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Background
On 21 October 2025, the European Securities and Markets Authority ("ESMA") published its final report and draft regulatory technical standards ("RTS") for open-ended loan-originating alternative investment funds ("AIFs") under Directive (EU) 2024/927 ("AIFMD II"). This follows the consultation on the proposed draft RTS, which was initiated by ESMA on 12 December 2024 and closed on 12 March 2025. The final report includes the revised draft RTS developed, taking into account the feedback received to the consultation.
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 alternative investment fund manager ("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.
Key amendments
The key amendments to the draft RTS following the consultation are the following:
- removal of the requirement for AIFMs to determine a target appropriate amount of liquid assets that AIFs should hold to meet redemption requests;
- liquidity stress tests must be carried out at least once a year rather than every quarter, as per the original proposal; and
- clarification that the draft RTS will apply to 'AIFMs that manage' AIFs, not those that 'intend to manage' AIFs.
Overview of RTS
Appropriate redemption policy
The redemption policy of an open-ended loan-originating
AIF must take into account the factors outlined in Article 3 of the
RTS which includes, inter alia, the redemption frequency offered to
investors, the investment policy and strategy of the AIF, the
availability of liquid assets held by the AIF, the credit quality
of the loans and the length of the AIF's notice period.
Removal of liquid asset requirements
In the updated draft RTS ESMA has removed the requirement
for AIFMs to determine a target appropriate amount of liquid assets
that AIFs should hold to meet redemption requests. Respondents to
the consultation emphasised that effective liquidity management in
AIFs depends more on the liquidity arising from the loans granted
by the funds, rather than constantly holding a fixed amount of
liquid assets. They also noted that such a requirement could
adversely impact fund performance. As a result, the draft RTS now
stipulate that AIFMs must structure AIFs in a manner that ensures
that they maintain sufficient liquidity to meet redemption
request.
Liquidity stress testing
Taking into consideration the feedback received, ESMA
updated the draft RTS to require that AIFMs must carry out
liquidity stress tests at least once a year unless a higher
frequency is justified by the characteristics of the AIF, rather
than every quarter as previously proposed in the consultation
paper. 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 portfolio concentration, cash flows, investor behaviour,
loan repayment schedules and early warning signs of loan
impairment. AIFMs must have the capacity to assess whether the
liquidity management system remains compatible with the investment
strategy of the AIF and the redemption policy offered to
investors.
No pre-authorisation required
Several respondents to the consultation highlighted that
the proposed requirements for AIFMs that 'intend to manage'
open-ended loan-originating AIFs in the draft RTS could be
misinterpreted as requiring open-ended loan-originating AIFs to
obtain pre-authorisation from their competent authorities. In
response, ESMA amended the draft RTS, replacing 'intend to
manage' with 'AIFMs that manage', in line with the
Level 1 Directive. Nonetheless, ESMA recognises that some
open-ended loan-originating AIFs may still require
pre-authorisation under national laws, as the AIFMD itself does not
regulate AIF authorisation procedures.
Next steps
The draft RTS have been submitted to the European Commission for adoption. However, ESMA notes that the European Commission, in a letter dated 1 October 2025, had included the draft RTS in the list of delayed non-essential Level 2 acts, and as a result the RTS will not be adopted by the European Commission before 1 October 2027 at the earliest. This de-prioritisation of the RTS is disappointing for AIFMs who were currently assessing their current liquidity management frameworks against the proposed requirements in the draft RTS and who were expecting clarity on the requirements prior to the entry into force of the Level 1 Directive requirements under AIFMD II on 16 April 2026.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
