Background

On 12 December 2024, the European Securities and Markets Authority (“ESMA“) initiated a consultation on draft regulatory technical standards (“RTS“) for open-ended loan originating alternative investment funds (“AIFs“) under Directive (EU) 2024/927 (“AIFMD II“).  Stakeholders are invited to submit responses to specific questions by 12 March 2025, and ESMA expects to publish the final RTS by Q3/Q4 2025.

AIFMD II provides that an AIFM shall ensure that a loan-originating AIF it manages is closed-ended. However, by way of derogation from this requirement, a loan-originating AIF may be open-ended provided that the AIFM that manages it is able to demonstrate to the competent authority of the home Member State of the AIFM that:

• the AIF’s liquidity risk management system is compatible with its investment strategy and redemption policy; and
• the key elements of the open-ended loan-originating AIF, including its strategy and dealing frequency, enable it to remain sufficiently liquid to be able to meet redemption requests.

Overview of RTS

Redemption policy

• The redemption policy of an open-ended loan-originating AIF must take into account the factors outlined in Article 2 of the RTS which includes, inter alia, the redemption frequency offered to investors, the target investors of the AIF, the length of the AIF’s notice period and the amount of liquid assets to be held.

Liquid asset requirements

• AIFMs are required to maintain an appropriate proportion of liquid assets, considering factors such as expected cash flows from loans, the AIF’s redemption policy, maturity profiles, potential default rates and the anticipated behaviour of targeted investors, as well as the investor concentration.
• AIFMs must determine the type of assets they consider as liquid.
• Liquid assets may include cash flows from loans and other investments that can be converted to cash without significant value loss during the notice period.

Liquidity stress testing

• Stress testing is mandated on at least a quarterly basis, unless a higher or lower frequency is justified by the characteristics of liquidity of the loans. The reasons for such a determination must be recorded in the liquidity stress testing (“LST“) policy of the open-ended loan originating AIF.
• Stress tests must cover both the assets and liabilities of the AIF.
• Scenarios for liquidity stress testing must be conservative, including low probability high impact events that could affect the valuation and liquidity of loans.

Ongoing monitoring

• AIFMs must monitor on an ongoing basis critical metrics such as the level of liquid assets, expected cash flows and potential future liabilities, investor behaviour, loan repayment schedules, and early warning signs of loan impairment.
• AIFMs must have capacity to assess whether the liquidity management system remains compatible with the investment strategy of the open-ended loan originating AIFs and the redemption policy offered to investors.

Implications for AIFMs

AIFMs managing, or intending to manage, open-ended loan originating AIFs should start assessing their current liquidity management frameworks against the proposed requirements. Early alignment with ESMA’s principles will ensure compliance and mitigate operational and other risks when the RTS come into force.

For any further details or information on the consultation or AIFMD II, please contact your usual Arthur Cox contact.