ESMA Suggests EU-wide Rules for Loan Originating Funds

April 13, 2016

On April 12, 2016, ESMA published an opinion calling for harmonized EU rules for loan originating alternative investment funds (“LO-AIFs”). Background for the opinion is the Action Plan on Building a Capital Markets Union according to which the Commission is in the process of assessing the need for a uniform EU framework for LO-AIFs. With respect to some elements of the framework for LO-AIFs, ESMA already formed a view while with respect to others it suggests further analysis.

ESMA’s view on necessary elements of EU framework:

  • LO-AIFs should be closed-ended funds
  • LO-AIFs should not be allowed to have liabilities with shorter maturities than the loans granted; maturities of the loans should not exceed the remaining lifespan of the fund
  • Only suitable investors should be permitted to invest (most likely professional investors)
  • Organizational requirements should apply including risk appetite statement, risk management, governance, credit monitoring, collateral management, expertise of staff
  • Leverage limits, liquidity requirements and regular stress testing should apply
  • LO-AIFs should not be permitted to engage in short-selling, securities financing transactions and derivatives (except for hedging purposes)
  • LO-AIFs should not be permitted to grant loans to individuals, financial institutions, collective investment schemes, related parties

ESMA’s suggestions for issues to be further analyzed:

  • Whether LO-AIFs should be subject to authorization requirement
  • Whether managers of LO-AIFs should be subject to authorization requirement or whether registration should suffice (and whether requirements exceeding AIFMD should apply)
  • Whether the scope of fund operations should be limited to loan originating activities
  • Whether LO-AIFs in terms of borrowing should rely on financing by banks only
  • Whether minimum diversification and additional reporting requirements should apply

Takeaways and next steps

  • The opinion is a strong indication that uniform EU rules for LO-AIFs are likely to come and gives a first glimpse of what the framework may look like
  • Market participants should look out for the consultation (planned for Q2 2016)
  • For the time being, the national regimes remain in place. See our Alert Memorandum “Direct Lending in Europe: Recent Developments” dated February 22, 2016
  • The ESMA Opinion contains a helpful overview of the national regimes (see “Annex – Mapping on national practices as to loan origination by funds” to the ESMA Opinion)
Please click here to read Cleary Gottlieb’s alert memorandum on “Direct Lending in Europe: Recent Developments” dated February 22, 2016.