The Commission began its review of AIFMD in 2018 with a general survey about the functioning of AIFMD. It concluded its review and issued a report on 10 June 2020, which included findings with regard to the impacts of AIFMD on AIFs and AIFMs, investors, and on monitoring and assessing systemic risk. On 21 October 2020, the Commission launched a consultation on the operation of AIFMD, which also included proposals in respect of UCITS. That consultation closed in January 2021 and the Commission has now published its legislative proposals arising from the consultation, including measures to align the UCITS framework with AIFMD.
This briefing focuses primarily on the proposals around delegation and substance and liquidity risk management which will be of keen interest to all authorised AIFMs and UCITS management companies (“FMCs”). The Commission’s proposals around loan origination and investor disclosure are also covered, but will only apply to AIFMs under AIFMD.

Delegation and Substance

In its proposal, the Commission acknowledges that the delegation framework contributes to the success of EU investment funds. In particular, the Commission notes that delegation allows for the efficient management of investment portfolios and for sourcing the necessary expertise in a particular geographic market or asset class. However, noting that there are diverging supervisory practices among EU member state regulators, the proposals aim to provide clarity on the rules around delegation and seek to achieve a coherent approach to delegation activities by FMCs and their supervisors. The proposals are set out below:

  • National competent authorities (“NCAs”) must provide annual notifications to ESMA of delegation arrangements where more risk or portfolio management is delegated by the FMC to entities in non-EU countries than is retained. ESMA is empowered to develop regulatory technical standards (“RTS”) to prescribe the form, content and procedures for transmission of these delegation notifications. The information required to be provided in a delegation notification includes:
    • information on the FMC and the AIF/UCITS;
    • information on the delegate, specifying the delegate’s domicile and whether it is a regulated entity or not;
    • a description of the delegated portfolio and risk management functions;
    • a description of the retained portfolio and risk management functions;
    • any other information necessary to analyse the delegation arrangements;
    • a description of the NCA’s supervisory activities, including desk-based reviews and on-site inspections, and the results of such activities; and
    • any details on the cooperation between the NCA of the FMC and the supervisory authority of the delegate.
  • ESMA will be required to provide frequent reports (at least every two years) to the Commission analysing market practices regarding delegation to non-EU entities;
  • ESMA will also be required to conduct peer-reviews (at least every two years) focused on NCAs’ supervisory activities regarding measures taken to prevent FMCs which delegate portfolio and risk management to non-EU country entities becoming letter-box entities; and
  • the Commission will also be required to review the delegation regime with a view to proposing any necessary amendments to preclude the formation of letter-box entities. However, this review will not take place until five years after the amended legislative requirements have entered into force.

The Commission is proposing that FMCs must provide NCAs with detailed information about the human and technical resources that the FMC will employ to carry out its functions and, where applicable, supervise its delegates at authorisation stage. The information required includes:

  • a detailed description of their role, title and level of seniority;
  • a description of their reporting lines and responsibilities in the FMC and outside the FMC;
  • an overview of their time allocated to each responsibility; and
  • a description of the technical and human resources that support their activities;

FMCs would also be required to employ at least two natural persons, resident in the EU, who are either employed full-time by the FMC or who are committed full-time to conduct the business of the FMC.
To align the AIFMD and UCITS frameworks, a UCITS will be required to justify its entire delegation structure based on objective reasons.
Both AIFMD and the UCITS Directive will be amended to clarify that the delegation rules apply to the delegation of all functions and services by FMCs, including ancillary services. The functions and services that a UCITS management company has been permitted to delegate must be listed in the UCITS’ prospectus.
Additionally, AIFMD will be amended to provide that AIFMs may also be authorised to provide the core services of loan-origination and servicing of securitisation special purpose entities, and the ancillary (non-MiFID) services of benchmark administration and credit servicing.

Liquidity Risk Management

The proposals around liquidity risk management would introduce a harmonised list of liquidity risk management tools (“LMTs”) available to FMCs of open-ended funds across the EU. These LMTs include: suspension of redemptions and subscriptions; redemption gates; notice periods; redemption fees; swing pricing; anti-dilution levies; redemptions in kind; and side pockets. Under the proposals FMCs would be required to:

  • in addition to temporarily suspending redemptions, select at least one of redemption gates, notice periods, and redemption fees as an additional appropriate LMT, and ensure the selected LMTs are included in the fund rules/instruments of incorporation;
  • implement detailed policies and procedures for activating and de-activating LMTs and the operational and administrative arrangements for the use of such a LMT;
  • notify their NCA without delay when activating or de-activating a LMT. The NCA of the FMC must inform, without delay, the host Member State NCA of the FMC and the ESRB of any notifications; and
  • NCAs may require a FMC, including a non-EU AIFM, to activate or de-activate a LMT. The NCA must also notify other relevant NCAs and the ESRB prior to requiring the activation or de-activation of a LMT.

Under the proposals, ESMA is empowered to develop RTS to specify the characteristics of the harmonised LMTs and also on the criteria for the selection and use of suitable LMTs, including appropriate disclosure to investors, as well as RTS specifying the situations in which NCAs may exercise their powers in relation to LMTs.

Loan Origination (AIFMD only)

The Commission notes that diverging national regulatory approaches undermine the establishment of an efficient internal market for loan-origination by promoting regulatory arbitrage and varying levels of investor protection. As such, the Commission’s proposals seek to introduce a harmonised framework for loan-origination AIFs across the EU. The requirements under the framework include:

  • loan-origination AIFs must be closed-ended if the notional value of its originated loans exceeds 60% of its NAV;
  • a lending limit of 20% of the AIF’s capital applies where the borrower is either a financial institution under the Solvency II Directive, a UCITS or an AIF;
  • AIFMs of AIFs that engage in lending activities, including purchasing loans on the secondary market, must have effective policies, procedures and processes for the granting of loans, assessing credit risk and administering and monitoring its credit portfolio, which should be reviewed regularly;
  • to avoid conflicts of interest, a loan-origination AIF may not lend to its AIFM or the staff of its AIFM, its depositary or a delegate of the AIFM; and
  • a loan-origination AIF must retain, on an ongoing basis, 5% of the notional value of the loans it has originated and subsequently sold on the secondary market.

The Central Bank of Ireland already applies similar requirements under the Irish loan origination fund regime that has been in place since 2014.

Investor Disclosure (AIFMD only)

The proposals also include provisions to supplement the investor disclosure requirements in Article 23 of AIFMD. These additional disclosures relate to the conditions for using LMTs and the fees which will be borne by the AIFM or its affiliates and periodic reporting on all direct and indirect charges that were directly or indirectly charged or allocated to the AIF of any of its investments. AIFMs will also be required to report to investors regarding the portfolio composition of originated loans. AIFMs must also report on a quarterly basis in relation to any parent company, subsidiary or special purpose entity established in relation to the AIF’s investments by the AIFM, the staff of the AIFM or the AIFM’s direct or indirect affiliates.

Data reporting

FMCs will be required to report on the markets and instruments in which they trade on behalf of the AIFs/UCITS under management.


Noting that central securities depositaries (“CSDs”) are not currently considered delegates of the depositary, the Commission proposes to bring CSDs into the custody chain and would not require depositaries to complete ex-ante due diligence on custodian CSDs. In respect of AIFMD only, the Commission is proposing to extend Article 61(5) to permit NCAs to allow depositary services to be procured in other Member States.

Next Steps

The draft proposals may be subject to change as they make their way through the EU legislative process. Once agreed, the proposals will be published in the Official Journal of the EU and Member States will have two years from this date to transpose the requirements.
If you would like to discuss the foregoing in the more detail please do not hesitate to contact any member of our team.