European Union: ESMA Calls For Common EU Harmonized Legal Framework For Loan-Originating Funds

Last Updated: 13 April 2016
Article by Patricia Volhard, LL.M. and Jin-Hyuk Jang

Most Read Contributor in Germany, November 2017

Following the discussions on loan-originating funds within the European Securities and Markets Authority ("ESMA") and the recent legislative developments in many EU Member States (including Germany) and the Commission's Action Plan on Building a Capital Markets Union (CMU) in September 2015, ESMA published today an opinion to the institutions setting out its view on the necessary elements for a common European framework for loan-originating funds ("Loan-Originating AIFs"). ESMA is of the view that a common approach at EU level would contribute to a level playing field for fund sponsors and investors as well as reducing the potential for regulatory arbitrage.

ESMA's opinion addresses the Commission's Action Plan of September 2015 where the Commission had outlined its goal to work with the Member States and the European authorities to assess the need for a coordinated approach. The Commission intends to consult on the elements of an EU framework on loan-originating funds in the second quarter of 2016 (the "Consultation") and has requested ESMA's advice on the elements which should form part of such Consultation.

ESMA is of the view that the elements presented in the opinion should ideally form part of a harmonized EU framework on loan origination and hence should be further assessed in the Commission's Consultation.

ESMA states that the implementation of such a framework could be achieved in different ways, e.g. through a legislative proposal or by way of an ESMA instrument supplementing the AIFMD. ESMA sees the merit in developing a grandfathering regime and/or transitional provisions for AIFs that no longer meet the requirements of the loan origination framework.

The elements which in ESMA's view should be considered as part of a legislative framework relate to:

  • authorization requirements of the AIFM and the AIF;
  • requirements as to the types of AIFs which may originate loans (only closed-ended or also open ended?);
  • requirements as to the types of investors which may invest in a loan-originating AIFs (also retails investors or only professional investors?);
  • organizational requirements of the AIFM managing such AIFs (risk management procedures);
  • leverage limitations;
  • liquidity requirements (in case of open ended AIFs);
  • stress testing requirements;
  • diversification requirements; and
  • eligible debtors requirements (no individuals, no consumers and no financing institutions or related parties as debtors).

We have summarized the above requirements as suggested by ESMA in a bit more detail:

I. The Legal Framework

ESMA's advice focuses on loan origination and does not seem to cover AIFs which buy and restructure loans. It also seems to suggest – without going into detail - that like in certain EU Member States there may be exemptions for private equity funds, venture capital funds and hedge funds to the extent they engage in loan origination.

1. Authorization Requirements relating to the Loan-Originating AIF and its AIFM

ESMA is of the view that the framework should ensure that the national competent authorities have the necessary powers to monitor, supervise, and enforce the requirements set for AIFMs and their AIFs. ESMA suggests that it should be assessed in the Commission's Consultation whether a registration of the AIFM as sub-threshold AIFM is deemed sufficient or whether a full AIFM authorization is required and/or whether further requirements should be imposed.

As to the AIF itself, ESMA states that while Loan-Originating AIFs themselves are subject to authorization requirements in certain Member States, no additional authorization requirements apply in others. ESMA leaves it open whether it deems it necessary to impose also authorization requirements with respect to the AIF itself but suggests that this should be further assessed in the Consultation.

2. Types of Loan-Originating AIFs

Because of the illiquid nature ESMA is of the opinion that loan-originating AIFs should generally be set up as closed ended vehicles without the right to redemption. It suggests, however, to further asses in the Consultation to what extent redemption rights would be acceptable.

3. Types of Investors

ESMA sees risks in making Loan-Originating AIFs available to retail investors on a general basis. ESMA states that if investments in such AIFs was open to retail investors the rules should at the very least afford protections similar to those in the ELTIF Regulation.

4. Risk Management Requirements

As Loan-Originating AIFs could be a source of systemic risk, ESMA sees a merit in establishing a risk management framework for Loan-Originating AIFs and their AIFMs which contains rules to mitigate risks arising from liquidity and maturity transformation, as well as risks related to imprudent lending.

In particular, ESMA is of the opinion that AIFMs managing Loan-Originating AIFs should be required to have specific policies, processes and procedures in place, governing among others:

  • risk management procedures, taking into account specific risks arising from loan origination,
  • the assessment, pricing and granting of credit (including criteria, governance and decision making committee structures),
  • credit monitoring, renewal and refinancing (including criteria, governance and decision making committee structures),
  • collateral management policy,
  • operational risk control appropriate to loan origination,
  • assessment and scoring of borrowers, valuation,
  • identification of problem debt management,
  • capability and experience of staff in regard to the specific tasks connected with loan origination.

5. Leverage Limitation, Liquidity and Stress Testing, Reporting

While ESMA seems to be of the view that Loan-Originating AIFs should be allowed to have a certain level of leverage, there should generally be limits to leverage. It further recommends that the Commission's Consultation should aim to assess whether Loan-Originating AIFs should, for the purposes of borrowing, rely on financing by credit institutions alone of whether other ways of financing should be open for them as well.

In case the AIFs permit redemptions liquidity requirements should be established.

ESMA deems it necessary that the AIFs should be required to conduct regulator stress tests tailored to their type and level of activity.

Finally ESMA also suggests to assess the need for changes to the AIFMD reporting requirements (Annex IV of the AIFMD Level 2 Regulation).

6. Diversification, eligible investments and eligible debtors

ESMA considers that mandatory diversification should be required while still allowing specialization of loan-originating funds.

ESMA is further of the view that Loan-Originating AIFs should not engage in short selling or securities financing transactions and they should not make use of derivatives except for hedging purposes.

Finally Loan-Originating AIFs should not be able to lend to individuals, financial institutions, collective investment schemes and the AIFM and related parties and consumers.

II. Comment

The requirements set out by ESMA remind very much of the requirements adopted recently in Germany. This is not surprising as ESMA has outlined key issues around loan origination that have been identified through work at ESMA level and by analysing the framework in place in Member States. Generally an EU wide harmonised legislative regime can improve legal certainty and encourage cross border business. However, the future of Loan-Originating Funds in Europe (and the acceptance and use of the new regime) will depend on whether the requirements which will be adopted end up to be reasonable and sufficiently consider the fact that AIFMs of Loan-Originating Funds are not comparable to credit institutions: they do not take deposits of retail clients (nor do the AIFs they manage) but they simply engage in investment management activities (typically for AIFs with only for institutional investors) just like other AIFs which are managed by AIFM subject to the AIFMD.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions