On 26 February 2024 the Council of the European Union has adopted the DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directives 2011/61/EU (“AIFMD”) and 2009/65/EC (“UCITS Directive”) as regards delegation arrangements, liquidity risk management, supervisory reporting, the provision of depositary and custody services and loan origination by alternative investment funds (the “AIFMD II”).

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I. Key changes

The most notable change is the introduction of a pan-European loan origination regime for alternative investment fund managers (“AIFMs”) and the alternative investment funds (“AIFs”) they manage.

Once AIFMD II has been implemented by Member States, new rules will apply to these types of AIFs, such as that loan-originating AIFs must be closed-ended, loan-originating AIFs have a leverage limit of 300% for closed-ended AIFs and 175% for open-ended AIFs or that proceeds of loans (less administration fees) must be attributed to the AIFs that originated them.

AIFMD II adds information to be included by AIFMs in the authorisation application with respect to delegation and sub-delegation to third parties, namely for each delegate, its legal name and relevant identifier, its jurisdiction of establishment, and where relevant, its supervisory authority and a detailed description of the human and technical resources employed by the AIFM for performing day-to-day portfolio management or risk management tasks within the AIFM, and monitoring the delegated activity.

AIFMs managing open-ended AIFs must select at least two appropriate liquidity management tools for possible use in the interest of the AIF’s investors.

The AIFM shall also implement detailed policies and procedures for the activation and deactivation of any selected liquidity management tool.

When the lack of depositary services in the home Member State of the AIF has been demonstrated and on a case by case basis, competent authorities of an AIF can allow the appointment of a depositary in another Member State.

In such case, there will be more supervision and the depositary should be required to cooperate not only with its competent authorities but also with the competent authorities of the AIF for which the depositary has been appointed and the competent authorities of the home Member State of the AIFM that manages the AIF.

AIFMD II extends ancillary services that can be provided by AIFMs to include benchmark administration – this is also applicable to UCITS management companies - and credit servicing activities as well as originating loans on behalf of an AIF and servicing securitisation special purpose entities.

AIFMs and UCITS management companies are also allowed to perform for the benefit of third parties the same functions and activities that they already perform in relation to the AIFs and UCITS they manage, provided that any potential conflict of interest is appropriately managed.

II. What is the impact in terms of Reporting?

AIFMD II requires additional information relating to the governance of the AIFM as well as in relation to each delegate to be provided to the home Member State competent authority at the time of application for authorisation by AIFMs or UCITS management companies.

The scope of regulatory reporting has been expanded to include more asset and market-related data as well as information in relation to the delegation arrangements.

As such AIFMD II adds a new obligation to disclose to investors (i) before they invest in the AIF the name of the AIF, a description of the possibility and conditions for using liquidity management tools and a list of fees, charges and expenses that are borne by the AIFM in connection with the operation of the AIF and that are to be directly or indirectly allocated to the AIF and (i) periodically the composition of the originated loan portfolio and on an annual basis, all fees, charges and expenses that were directly or indirectly borne by investors and any parent undertaking, subsidiary or special purpose vehicle utilised in relation to the AIF’s investments by or on behalf of the AIFM.

AIFMD II clarifies that AIFMs shall, in respect of each AIF they manage, provide information on the instruments in which it is trading, on markets of which it is a member or where it actively trades, and on the exposures and assets of each AIF.

AIFMD II also adds information that AIFMs and UCITS management companies shall, for each of the AIF or UCITS they manage, report to the competent authorities of its home Member State the current risk profile of the fund and information regarding delegation arrangements concerning portfolio management or risk management functions.

ESMA shall develop guidelines and it is expected that AIFMs/UCITS management companies will be required to use a prescribed reporting template which should be published in due course.

III. Next steps

AIFMD II will now be published in the EU’s Official Journal and enter into force 20 days later. Member States will have 24 months after the entry into force to transpose the rules into national legislation meaning that, subject to grandfathering provisions, the provisions are likely to be fully applicable by the beginning of 2026.

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