European Parliament here.
