New AIFMD 2 and UCITS rules on delegation, liquidity risk management, depository and custody services and loan origination

Key takeaways

1. Directive 2024/927 amending the Alternative Investment Fund Managers Directive and the Directive on undertakings for collective investment in transferable securities, has been published in the Official Journal of the European Union.
2. The Directive provides essential clarifications to the regimes regarding delegation arrangements, liquidity risk management, supervisory reporting, the provision of depositary and custody services and loan origination by alternative investment funds.
3. The new rules must be transposed by 16 April 2026, except for the reporting requirements which will apply 12 months later. Meanwhile, ESMA must submit the first draft technical standards by 16 April 2025, which means that a consultation paper may be expected by the end of this year.

On 26 March 2024, Directive 2024/927 amending Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD) and Directive 2009/65/EC on undertakings for collective investment in transferable securities (UCITSD) as regards delegation arrangements, liquidity risk management, supervisory reporting, the provision of depositary and custody services and loan origination by alternative investment funds (Amending Directive), has been published in the Official Journal of the European Union.

This note gives an overview of the key changes made by the Amending Directive to AIFMD (AIFMD 2) and UCITSD

AIFMD 2

The purpose of AIFMD 2 is to harmonise existing regulatory practices to facilitate the structuring and marketing of alternative investment funds (AIFs) across the EU, while ensuring sound governance at the level of the alternative investment fund managers (AIFMs) and adequate investor protection. Recent global challenges affecting financial markets have highlighted the need for the changes brought about by AIFMD 2.

1. Introduction of a legal framework applicable to liquidity management tools and direct lending AIFs

Liquidity Management Tools

Recent events highlighted that not all AIFs could effectively utilise appropriate liquidity management tools (LMTs). This inefficiency arose either because the fund documentation did not permit these tools or the tools were not suited to the AIF's liquidity risk profile or investment strategy. Consequently, practices diverged across jurisdictions, resulting in unequal outcomes and inconsistent investor treatment. To address these disparities, AIFMD 2 introduces a harmonised LMTs framework, enabling AIFMs to manage market stress and liquidity issues in a coherent, effective and harmonised way while safeguarding investor protection. To this end, AIFMD 2 sets out a list of LMTs from which an AIFM which manages open-ended AIFs is required to select at least two, and include such tools into each AIF’s constitutional documents, after assessing their suitability for its investment strategy, liquidity profile and redemption policy. The list of LMTs notably includes suspension of subscriptions/redemptions, gates, notice periods, redemption fees, swing pricing, dual pricing, anti-dilution levies, redemption in kind (for professional investors only), side pockets.

Protective rules are also set out by AIFMD 2 regarding the selection of LMTs to ensure the efficiency of liquidity risk management, e.g., AIFMs are not allowed to select swing pricing and dual pricing only, redemption in kind is only possible to meet redemption requests of professional investors.

Additionally, AIFMs should always have the authority to temporarily suspend subscriptions, repurchases and redemptions. As these LMTs are included in the constitutional documents, detailed policies and procedures for activating and deactivating these tools must be implemented, along with operational and administrative arrangements for their use.

AIFMD 2 also enhances the supervisory powers of national authorities by requiring AIFMs to notify their competent authority of the activation and deactivation of LMTs. As enhanced disclosure is also important to ensure proper functioning of the LMTs, AIFMs are required to disclose the conditions for using LMTs to investors.

ESMA will further publish RTS to precisely define the characteristics of the LMTs.

Direct Lending AIFs

By June 2022, EU AUM within private debt funds reached EUR 267.8 bn. Direct lending has become a crucial alternative financing source for the real economy, especially when traditional lending channels are less accessible. Nonetheless, disparities in national regulations on lending have led to competitive imbalances between jurisdictions that prohibit non-bank lending and those with more flexible regulations permitting free deployment of debt funds. AIFMD 2 addresses these disparities by expanding the ancillary services AIFMs can provide to include loan origination for AIFs.

To ensure a level playing field, AIFMD 2 amends the list of ancillary services which may be performed by AIFMs to include the activity of originating loans on behalf of AIF while providing harmonised definitions of “loan origination”, “leveraged AIF” and “loan originating AIF” (i.e., AIF whose investment strategy is mainly to originate loans or where the notional value of the AIF’s originated loans represents at least 50% of its NAV).

AIFMD 2 also establishes common rules to ensure effective risk management and mitigate conflicts of interest. These rules apply both at the level of AIFMs and the loan originating AIFs themselves.

At AIFM level, effective policies and procedures must be set up for granting loans. These are designed to properly assess and monitor credit risk. Such policies and procedures shall be subject to regular review (at least once a year). In addition, the AIFM (including its staff, delegates and affiliates) as well as selected other entities (including the AIF’s depositary) are prohibited to receive loans from the AIF managed by the AIFM. AIFMD 2 also specifically addresses and regulates shareholders’ loans.

At AIF level (even through a SPV), loan-originating AIFs are generally required to be closed-ended to avoid liquidity mismatches. Open-ended AIFs are permitted, provided that it can be demonstrated that its liquidity risk management system is compatible with its investment strategy and redemption policy.

AIFMD 2 also provides specific guidelines regarding the use leverage by loan-originating AIFs. It specifically allows loan-originating AIFs to leverage up to 300% if closed-ended and 175% if open-ended, where leverage is the ratio between its exposure (calculated using the commitment method) and its net asset value. It imposes diversification and exposure limits when lending to financial undertakings, other AIFs or UCITS, capping loans to a single borrower at 20% of the AIF’s capital. 'Originate to distribute' strategies are prohibited, requiring AIFs to retain 5% of each loan's notional value. All loan proceeds must be attributed to the AIF, and costs related to loan administration must be disclosed to investors.

Specific transitional rules are laid down to avoid disturbing the market and ESMA will publish RTS to further develop liquidity management rules. National legislators are free to adopt more restrictive rules (e.g. prohibiting loan origination by AIF to consumers in their territory or strengthening leverage limit).

2. More robust governance of substance and delegation

The revision of the AIFMD was also an opportunity to bolster the rules governing substance and delegation, aligning the Directive with industry practices and broader regulatory shifts, especially post-Brexit. Therefore, AIFMD 2 imposes minimum requirements on the human and technical resources of AIFMs, which must be communicated in the application for authorisation. Specifically, the conduct of business of the AIFM must be decided by at least two natural persons who are domiciled in the EU and are either employed full-time or managers with a full-time commitment. In addition, AIFMs must also specify the management company’s programme of activity that specifies at least the organisational structure, and the human and technical resources that will be used to conduct the business, including the time commitment of conducting officers and covering arrangements made for (sub-)delegated functions.

In terms of delegation, AIFMD 2 reinforces the current regulatory framework. Notably, all functions and services for which the AIFM is authorised, fall under delegation requirements and require regulatory approval. This extends to non-core services provided under a “MiFID top-up” license. In particular, AIFMD 2 addresses a common scenario where a third-party AIFM manages an AIF initially backed by a delegated portfolio manager or a related group entity. In this set-up, potential conflicts of interest are expected, and AIFMD 2 emphasises the need for AIFMs to prevent, or if unavoidable, identify, manage and monitor these conflicts to protect the interest of the AIF and its investors.

To alleviate concerns about this broad scope, distributors authorised under Directive 2014/65/EU (MiFID II) or Directive 2016/97/EU (IDD), acting independently, are not deemed “delegates” and are exempt from its delegation requirements, irrespective of any distribution agreement with the AIFM.

Regarding both substance and delegation, AIFMD 2 also strengthens reporting obligations for AIFMs.  by requiring them to include these aspects in the information periodically submitted to national regulators.

3. Enhancement of cross-border aspects and marketing to retail investors

AIFMD 2 introduces the option for providing depositary services across borders, without however introducing a full-fledged cross-border depositary passport. Utilising this provisional passport requires enhanced collaboration between depositaries and their respective competent authorities, as well as the competent authorities of the AIF and of the AIFM, if they differ. Importantly, the application of this passport under AIFMD 2 is subject to the “necessity principle”, pursuant to which, the AIFM will have to demonstrate the lack of relevant depositary services in the Member State of the AIF, having regard to the investment strategy. The relevant cross-border depositary authorisation will thus only be granted on a case-by-case basis, based on the investment strategy of the AIF. This mechanism is intended to remain until a full depositary passport is adopted.

In parallel, AIFMD 2 expands data reporting obligations for custodians by integrating the concept of “central securities depositary” (CSD) and introducing CSDs in the custody chain. The requirement for depositaries to perform ex-ante due diligence checks where the custodian qualifies as a CSD will be removed. In terms of delegating depositary custody functions, AIFMD 2 introduces a distinction: services provided by a CSD acting as an issuer CSD will not be considered a delegation, whereas those offered by a CSD acting as an investor CSD will be viewed as such.

AIFMD 2 finally reflects the latest updates of the EU regulatory framework, with, for instance, the update of the references to MiFID II, the AML Directive (Directive (EU) 2015/849) and the EU list of non-cooperative jurisdictions for tax purposes. Importantly, it encompasses updates to this list and subsequent actions required of depositaries or AIFMs based in jurisdictions newly added to it.

4. UCITS

The modernisation of UCITSD by the Amending Directive effectively brought closer the regulatory regimes of UCITS and AIFs (in respect of retail markets), thus reducing regulatory divergence for managers offering both products across the EU. The Amending Directive introduces some changes to UCITSD, many of which are aligned or build on the new requirements for AIFs.

Liquidity Management Tools

Liquidity being even more crucial in the context of open-ended funds, a UCITS will also be required to select at least two LMTs picked out of the list set out in UCITSD and include those into their constitutional documents, where suitable in relation to its investment strategy, liquidity profile and redemption policy. While the list of LMTs is aligned with the one presented under AIFMD 2, it must be noted that “redemptions in kind” may only be used in the context of UCITS reserved to professional investors, and not with retail investors. On the contrary, a UCITS authorised as a money market fund may decide to select only one LMT. Detailed policies and procedures as regards the activation and deactivation of those LMTs must be implemented and communicated to the national authority.

The general possibility for UCITS to suspend subscription and redemption orders in specific circumstances which was provided for under Article 84 of the UCITSD, is now replaced by a broader regime – similar to AIFMD 2 – which takes into consideration the existence and use of the LMTs as alternative to suspending subscriptions and redemptions. The activation of any such LMTs, however, must be notified to the national supervisory authority.

Strengthening of the governance and reporting requirements

In terms of governance, it is important that what is brought in by AIFMD 2 for AIFMs, is also requested from UCITS management companies (ManCos) in terms of staffing, time commitment, conflicts of interests and delegation. However, UCITSD imposes a higher disclosure obligation than AIFMD 2, as a list of services and functions delegated accordingly must be included in their prospectus. The CSD regime adopted for AIFs and their depositaries is also reproduced for UCITS and their depositaries. Finally, the delegation exemption regarding distributors authorised under MiFID II or IDD, is also replicated.

Additionally, a new reporting obligation toward national supervisory authorities is introduced on UCITS, which is not unlike the “Annex IV reporting” for AIFs under AIFMD. Similarly, ManCos will be requested to report regularly on markets and instruments in which they trade on behalf of the UCITS, arrangements for managing the liquidity, current risk profile, use of leverage and results of stress tests. Additionally, a strong emphasis is put on reporting on delegated functions and delegates, but also on the effective marketing coverage of the UCITS.

5. Other aspects

As part of the extension of the ancillary services an AIFM or a ManCo may provide:

• AIFMs will be entitled to apply for an extension covering “administration of benchmarks” and “credit servicing activities” in accordance with the relevant EU rules, in addition to the individual portfolio management, investment advice, safe-keeping, reception and transmission of orders services that AIFMs could provide under a “MiFID top-up” license;
• ManCos will be entitled to apply for an extension covering “administration of benchmark” and “reception and transmission of orders” services, in addition to the investment advice and safe-keeping services that ManCos could provide under the same “MiFID top-up”.

Finally, under AIFMD 2 and the revised UCITSD, national competent authorities will benefit from enhanced cooperation and data sharing amongst them, whilst ESMA and national competent authorities will also see their supervisory powers increase more generally (merely counterbalanced by a new obligation on those authorities to professional secrecy).

6. Important dates

Member States must transpose and apply the new rules by 16 April 2026, with the exception of the supervisory reporting, which will apply from 16 April 2027.

Another important date is 16 April 2029, by which the grandfathering clause for AIFMs constituted before 15 April 2024 which are engaged in loan origination, expires.

Finally, as ESMA is tasked with drafting technical standards and guidelines to implement various rules (e.g. regarding LMTs and reporting) over the course of two years, with deadlines by 16 April 2025, 2026 and 2027, its first consultations may be launched as early as by the end of this year.

For more information or assistance with the regulatory aspects of your ELTIF, please contact our Investment Management and Funds team or our EU Financial Services Regulatory team.