COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT REPORT Accompanying the Proposal for a Directive of the European Parliament and of the Council amending Directives 2011/61/EU and 2009/65/EC as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds
Date: 2021-11-25
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: European Securities and Markets Authority, UCITS fund, alternative investment, exchange of information, financial legislation, financial risk, financial supervision, loan, provision of services, transfer of competence

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 25.11.2021  SWD(2021) 340 final  COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT REPORT  Accompanying the Proposal for a Directive of the European Parliament and of the Council amending Directives 2011/61/EU and 2009/65/EC as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds {COM(2021) 721 final} - {SEC(2021) 570 final} - {SWD(2021) 341 final}  
 
 
TABLE OF CONTENTS 

1. INTRODUCTION ........................................................................................................... 8 

2. PROBLEM DEFINITION............................................................................................. 12 

2.1 Problems .............................................................................................................. 12 
2.2 Problem Drivers .................................................................................................. 13 
2.3 Consequences ...................................................................................................... 28 
2.4 How will the problem evolve if not addressed? .................................................. 29 

3. WHY SHOULD THE EU ACT? .................................................................................. 32 

3.1 Legal basis ........................................................................................................... 32 
3.2 Subsidiarity: Necessity of EU action ................................................................... 32 
3.3 Subsidiarity: Added value of EU action .............................................................. 33 

4. OBJECTIVES: WHAT IS TO BE ACHIEVED? ......................................................... 33 

4.1 General objectives ............................................................................................... 33 
4.2 Specific objectives ............................................................................................... 34 

5. WHAT ARE THE AVAILABLE POLICY OPTIONS? .............................................. 34 

5.1  Options to implement operational requirements for the managers of loan 
originating AIFs ensuring that risks to financial stability are mitigated 
and investors are protected whilst levelling the playing field for those 
funds in the internal market ............................................................................. 34 
5.1.1 Option 1 and Option 2 discarded early in the process ..................................... 35 

5.1.2 Description of Option 3 .................................................................................... 36 

5.1.3 The impacts of the retained Option 3 ............................................................... 39 

5.1.4 Comparison of the Option ................................................................................ 40 

5.1.5 Costs ................................................................................................................. 42 

5.1.6 Preferred Option ............................................................................................... 42 

5.2  Options to increase competition for depositary services provided to AIFs 
in  those  markets  where  there  are  a  limited  number  of  depositary 
service providers .............................................................................................. 43 
5.2.1 Description of Options ..................................................................................... 43 

5.2.2 The impacts of the Options .............................................................................. 45 

5.2.3 Comparison of the Options .............................................................................. 47 

5.2.4 Costs ................................................................................................................. 49 

5.2.5 Preferred Option ............................................................................................... 49 

5.3  Options  to  improve  effectiveness  of  the  AIFMD  and  UCITS  rules  on 
delegation  to  ensure  the  necessary  level  of  investor  protection  across 
the Union ......................................................................................................... 50 

1 

 
 
5.3.1 Description of Options ..................................................................................... 50 

5.3.2 The impacts of the Options .............................................................................. 52 

5.3.3 Comparison of the Options .............................................................................. 55 

5.3.4 Costs ................................................................................................................. 57 

5.3.5 Preferred Option ............................................................................................... 57 

6. PREFERRED COMBINATION OF OPTIONS ........................................................... 58 

6.1 General impacts ................................................................................................... 58 
Consistency with other Union laws ........................................................................... 59 
6.2 Cost implications ................................................................................................. 60 
6.3 Impact on SMEs .................................................................................................. 61 
6.4 REFIT (simplification and improved efficiency) ................................................ 61 

7. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? ........... 62 

ANNEX 1: PROCEDURAL INFORMATION ................................................................ 64 

ANNEX 2: STAKEHOLDER CONSULTATION ........................................................... 68 

ANNEX 3: WHO IS AFFECTED AND HOW? ............................................................... 78 

ANNEX 4: ANALYTICAL METHODS .......................................................................... 86 

ANNEX 5: RISKS OF LOAN-ORIGINATING FUNDS................................................. 88 

ANNEX  6:  TECHNICAL  IMPROVEMENTS  TO  THE  AIFMD  THAT  ARE 

NOT IMPACT ASSESSED ...................................................................................... 93 

1.1  Options  to  improve  the  availability  of  LMTs  for  open-ended  AIFs  and 

UCITS across the EU ...................................................................................... 93 
1.2 The impacts of the Options .................................................................................. 96 
1.3 Comparison of the Options .................................................................................. 98 
1.4  Costs ................................................................................................................. 100 
1.5 Preferred Option ............................................................................................... 101 
2.1 Options to improve supervisory reporting by providing supervisors with 
more  granular  data  for  market  monitoring  while  removing  the 
reporting duplications for AIFs and UCITS managers ................................. 101 
2.2 The impacts of the Options ................................................................................ 102 
2.3 Comparison of the Options ................................................................................ 104 
2.4 Costs .................................................................................................................. 105 
2.5 Preferred Option ............................................................................................... 106 
3.1 Options to ensure the equal treatment of custodians upholding investor 
protection  regardless  of  the  type  of  entity  that  safe  keeps  AIFs’  or 
UCITS assets ................................................................................................. 106 
3.2 The impacts of the Options ................................................................................ 107 
3.3 Comparison of the options ................................................................................ 108 
3.4 Costs .................................................................................................................. 109 
3.5 Preferred Option ............................................................................................... 109 

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ANNEX  7.  THE  MAIN  FEATURES  OF  A  SELECTION  OF  NATIONAL 

LOAN ORIGINATING FRAMEWORKS ............................................................. 110 

ANNEX  8.  MAPPING  OF  LIQUIDITY  MANAGEMENT  INSTRUMENTS 

AVAILABLE FOR AIFMS IN NATIONAL FRAMEWORKS ............................ 115 

ANNEX 9. EVALUATION OF THE AIFMD ............................................................... 117 

1. 

INTRODUCTION ................................................................................................... 118 

2.  BACKGROUND TO THE INTERVENTION ....................................................... 120 

Baseline and points of comparison .......................................................................... 123 

3.  METHOD ................................................................................................................ 128 

3.1  Short description of methodology ................................................................. 128 
3.2  Limitations and robustness of findings .......................................................... 130 

4.  ANALYSIS AND ANSWERS TO THE EVALUATION QUESTIONS .............. 130 

4.1  Effectiveness .................................................................................................. 130 
4.1.1 
registration requirements ......................................................................................... 131 

Specific objective: All AIFM are subject to appropriate authorisation and 

4.1.2 

Specific objective: Proper monitoring of macro-prudential risks ............ 132 

Specific objective: Proper monitoring and limitation of microprudential 

4.1.3 
risks  …………………………………………………………………………...139 

4.1.4 
Specific objective: Common approach to protect investors in AIFM 
managed funds ........................................................................................................ 144 

4.1.5 

Specific objective: Develop the single market in AIFs ............................ 146 

4.2  Efficiency ...................................................................................................... 148 
4.2.1 
registration requirements ......................................................................................... 148 

Specific objective: All AIFM are subject to appropriate authorisation and 

4.2.2 

Specific objective: Proper monitoring of macro-prudential risks ............ 149 

Specific objective: Proper monitoring and limitation of microprudential 

4.2.3 
risks  …………………………………………………………………………...153 

Specific objective: Common approach to protect professional investors in 

4.2.4 
AIFM managed funds ............................................................................................. 154 

4.2.5 

Specific objective: Develop the single market in AIF.............................. 154 

4.3.  Relevance ...................................................................................................... 155 
4.3.1 
registration requirements ......................................................................................... 155 

Specific objective: All AIFM are subject to appropriate authorisation and 

4.3.2 

Specific objective: Proper monitoring of macro-prudential risks ............ 155 

Specific objective: Proper monitoring and limitation of microprudential 

4.3.3 
risks……………… ................................................................................................. 156 

Specific objective: Common approach to protect professional investors in 

4.3.4 
AIFM managed funds ............................................................................................. 157 

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4.3.5 

Specific objective: Develop the single market in AIF.............................. 157 

4.4.  Coherence ...................................................................................................... 157 
4.4.1 
registration requirements ......................................................................................... 158 

Specific objective: All AIFM are subject to appropriate authorisation and 

4.4.2 

Specific objective: Proper monitoring of macro-prudential risks ............ 158 

Specific objective: Proper monitoring and limitation of microprudential 

4.4.3 
risks……………… ................................................................................................. 160 

Specific objective: Common approach to protect professional investors in 

4.4.4 
AIFM managed funds ............................................................................................. 161 

4.4.5 

Specific objective: Develop the single market in AIF.............................. 161 

4.5  EU added value .............................................................................................. 162 
4.5.1 
registration requirements ......................................................................................... 162 

Specific objective: All AIFM are subject to appropriate authorisation and 

4.5.2 

Specific objective: Proper monitoring of macro-prudential risks ............ 162 

Specific objective: Proper monitoring and limitation of microprudential 

4.5.3 
risks…….. ............................................................................................................... 163 

Specific objective: Common approach to protect professional investors in 

4.5.4 
AIFM managed funds ............................................................................................. 164 

5.  CONCLUSIONS ..................................................................................................... 164 

4 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GLOSSARY 

Assets under management (AuM): is the total market value of the investments that a fund 
manager manages on behalf the fund. 

Collective  Investment  Undertaking  (CIU):  is  a  legal  structure  to  pool  capital  and  hold 
collective investments.  It usually has no economic life on its own; the key  decisions in 
relation to the management and marketing of a CIU are taken by a fund manager of the 
CIU. CIU span a wide range of legal structures, including closed and open-end funds and 
partnerships. 

Alternative  Investment  Fund  (AIF):  is  a  CIU  defined  by  the  EU  law  as  raising  capital 
from  a  number  of  investors,  with  a  view  to  investing  it  in  accordance  with  a  defined 
investment  policy  for  the  benefit  of  those  investors  and  does  not  require  authorisation 
pursuant to Article 5 of Directive 2009/65/EC (UCITS Directive).  

Alternative  Investment  Fund  Manager  (AIFM):  is  responsible  for  the  management  of 
AIFs.  Typical  tasks  include,  for  example,  picking  investments,  managing  risks  of  the 
composed  collective  investment  portfolio,  monitoring  third  entities  to  which  AIFM 
delegated certain functions and providing investor disclosures. 

Alternative  Investment  Fund  Managers  Directive  (AIFMD):  was  voted  into  EU  law  in 
2011 and entered into application in July 2013. This Directive governs authorisation and 
supervision of AIFMs in the EU and lays down organisation and operation requirements 
for AIFMs.  

Alternative  Investment  Fund  Managers  Regulation  (AIFMR):  it  supplements  the 
AIFMD, including detailed supervisory reporting requirements by AIFs. 

Alternative Investment Management Association (AIMA): is the global representative of 
the alternative investment industry. 

Capital Market Union (CMU): is a plan of the European Commission to create a single 
market for capital. The aim is to get money – investments and savings – flowing across 
the  EU  so  that  it  can  benefit  consumers,  investors  and  companies,  regardless  of  where 
they are located. 

Competent  authority:  means  the  national  authorities  of  a  Member  State,  which  are 
empowered by law or regulation to supervise AIFMs and/or AIFs. 

Central  securities  depositories  (CSDs):  as  a  part  of  the  post-trade  infrastructures  CSDs 
operate securities settlement systems,  participate in  controlling the integrity of an issue 
hindering  the  undue  creation  or  reduction  of  issued  securities  and  are  involved  in 
securing  collateral  for  monetary  policy  operations  as  well  as  in  securing  collateral 
between credit institutions. CSD also hold securities of their participants.  

Central Securities Depositories Regulation (CSDR): is an EU Regulation No 909/2014 of 
23  July  2014  governing  activities  of  CSDs  and  improving  securities  settlement  in  the 
Union.  

5 

 
 
Custodian:  an  entity  that  safe-keeps  investment  funds’  assets,  which  are  financial 
instruments,  often  a  credit  institution,  an  investment  bank  or  a  central  securities 
depository. 

Depositary:  an  entity,  often  a  credit  institution,  which  besides  safe-keeping  investment 
funds’ assets, has other oversight duties such as monitoring cash flows and compliance 
with fund rules.  

European Long-term Investment Funds (ELTIF): is an EU regulated CIU, which allows 
professional  and  retail  investors  to  invest  into  companies  and  projects  that  need  long-
term capital. 

European  Funds  and  Asset  Managers  Association  (EFAMA):  is  a  pan-European 
organisation  that  represents  the  European  investment  management  industry  towards 
European policymakers. 

Environmental,  social,  and  corporate  governance  (ESG):  this  refers  to  the  three  central 
factors in measuring the sustainability and societal impact of an investment in a company 
or business. 

European  Securities  and  Markets  Authority  (ESMA):  ESMA  is  an  independent  EU 
Authority that contributes to safeguarding the stability of the European Union's financial 
system  by  enhancing  the  protection  of  investors  and  promoting  stable  and  orderly 
financial markets.  It achieves this by assessing risks to investors, markets and financial 
stability,  completing  a  single  rulebook  for  EU  financial  markets  and  promoting 
supervisory convergence.  

Gross  notional  exposure  (GNE):  is  the  sum  of  all  the  absolute  value  of  all  fund’s 
positions, a leverage –related measure to be reported under the AIFMR. 

Home competent authority: refers to the competent authority of the Member State where 
an AIFM is domiciled or authorised/registered. 

Host competent authority:  refers to the competent authority of the Member State where 
an AIF is marketed and which is other than the Member State where the AIFM or AIF is 
domiciled or authorised/registered. 

Key Information Document (KID): refers to the document under the PRIIP Regulation, 
containing  the  key  information  necessary  for  retail  investors  to  make  an  informed 
investment decision and compare different investment products.  

Liquidity  Management  Tools  (LMTs):  refers  to  the  tools  asset  managers  can  use  to 
manage liquidity risks in open-ended investment funds. 

Loan originating fund (LOF): refers to an AIF that - provides credit by acting as the sole 
or primary lender, participates in loans through purchases on the secondary market and/or 
participates in loan restructuring for indebted borrowers. 

Directive  on  Markets  in  Financial  Instruments  (MiFID):  is  a  Directive,  which  is  a 
cornerstone of the EU regulation of financial  markets conceived in 2004 with an effect 
from  2007.  It  governs  the  provision  of  investment  services  in  financial  instruments  by 
banks  and  investment  firms  and  the  operation  of  traditional  stock  exchanges  and 
alternative trading venues. 

6 

 
MiFID II: in 2011, the European Commission issued a MiFID amending proposal, which 
led to the adoption of MiFID II. This new law entered into force in January 2018. 

Regulation on Markets in Financial Instruments (MiFIR): is the Regulation on markets in 
financial instruments complements MiFID II. It was voted into law on 15 May 2014. 

Money markets funds (MMFs): are open-ended investment funds that provide short-term 
finance  to  financial  institutions,  corporations  and  governments.  They  provide  a  high 
degree  of  liquidity,  diversification  and  stability  of  value  of  the  principal  invested, 
combined with a market-based  yield.  In the Union activities of MMFs are governed by 
Regulation of 14 June 2017.  

Net Asset Value (NAV): value of a fund's total assets, minus its liabilities. The NAV per 
share is used to determine prices available to investors for redemptions and subscriptions. 

Open-ended fund: is a CIU, which can issue and redeem shares at any time. Investors can 
buy or sell shares directly from the fund. 

Undertakings for Collective Investment in Transferable Securities (UCITS): is an open-
ended,  standardised  CIU,  which  predominantly  invests  in  transferable  securities  and 
available to retail investors. A UCITS and its manager must be established in the EU. 

UCITS Directive (UCITSD): is the main European framework covering retail collective 
investment schemes. The first UCITS Directive was adopted in 1985, and since then the 
framework  has  continuously  evolved.  The  last  amendment  took  place  in  2014  with  the 
UCITS  V  Directive,  where  the  depositary  regime  was  clarified  and  strengthened.  The 
UCITS Directive is  seen as the benchmark for retail  investment  funds, as the Directive 
imposes  a  strict  investment  portfolio  diversification  and  restricts  eligible  assets  to 
transferable  securities  in  order  to  ensure  that  retail  investors  can  easily  redeem  their 
investment. 

7 

 
 
 
 
 
 
 
 
 
 
 
 
 
1. INTRODUCTION 

The  Alternative  Investment  Funds  Manager  Directive  (AIFMD)  was  first  adopted  in 
2011  to  establish  a  regulatory  framework  covering  the  activities  of  the  Alternative 
Investments  Fund  (AIF)  sector.  It  was  designed  as  part  of  the  policy  response  to  the 
global  financial  crisis  that  exposed  weaknesses  and  vulnerabilities  in  certain  fund 
activities  that  could  amplify  risks  to  the  broader  financial  system  and  to  investors 
following  the  consensus  among  G20  Leaders  that  all  sectors  of  the  financial  industry 
should  be  better  regulated  and  supervised.1  In  support  of  the  G20  objectives  the 
International  Organization  of  Securities  Commissions  (IOSCO)  issued  high-level 
principles for hedge funds regulation to guide the development of international standards 
in this area.2 

Following the European Council’s3 endorsement of Europe’s international commitments, 
and  in  the  light  of  the  European  Parliament  report4,  the  European  Commission 
(hereinafter  -  ‘Commission’)  issued  a  legislative  proposal  for  a  regulatory  framework 
governing  Alternative  Investment  Fund  Managers  (AIFMs).5  The  AIFMD  was  adopted 
on  8  June  2011.  Following  its  transposition  into  national  legal  systems,  the  AIFMD 
entered into application on 22 July 2013.6 

As a post-crisis regulatory initiative, the AIFMD seeks to achieve a coherent supervisory 
approach to the risks that the activities of AIFs may generate or transmit to the financial 
system,  to  provide  high-levels  of  investor  protections  while  also  facilitating  EU  AIF 
market integration.7 AIFMs are required to effectively manage risks and ensure adequate 
transparency  regarding  the  activities  of  their  managed  AIFs  and  in  return,  are  able  to 
manage  and  market  AIFs  to  professional  investors  across  the  Union  with  a  single 
authorisation  from  their  home  supervisor.8  The  Evaluation  annexed  to  this  impact 
assessment (Annex 9) concludes that the AIFMD has largely met its objectives.  

1 Declaration of  the  Summit on Financial Markets and the  World Economy, Washington DC, November 
15, 2008.  
2 Recital 89 of the AIFMD; IOSCO Final Report Hedge Funds Oversight, June 2009.  
3 Conclusions of the European Council of 16 September 2010.   
4 Report of the European Parliament with recommendations to the Commission on hedge funds and private 
equity (A6-0338/2008) ['Rasmussen' Report] and on the transparency of institutional investors  (A6-0296-
2008) ['Lehne' Report]; Report of the High - Level Group on Financial Supervision in the EU, 25 February 
2009, p. 25. 
5 Proposal for a Directive of the European Parliament and of the Council on Alternative Investment Fund 
Managers, 30.04.2009, COM (2009) 207 final.  
6 The last Member State transposing the AIFMD completed this process by the end of 2015. 
7 Recitals 2 - 4 and 94 of the AIFMD.  
8 Article 32(1) of the AIFMD. 

8 

 
 
 
                                                           
20

Figure 1: total assets EU 
investment fund sector (EUR 
trillions)

The investment fund sector has roughly tripled  in size since 2008, from EUR 5.5 trillion 
assets  to  more  than  15  trillion  assets  (figure  1), 
and  its  assets  as  a  percentage  of  total  financial 
sector assets have also grown significantly.9 It has 
interconnections  with  the  broader  the  financial 
sector  (e.g.  by  providing  wholesale  funding  to 
banks),  making  it  important  to  manage  potential 
systemic risks appropriately.10 At the same time, it 
is  important  to  ensure  that  the  AIFMD  does  not 
impose unnecessary costs on fund managers in the 
context  of  globally  competitive financial markets  and  where such costs  can  affect  fund 
fees and investor returns. The fund sector has an important role to play in the pandemic 
recovery  as  a  channel  for  financing  of  the  real  economy,  supporting  economic  growth, 
innovation and employment. 

08 09 10 11 12 13 14 15 16 17 18 19 20

0

The  AIFMD  contains  rules  on  conflicts  of  interest,  disclosure  and  transparency 
requirements  to  protect  investors,  which  is  beneficial  for  building  confidence  in  EU 
financial  markets  and  supporting  the  flow  of  capital  to  investments  in  the  economy. 
Rules governing valuation, which is necessary for establishing each investor’s share in a 
given  AIF  and  for  monitoring  the  AIF’s  performance,  have  increased  discipline  and 
structure in the asset valuation process.  

The AIFMD homogenizing depositary liability and functions, such as the safekeeping of 
AIF assets and fund oversight, and requiring that each fund appoints a depositary further 
enhanced investor protection. It is a requirement that for EU AIFs the depositary must be 
located in the same Member State as the fund, which has led to a fragmented landscape 
of  depositary  services  in  Europe.  Nevertheless,  the  depositary  regime  can  be  credited 
with supporting the orderly functioning of the investment funds market and its integrity.   

The AIFMD introduced tools for improved macro-prudential monitoring and supervision 
of financial stability risks. AIFMs are required to report on the main AIF exposures, their 
liquidity  profile  and  leverage.  While  the  granularity  of  the  reported  data  could  be 
improved, this information has supported effective macro-prudential supervision and can 
help  identify  and  mitigate  potential  financial  stability  risks.  For  example,  the  European 
Securities  and  Markets  Authority  (ESMA)  aggregates  supervisory  reporting  data  and 
publishes  Annual  Statistical  Reports  on  EU  AIFs,  which  provide  market  participants, 
investors  as  well  as  supervisors  and  policy  makers  with  information  on  market 
developments.11 Supervisory reporting is of outmost value in times of market stress. 

The  onset  of  the  COVID-19  pandemic  resulted  in  a  real  life  stress-test  with  markets 
experiencing  significant  turmoil  and  liquidity  constraints  during  2020.  This  led  central 
banks to intervene to stabilise markets and provide market liquidity. Certain fund types, 
such  as  property  funds,  experienced  difficulties  given  the  illiquid  nature  of  their 

9 Source: ECB SDW. In 2008, the assets of euro area investment funds were about 13% of total financial 
sector assets, compared to almost 20% in 2020 (source: ECB Macroprudential Bulletin April 2021). 
10 See e.g. ESRB NBFI Monitor 2020, p. 59, 62-63. 
https://www.esrb.europa.eu/pub/pdf/reports/nbfi_monitor/esrb.202010_eunon-
bankfinancialintermediationriskmonitor2020~89c25e1973.en.pdf?588be9e8391cfb17584d2a283dfe0abe 
11  ESMA  Annual  Statistical  Report  EU  Alternative  Investment  Funds  2019,  21.01.2019,  ESMA  50-165-
748. 

9 

 
 
 
 
 
                                                           
underlying  assets  combined  with  open-ended  fund  structures  where  particular  issues 
arose with obtaining accurate asset valuations.12 Funds investing in high-yield (HY) and 
emerging  markets  (EM)  bonds,  which  are  also  less  liquid  assets,  similarly  faced 
significant liquidity pressure following increased redemption requests.   

The  figures  and  trends  reported  as  of  13  of  May  2021  indicate  that  the  European 
investment fund sector has, in  general, weathered the COVID-19 storm quite well. The 
total  net  asset value (NAV) of funds that activated a liquidity management  tool (LMT) 
for  EU  and  EEA  AIFs  was  €5.57bn.  Regarding  AIFs,  suspensions  of  redemptions 
reported by NCAs amounted to €2.34bn unchanged from the previous iterations.13 There 
were  only  56  AIFs14  out  of  30,357  EU  AIFs15  liquidated  or  entering  into  liquidation 
during  the  COVID-19  crisis.16  Besides  managing  liquidity  risks,  which  may  have  an 
impact on the entire financial system, AIFMs are also  mainstreaming sustainability into 
their risk management processes.    

The EU is determined to address climate/sustainability risks and is finalising the adoption 
of  a  range  of  measures  applicable  to  financial  intermediaries.  The  Sustainable  Finance 
Disclosure  Regulation  (SFDR),  which  covers  asset  managers  like  AIFMs,  seeks  to 
increase awareness of adverse sustainability impacts and reliability of financial products 
claiming  to  pursue  sustainable  investing.17  AIFMs  are  set  to  play  an  important  role  in 
creating  a  more  ESG-embedded  investment  culture  by  taking  into  account  longer-term 
developments linked to ESG when assessing potential investments. The effectiveness of 
the  ESG-related  measures  will  be  assessed  in  the  future,  whereas  this  Staff  Working 
Document  tackles  the  issues  brought  up  by  the  backwards-looking  analysis  of  the 
functioning of the AIFMD.   

The AIFMD contains  a  review clause that mandated the Commission  to  start  assessing 
the scope and functioning of this legal framework by July 2016, and to present a report to 
the  European  Parliament  and  Council.18  Drawing  on  the  extensive  preparatory  work 
involving an external contactor conducting a general survey and producing an evidence-
based study on the effectiveness of the AIFMD19, the Commission submitted a report to 
the  EU  co-legislators  assessing  the  application  and  the  scope  of  the  AIFMD  (AIFMD 
Report)20 on the 10 June 2020. The AIFMD Report assessed the impact of the AIFMD on 
investors,  AIFs,  AIFMs  in  the  Union  and  in  third  countries,  establishing  the  degree  to 

12 Open-end fund (or open-ended fund) is a collective investment scheme that can issue and redeem shares 
at any time. These property funds were based in the UK and a few in Ireland. 
13 ESMA 20 of May 2021 Report on the use of by UCITS/AIFs/MMFs. It includes information pertaining 
to marketing of funds in EU28 and EEA Member states. 
14 49 in Austria, 1 in France, 2 in the Netherlands and 3 in Ireland. This data is based on the NCA reporting 
to ESMA.  
15 ESMA Annual Statistical Report EU Alternative Investment Funds 2020, 10 January 2020 ESMA50-
165-1032. 
16 For example, due to liquidity issues, valuation problems and/or significant outflows. 
17 Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on 
sustainability‐related disclosures in the financial services sector; OJ L 317, 9.12.2019, p. 1–16. 
18 Article 69 of the AIFMD. 
19 Report on the Operation of the Alternative Investment Fund Managers Directive (AIFMD)  -  Directive 
2011/61/EU, retrieved from: 
[https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/190110
-aifmd-operation-report_en.pdf] (KPMG Report, December 2018). 
20 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020DC0232 

10 

 
 
 
 
                                                           
which the objectives pursued by the AIFMD have been achieved. An accompanying Staff 
Working  Document  provides  more  detail  of  the  assessment  provided  in  the  AIFMD 
Report.21 Finally, an Evaluation of the AIFMD was completed as documented in Annex 
9 of this impact assessment.    

The  AIFMD  Report,  Evaluation  and  stakeholder  feedback  highlighted  specific  areas 
where  targeted  improvements  could  be  made  to  the  AIFMD  regulatory  framework  and 
identified regulatory  gaps that could  be  addressed. These  are (i)  fragmented market  for 
loan-originating  AIFs,  which  also  raise  potential  risks  to  financial  stability;  (ii) 
fragmented  market  for  depositary  services;  (iii)  diverging  interpretation  of  delegation 
regimes  under  AIFMD  and  UCITS;  (iv)  constrained  liquidity  risk  management  by  the 
managers  of  open-ended  investment  funds;  (v)  inadequate  data  reporting  for  market 
monitoring and (vi) unequal treatment of custodians of AIFs’ assets. The sections below 
describe the problems that these regulatory gaps create offering a range of policy options 
that were assessed to determine the best way forward.   

Section  2  explains  the  market  and  regulatory  developments  that  have  led  to  the  issues 
that  have  emerged  since  the  Directive  entered  into  force  and  discusses  the  problem 
drivers and the consequences for financial stability, the efficiency of the investment fund 
market and overall investor protection.  

Section  3  explains  why  it  is  necessary  for  the  European  Union  to  address  these  issues 
directly instead of the individual Member States. The proposed policy responses respect 
the  principles  of  proportionality  and  subsidiarity.  Section  4  lists  the  general  specific 
objectives of this review.  

Section  5  assesses  the  available  policy  options  caused  by  (i)  fragmented  regulation  for 
AIFMs  managing  loan-originating  AIFs,  (ii)  limited  supply  of  depositary  services  in 
smaller markets and (iii) differing interpretation of delegation rules. The  options related 
to (iv) the lack of harmonised availability of liquidity management tools in all Member 
States, (v) inadequate data reporting for market monitoring and (vi) the unequal treatment 
of  custodians  of  investment  funds’  assets  are  considered  in  Annex  6  as  these  policy 
elements  are  supported  by  technical  recommendations  provided  by  the  ESRB  and/or 
ESMA.   

Section  6  assesses  the  impact  and  cost  implications  of  the  preferred  combination  of 
options.  Section  7  specifies  how  the  impact  of  the  preferred  options  will  be  monitored 
and evaluated after their adoption.  

Certain  policy  options  are  also  relevant  for  the  UCITS  legal  framework  and  this  is 
explained further in those sections covering issues relating to (i) diverging interpretation 
of  delegation  regimes  under  UCITSD,  (ii)  lack  of  availability  of  liquidity  management 
tools  by  UCITS,  (iii)  inadequate  data  reporting  for  market  monitoring  and  (iv)  the 
unequal  treatment  of  custodians  of  UCITS’  assets.  UCITSD  legal  framework  does  not 
contain  the  level  of  detail  governing  delegation  arrangements  existing  in  AIFMR.  As 
open-ended funds, UCITS suffer from liquidity pressures in market stress situation like 
open-ended  AIFs, 
liquidity 
management of AIFs are relevant  also for UCITS. Finally, whilst supervisory reporting 

the  measures  considered  for 

improving 

therefore, 

21 https://ec.europa.eu/info/files/200610-aifmd-application-scope-working-document_en 

11 

 
 
 
 
 
 
 
                                                           
data by AIFMs could benefit from the revision, whereas UCITS are not even required to 
make periodic reports on their trades on the basis of a template that would be harmonised 
at  the  Union  level.    Finally,  it  seems  that  the  recital  in  the  UCITS  Directive  that  was 
aimed at insuring that CSDs are considered depositaries’ delegates is not being followed 
in  all  cases  for  the  lack  of  its  normative  force,  therefore,  proposals  to  this  effect 
contemplated in the AIFMD review should be extended to the UCITS legal framework 
too. 

2. PROBLEM DEFINITION 

2.1 Problems  

Based on the Evaluation of the AIFMD (Annex 9) and stakeholder feedback (Annex 2) to 
the public consultation, it is concluded that the AIFMD has generally functioned well and 
largely  achieved  its  objectives  in  terms  of  establishing  an  effective  supervisory  regime 
for AIFMs, ensuring high levels of investor protection and facilitating the creation of the 
EU  AIF  market.  However,  the  AIFMD  could  benefit  from  targeted  improvements  to 
those  elements  of  the  framework  that  have  not  been  sufficiently  addressed  at  the 
inception of the Directive and to take account of new developments in the market since 
its entry into force.  

As set out in the Problem Tree (Graph 1), three main problems have been identified:  

1)  Difficulties in monitoring and managing financial stability risks 

The AIFMD intended to improve the supervisory oversight and transparency of AIF 
activities  in  order  to  manage  the  risks  they  may  pose  to  financial  system  and  to 
identify potential new risks to the EU and its economy over time. Where the market 
data  submitted  to  the  supervisory  authorities  has  gaps  or  lacks  the  requisite  detail, 
their ability to perform this key role may be impaired. This reduces the effectiveness 
of the AIFMD and may lead to overlooking the build-up and spill over of risks to the 
broader  financial system.  Market  developments  and innovation  may have led to  the 
creation of new products that did not exist at the time of the inception of the AIFMD. 
As concluded in the Evaluation, the regulatory fragmentation in the loan-originating 
sector poses difficulties in identifying and reacting effectively to the potential market 
wide effects that may emanate from activities of such funds.    

2)  Inefficiencies in managing investment funds 

Inefficiencies  in  the  regulatory  framework  can  lead  to  unnecessary  additional  costs 
for  industry  and  supervisory  authorities.  Increased  operating  costs  for  the  fund 
managers  harm  investor  returns  and  high  management  fees  impedes  further 
development  of the AIF  sector.  Persistent  under-development  of certain  sectors and 
service  providers  in  the  AIF  market  can  also  lead  to  level-playing  field  concerns 
within the internal  market.  The Evaluation  of the AIFMD shown that there is  room 
for increasing efficiency gains in managing investment funds, in particular levelling 
the  playing  field  for  loan-originating  fund  managers,  streamlining  supervisory 
reporting  requirements  and  diluting  market  depositary  concentration  in  smaller 
markets.  

12 

 
 
 
 
 
 
 
 
3)  Inadequate protection of fund investors 

A core objective of the AIFMD is a high level of investor protection. The evaluation 
concluded that divergent interpretations of the legal requirements for fund managers 
delegating  their  functions  to  third  parties  or  different  national  supervisory  practices 
can  create  gaps  that  reduce  the  overall  level  of  investor  protection  and  trust  in  the 
market.  Insufficient  clarity  of  the  applicable  legal  requirements  leads  to  less  legal 
certainty,  increases  divergence  in  supervisory  outcomes  ultimately  failing  to  ensure 
the necessary level of investor protection across the Union.   

Graph 1 – Problem Tree 

2.2 Problem Drivers 

2.2.1 Incomplete or inefficient regulation 

a) Differing national requirements for Loan Originating Funds (LOFs) 

Since  the  adoption  of  the  AIFMD  in  2011,  the  market  has  seen  significant  growth  and 
innovation in order to generate investor returns.  One key trend is the provision of credit 
by investment funds. This is possible in several ways: loan origination, loan participation 
and  loan  restructuring.  By  carrying  out  loan  origination,  an  investment  fund  provides 
credit  while  acting  as  the  sole  or  primary  lender.  Loan  participation  typically  involves 
funds  that  have  gained  exposure  to  loans  through  the  secondary  market,  for  example, 
buying  loans  from  credit  institutions.  Examples  of  loan  restructuring  or  'opportunity' 
financing include where a fund invests in reaction to the restructuring of existing debt by 
a corporate issuer. 

13 

 
 
 
 
 
 
 
While the market  for direct  lending outside the banking  sector in  Europe  is  growing, a 
harmonised framework for loan-originating funds is missing.  

Graph 2. European Direct Lending Market Growth. Source: Deloitte Alternative Lending 
Deal Tracker, Autumn 2020. 

This  has  led  to  a  fragmented  regulatory 
landscape  of  national  regimes,  which 
to  address 
the  ability 
may  affect 
potential 
and 
micro- 
macroprudential/financial  stability  risks 
and  lead  to  different  levels  of  investor 
protection across the EU. 

While the AIFMD contains general rules on liquidity management, use of leverage and 
valuation for managing risks at fund level, these are not specific enough to fully capture 
the specificities of managing direct lending portfolios and to address the potential micro 
and macro risks. This increases potential risks to broader financial stability. The differing 
national  legal  frameworks  imposing  varying  leverage  caps  and  other  limits  on  risk 
enhancing techniques as well as insufficient market wide data does not allow sufficient 
monitoring  and  containment  of  potential  financial  stability  risk  arising  from  loan 
originating funds. 

As  set  out  in  the  Evaluation,  AIFs  can  originate  loans  without  being  subject  to  any 
specific EU level restrictions because the AIFMD does not contain provisions related to 
this activity. In the absence of harmonised EU rules for loan-originating AIFs, a number 
of  Member  States  have  chosen  to  establish  their  own  national  frameworks  to  regulate 
loan-originating  funds  leading  to  divergent  approaches,  market  fragmentation  and  the 
concentration of funds in some Member States.  

It  is  important  the  note  that  loan  origination  is  a  highly  specialised  activity  requiring 
specific processes, procedures and expertise to ensure that the newly created loans are of 
sufficient  credit  quality.    Entities  in  this  space  must  be  able  to  evaluate  the  credit 
worthiness  of  borrowers,  assess  the  potential  impact  of  macro  and  micro  economic 
changes  on  the  performance  of  their  loan  portfolios,  actively  manage  impaired  or  non-
performing  loans  and  comply  with  applicable  prudential  and  consumer  protection 
regulations. 

The accompanying mapping exercise in Annex 7 indicates that loan origination is either 
partly, or fully allowed in the majority of Member States and that a number of Member 
States  (France,  Germany,  Ireland,  Spain,  Malta  and  Italy)  have  established  bespoke 
national regimes. For example, Ireland and France require that loan-originating AIFs are 
managed by authorized AIFMs.  Italy, Germany and Malta permit sub-threshold AIFMs 
to  manage  loan-originating  funds.  In  fact,  80%  of  NCAs  declared  that  loan  origination 
was allowed in their jurisdictions for all or part of the AIFs/AIFMs. However, only 33% 

14 

 
 
 
 
 
 
 
 
 
 
 
of  them  had  a  specific  framework  for  this  activity.22  This  fragmented  regulatory 
landscape creates uncertainty for fund managers that have to comply with different rules 
depending  on  the  Member  State  they  are  located  in  leading  to  increased  compliance 
costs, an un-level playing field and, inhibiting the cross-border activity of these funds and 
their  ability  to  scale  up  in  size  to  realise  greater  economies  of  scale.    For  example, 
divergent  leverage  limits  in  different  Member  States  or  differing  restrictions  on  loan 
originating  activity  lead  to  different  levels  of  risk  mitigation  depending  on  the  limits 
imposed at the national level.  This also makes it difficult for supervisory authorities to 
monitor  market  developments  and  manage  potential  risks  as  there  are  no  minimum 
harmonised set of rules against which to assess the fund’s activity or market performance 
at the EU level. 

Market data indicates that private credit funds generally do not use significant levels of 
leverage.23 However, as the industry  becomes larger and increases its share of the loan 
market in comparison to traditional lenders, it could contribute to self-reinforcing macro-
financial  mechanisms  and  credit  bubbles  that  may  contribute  to  the  creation  of 
unsustainable  debt  levels  in  the  non-financial  private  sector,  which  may  have 
implications  beyond  loan-originating  funds.  This  would  include  risks  that  could  arise 
from excessive risk taking or the impact of economic cycles particularly where there is a 
lack  of  sufficient  prudent  underwriting  standards,  effective  risk  management  processes 
that could expose the loan portfolios to the impact of directional risks such as changes in 
interest  rates.  However,  macro-prudential  authorities  lack  effective  instruments  to 
mitigate such risks, as their scope of intervention is mainly focused on the banking sector 
(e.g., through the counter-cyclical capital buffer, which is meant to address risks related 
to excessive credit growth). This asymmetry could further exacerbate regulatory arbitrage 
and the un-level playing field across the financial system.  

According to the AIFMD, NCAs can impose leverage caps on an ad hoc basis, however, 
it  is  very  difficult  to  time  this  supervisory  action  right  to  contain  systemic  risks 
associated with excessive credit growth and leverage across the entire financial system. 
In  this  respect,  where  Member  States  have  established  national  regimes,  they  have 
imposed  specific  statutory  limits  on  the  use  of  leverage  and  derivatives  by  loan-
originating  AIFs  to  reduce  the  potential  risks  posed  by  these  funds.  The  ESMA  and 
ESRB recommendations related to loan originating funds are summarised in Annex 5 and 
contain further details on the potential systemic risks posed by these funds.  

Similar to lending banks, loan-originating funds can face a range of risk factors including 
maturity,  liquidity  transformation  and  leverage  (see  Part  I  of  Annex  5  for  a  full  list  of 
risks).  However,  unlike  banks  where  the  systemic  risks  have  been  extensively  studied 
following  the  global  financial  crisis,  loan-originating  funds  are  not  as  well  understood, 
also  due to  the lack of specific disclosure requirements. Under the AIFMR supervisory 
reporting template, AIFMs have to fill in two data fields: ‘leveraged loans’ and ‘other’. 
As such, there is no useful breakdown of the originated loans debt classes or reporting of 
non-performing  loans  and  loans  subject  to  forebearance  thus  creating  difficulties  in 

22  ESMA  opinion  (ESMA/2016/596,  April  2016),  Key  principles  for  a  European  framework  on  loan 
origination by funds. 
23 ESMA Annual Statistical Report EU Alternative Investment Funds 2020, 10 January 2020 ESMA50-
165-1032, p.44. According to AIMA research, “there is typically no more than one unit of debt for one unit 
of equity in a credit fund. In other words, the leverage rarely exceeds 100% of the funds’ net asset value 
(equivalent of equity).” 

15 

 
 
 
 
                                                           
monitoring the market for low credit quality loans and potential negative effects thereof 
on financial stability.  

Moreover, depending on the linkages with the banking and insurance sectors, there could 
be  a  channel  for  contagion.  The  fund  industry  may  seek  partnership  with  banks  for  a 
number  of  reasons,  including  the  ability  to  adopt  best  practices  for  credit  analysis,  risk 
management,  and  the  structuring  and  servicing  of  loans.  Alternatively,  banks  may  also 
find it beneficial to use funds’ balance sheets, including for risk sharing purposes and for 
financing new lending activities. This interplay can contribute to systemic risks but is not 
currently addressed in the AIFMD.  

The potential systemic risks posed by the growth of loan originating funds has been the 
subject of research by the ESRB24, ESMA25, IOSCO26, FSB27 and EBA28 which have all 
highlighted concerns related to loan origination by funds: 

1)  Risk  of  runs  –  these  funds  are  invested  primarily  in  non-listed  assets  that  are 
intrinsically  illiquid  which  poses  particular  risks  in  open-ended  fund  structures 
which are more exposed to maturity and liquidity risks. 

2)  Flawed  credit  risk  transfer  –  as  described  above,  loan  origination  requires 
undertaking  a  thorough  credit  assessment  of  the  borrower.    Granting  loans 
requires specific skills and experience as the process requires not only screening 
the  loans  but  also  their  active  administration  particularly  when  recovering 
payments  or  managing  delinquencies.    A  lack  of  proper  loan  risk  management 
may  lead  to  funds  undervaluing  risk  or  extending  loans  without  sufficient  due 
diligence. 

3)  Pro-cyclicality risk – the use of leverage is a risk magnifier.  High leverage could 
imply potential contagion effects for financial institutions through debt financing 
particularly if the available capital was not sufficient to cover loan losses.  If loan 
originating  funds are a  major source of credit to the real economy, falling asset 
prices could lead to their withdrawal from providing credit amplifying the impact 
of an economic downturn. 

4)  Inter-connectedness (cross-border and banking sector) – the cross border impact 
of lending (where may be possible)  should be monitored as funds may invest in 
loans  not  originated  in  their  country  of  domicile  and  sold  across  the  EU  with 
potential systemic implications on other Member States. A key area of risk is the 
potential  interplay  between  the  loan  originating  and  banking  sectors.    In 
particular, banks could establish loan originating funds in a manner linked to their 
own balance sheet management (similar to how securitisation was used before the 
financial  crisis)  to  reduce  their  regulatory  requirements.    Banks  could  also 
transfer non-performing loans from their balance sheet to loan originating funds 
transferring the credit risk to investors.   

24 ESRB response to the European Commission consultation on the review of AIFMD – January 2020. 
25 ESMA opinion on Key Principles for a European framework on loan origination by funds – 2016. 
26 IOSCO Findings of the Survey on Loan Funds Report – February 2017. 
27 FSB Global Shadow Banking Monitoring Report – 2017. 
28 EBA Guidelines on loan origination and monitoring – May 2020. 

16 

 
 
 
                                                           
5)  Integrity  of  the  EU  financial  market  –  the  lack  of  a  harmonised  EU  framework 
could undermine broader market integrity if the sector continues to grow (as it is 
expected to do) in importance within national frameworks and potentially lead to 
regulatory arbitrage between the jurisdictions.  This is the view of ESMA and the 
FSB  which  have  recommended 
that  minimum  regulatory  standards  are 
established while allowing Member States to then adopt stricter measures if they 
wish.   

Concerns were also raised about the potential for regulatory competition through a ‘race 
to the bottom’ in order to attract entities to locate in that jurisdiction.  The FBS states that 
‘given  the  importance  of  contagion  risks  in  global  financial  markets  leaving  the  door 
open to regulatory competition of this type may be dangerous’. 

In  general,  fund  industry  representatives  either  have  no  opinion  on  whether  there  is  a 
need for further measures tackling activities of AIFMs managing loan-originating funds, 
or deem the current AIFMD rules sufficient. Public authorities, as evidenced by differing 
national  rules, believe that there is  a need for more targeted measures to  address  micro 
and macro risks emanating from the activities of such funds. 

b) Fragmented rules on and availability of Liquidity Management Tools 
(LMTs) 

During  times  of  market  stress,  large-scale  liquidations  or  fire  sales  of  assets  by  asset 
managers  and  institutional  investors  can  lead  to  significant  price  decreases,  which  can 
then  impact  on  investors  including  other  financial  institutions  (banks  and  insurers)  and 
translate into broader systemic risk and market instability.  

To  manage  their  liquidity  profile  and  risks  effectively,  AIFMs  incorporate  liquidity 
management  tools  (LMTs)  into  their  portfolio  management.  These  tools  include  gates, 
suspension  of  redemptions,  swing  pricing,  and  temporary  borrowing  that  restrict  the 
ability of investors to redeem their holdings and protect both the redeeming investor and 
those that are remaining invested in the fund. The effective and proper use of these tools 
can protect the value of investors’ money and reduce liquidity pressure on the fund and 
mitigate against broader systemic risk implications in situations of market-wide stress.   

At  present,  the  AIFMD  does  not  provide  for  a  minimum  harmonised  set  of  LMTs 
available to AIFMs that would enable fund managers in every Member State to deal with 
(future)  redemption  pressures  under  stressed  market  conditions  and  better  handle 
potential  cross-border  spill-overs  of  liquidity  tensions.29  Only  the  suspension  of 
redemptions by an NCA, a measure of last resort, is explicitly allowed under the AIFMD. 
In  the  absence  of  appropriate  LMTs,  asset  sales  by  fund  managers  facing  increased 
redemption requests in response to negative market developments can further exacerbate 
asset price falls, creating a self-reinforcing negative loop between fund redemptions and 
asset sales that can endanger broader financial stability.30 The ESRB has recommended 

29 Additionally, the absence of a minimum set of LMTs may lead to differences between Member States 
from a market integration perspective.  
30 Analysing investment fund sector developments following the onset of the COVID‑19 crisis, the ECB 
showed that greater availability and use of ex ante liquidity measures could have mitigated the build-up of 
systemic risks (https://www.ecb.europa.eu/pub/financial-stability/macroprudential-

17 

 
 
                                                           
 
the Commission to propose that EU legislation incorporates a common legal framework 
governing  the  inclusion  of  LMTs  in  the  design  of  investment  funds.31  By  law,  this 
recommendation is subject to a comply-or-explain principle.  

The lack of homogenised measures makes it difficult for some fund managers to manage 
liquidity risks effectively, which can spill over to and destabilise the financial system.32 
The varying availability of LMTs in different Member States. National rules are filling in 
these  regulatory  gaps  that  are  open  at  the  Union  level  leading  to  market  fragmentation 
and insufficient measures for supporting the stability of the financial system. Inefficient 
and  incomplete  data  reporting  further  undermines  the  monitoring  development  in  the 
markets and management of potential risks to financial stability.   

Over the past years, investment funds have taken on more liquidity risks in a search-for-
yield  due to  the prolonged low interest  rate  environment.  In the EU, smaller funds  and 
fixed-income funds have increased their average portfolio maturities making them more 
vulnerable to liquidity shocks (IMF GFSR October 2019). In its FSR of November 2020, 
the ECB concluded that investment funds are again increasing their liquidity risk-taking 
after  the  market  turmoil  of  Spring  2020.33  Two  thirds  of  open-ended  AIFs  offer  daily 
redemptions, but at an aggregate level, the sector’s liquidity profile shows that they may 
not hold sufficient liquid assets to sell within that period to meet redemption requests.34 
Liquidity  stress  events  can  expose  investment  funds  to  high  and  rapid  redemption 
requests, as it happened in the 2008 crisis, in the 2011 and in the March 2020 turmoil.  

ESMA  observes  in  a  letter  to  EVP  Dombrovskis  in  August  2020  on  the  AIFMD 
Review35  “the  experience  of  market  dislocation  during  the  on-going  COVID-19  crisis 
also  demonstrates  the  need  for  all  LMTs  to  be  available  in  all  jurisdictions  in  a 
consistent manner.” As this was not the case, AIFMs in some Member States were not 
able to use (certain) LMTs. The availability and implementation of LMTs for investment 
funds  varies  significantly  across  the  Member  States,  despite  similarities  in  fund 
characteristics.36 (see Table in the Annex 8 with the overview of LMTs across the EU).  

The  November  2020  ESMA  report  reveals  important  weaknesses,  which  should  be 
addressed:  (i)  some  funds  presented  potential  liquidity  mismatches  and  weak  liquidity 

bulletin/html/ecb.mpbu202104_3~a7ddbf0d16.en.html). Ex ante LMTs, such as swing pricing, can 
contribute to mitigating liquidity risks by reducing the first-mover advantages. 
31 ESRB Recommendation 2017/6 of 7 December 2017 on liquidity and leverage risks in investment funds. 
32 Analysing investment fund sector developments following the onset of the COVID‑19 crisis, the ECB 
showed that greater availability and use of ex ante liquidity measures could have mitigated the build-up of 
systemic risks (https://www.ecb.europa.eu/pub/financial-stability/macroprudential-
bulletin/html/ecb.mpbu202104_3~a7ddbf0d16.en.html). Ex ante LMTs, such as swing pricing, can 
contribute to mitigating liquidity risks by reducing the first-mover advantages. 
33 For instance, the share of liquid debt securities held by euro area investment funds has declined from 
36% in 2013 to less than 30% in June 2020. 
34 ESMA Annual Statistical Report on EU Alternative Investment Funds 2021, pp. 13-15. 
35 https://www.esma.europa.eu/sites/default/files/library/esma34-32-
551_esma_letter_on_aifmd_review.pdf 
36 See ESMA report on preparedness of open-ended investment funds to potential future adverse shocks, 
https://www.esma.europa.eu/sites/default/files/library/esma34-39-1119-
report_on_the_esrb_recommendation_on_liquidity_risks_in_funds.pdf (pp. 38, 47, 53, 55, 60). See also p. 
32 of ESMA’s September 2020 report  on Trends, Risks and Vulnerabilities: 
https://www.esma.europa.eu/sites/default/files/library/esma_50-165-
1287_report_on_trends_risks_and_vulnerabilities_no.2_2020.pdf. 

18 

 
 
                                                                                                                                                                            
risk management or valuation processes due to their liquidity set up,37 and (ii) despite the 
severity of the 2020 liquidity crisis, only a few funds have adjusted their liquidity set-up 
in light of the issues encountered.38 The report cautions against taking too much comfort 
from  how funds managed to  cope with  market  stress  in  spring 2020, as that  took  place 
‘amid significant  government and central  bank interventions which provided support to 
the markets in which these funds invest and relatively short in time.39  

In most Member States, fund managers are solely responsible for the activation of almost 
all liquidity management tools, and do usually not need regulatory authorisation to do so. 
Typically, LMTs and the circumstances under which they can be used must be listed in 
the constitutional and contractual documents of the investment fund, which are subject to 
authorisation  in  EU  Member  States.  The  availability  of  the  tools  is,  in  some  cases, 
restricted to certain types of investment funds and/or to exceptional circumstances.  

However,  fund  managers  are  often  not  keen  to  activate  LMTs  due  to  competitive  or 
reputational reasons. They may also not internalise that forced asset sales in response to 
large-scale redemptions may have negative implications for the stability of the financial 
system.40 The AIFMD provides a limited harmonised solution permitting NCAs to step 
in  and  suspend  redemptions  in  the  public  interest.  Nevertheless,  NCAs  usually  do  not 
have  the  power  to  activate  LMTs  other  than  suspension  of  redemptions.  For  example, 
redemption gates are a more nuanced tool, as they can still allow investors to redeem a 
part  of  their  AIF  shares  and  thus  limit  the  extent  to  which  liquidity  shocks  are  spread 
across  the  financial  system.  However,  only  in  a  number  of  jurisdictions  NCAs  are 
granted the power to activate redemption gates.41 Currently, the AIFMD framework does 
also  not  explicitly  include  provision  on  ensuring  consistency  in  application  and 
coordination  across  borders  if  NCAs  would  use  their  powers,  as  also  signalled  by  the 
ESRB.   

c) Differential regulatory treatment of custodians of AIF and UCITS 
assets 

The AIFMD was adopted prior to the CSDR and therefore does not fully take account of 
the  different  functions  that  CSDs  can  perform.  It  does  not  clearly  distinguish  the 
situations when CSDs are acting outside their primary function as market infrastructure 
(as Issuer CSD) and are competing with other custodians to provide custody for AIFs (as 
Investor CSD). 

An incomplete regulation of custodians of investment funds’ assets at the Union level is 
undermining  investor  protection,  which  depositaries  are  meant  to  guard.  It  is  worth  to 
mention  that  the  ongoing  CSDR  review  has  no  impact  on  this  analysis,  as  it  does  not 
touch the custody activity of Investor CSDs. 

The AIFM needs to appoint a depositary and only certain entities can act as depositaries 
(credit  institutions,  under  certain  conditions  investment  firms  and  other  institutions 

37 E.g. a combination of high redemption frequency, no/short notice periods and no LMTs in the case of 
funds investing in asset classes either illiquid by nature or whose liquidity may recede during a period of 
market stress. 
38 e.g., introduction of LMTs, adaptation of the redemption frequency and notice period. 
39 Ibid., p. 6. Cf. pp. 22, 27, 53. 
40 Supra 37, ESRB recommendations. 
41 Ibid. 

19 

 
 
                                                           
subject to prudential regulation). The depositary has extensive duties and tasks, including 
monitoring of cash flows, carrying out instructions from the AIFM if they do not conflict 
with fund rules or national law, and safekeeping of assets, which means either custody of 
financial  instruments  or  verification  of  ownership  for  other  assets.  Custody  is  the  only 
task a depositary can delegate. This implies in  return that all the necessary checks, e.g. 
including checking that no financial instrument has been lost, still need to be undertaken 
by  the  depositary  itself  and  that  the  information  flow  in  the  custody  chain,  and  more 
precisely  between  the  depositary  and  its  delegate,  needs  to  be  complete,  timely  and 
smooth.  

Under the AIFMD, however, a Central Securities Depositary (CSD) is not considered to 
be part of the custody chain and thus it is not considered a delegate of the depositary.42 
This legal situation does not guarantee a stable information flow between the custodian 
of  an  AIF’s  asset  and  the  depositary.  Consequently,  depositaries’  ability  to  fulfil  their 
oversight  duties  effectively  is  impaired  absent  a  stable  flow  of  information  on  the 
portfolio movements.  

Moreover, CSDs, in contrast to custodians acting as delegates of the depositaries, are not 
subject to the asset segregation rules as laid down in the AIFMR. Instead, they follow the 
CSDR rules in this respect that in many jurisdictions are less detailed. 

It  was  attempted  to  solve  a  similar  issue  in  the  UCITS  legal  framework  by  inserting  a 
recital in the UCITS V. The recital states that when CSD act as custodians they should be 
considered as delegates of the depositaries. Due to the lack of normative force, however, 
the  recital  seems  to  be  often  ignored  in  practice  and  hence  the  discussed  issues  persist 
where CSDs hold in custody UCITS assets. 

ESMA carried out extensive work on this matter and in its Opinion strongly recommends 
a legislative intervention to address the issue.  

Anecdotal  evidence  was  provided  by  a  number  of  depositaries  on  a  confidential  basis 
regarding  delegation  of  custody  to  investor  CSDs.  This  evidence  shows  that  in  several 
Member States investor CSDs hold a share of more than 8% of the financial instruments 
entrusted for custody to the depositary. This share can exceptionally exceed 30% of the 
financial  instruments,  which  can  be  held  in  custody.  In  these  cases,  where  depositaries 
are  not  ensured  a  stable  information  flow  and  therefore  cannot  discharged  their  duties 
properly, the investor protection is weaker. 

d) Overlapping or missing supervisory reporting data  

Timely,  high  quality  reporting  of  relevant  data  is  vital  for  supervisors  to  monitor 
developments  in  the  markets  and  address  potential  risks  to  financial  stability  stemming 
from  AIFM  and  AIF  activities.  The  AIFMD  lays  down  principles  for  supervisory 
reporting,  which  are  further  detailed  in  a  Regulation  supplementing  the  AIFMD  - 
AIFMR.    However,  the  AIFMD  Report  and  AIFMD  Evaluation  concludes  that  the 
AIFMR template is not sufficiently granular for effective market monitoring.  

Moreover,  the  fitness  check  of  supervisory  reporting  requirements  existing  across 
different  EU  financial  laws  revealed  that  there  was  a  significant  overlap  between  the 
AIFMR  supervisory  reporting  obligations  and  reporting  to  the  ECB  for  statistical 

42 The last indent of Article 21(11). 

20 

 
 
                                                           
purposes. A more detailed study is currently on-going to investigate a potential approach 
for  an  integrated  reporting  of  respective  supervisory  and  statistical  data.  This  could 
potentially  lead  to  reduced  administrative  burdens  in  the  area  of  reporting  by  reducing 
duplicative, but different reporting obligations (for more details see evaluation in Annex 
9  on  the  fitness  check).  The  current  inefficient  and  incomplete  supervisory  reporting 
obligations  impede  better  monitoring  of  developments  observed  in  the  markets  and 
addressing potential financial stability risks. 

The KPMG general survey and semi-structured interviews revealed that regardless of the 
reporting template included in Annex IV of the AIFMR, the reporting requirements differ 
among NCAs, with different interpretations or additional requirements. AIFMs that have 
reporting obligations to NCAs located in Member States in addition to their home office 
domicile,  or  if  the  AIFM  invests  in  a  target  company  located  in  a  different  specific 
observed the differences in filing procedures and translation costs were said to add to the 
administrative  and  cost  burden.43  Most  of  the  respondents,  therefore,  would  support  a 
rationalised template and a consistent application of the AIFMD reporting requirements. 
Considering the high costs of implementation of the reporting requirements, it is advised 
strongly to have a cross-sectoral view at regulatory reporting and to look for possible cost 
reductions and efficiencies for managers.44  

AIFMR supplementing the AIFMD requires only the reporting of aggregated data, such 
as the 5 most important instruments  in  which the AIF trades, 10 principle exposures, 5 
most important portfolio concentrations etc., at times may provide an incomplete picture 
of the funds activities for the supervisory authorities depending on the whole investment 
portfolio. In addition, ESMA, ESRB and industry stakeholders consider that addressing 
other current data gaps would improve macro-prudential monitoring.  

The  examples  of  the  missing  information  include  collecting  data  on  loan  origination, 
details  on  initial  margin  and  variation  margin,  and  Value  at  Risk.  The  ESRB  suggests 
that a mandatory Legal Entity Identifier (LEI) for AIFs could enhance financial stability 
monitoring by enabling  matching various data sets  reported under different  Union laws 
(e.g. EMIR). A direct  link to  other data sets,  especially transaction reports, is  currently 
not possible in many cases as only the AIFMs hold LEI but not the individual funds they 
manage  (i.e.  often  the  same  LEI  used  for  multiple  funds).  Also,  over  60%  of  AIFs  are 
self-classified  as  ‘other’.  The  ESRB  recommends  improving  the  reported  self-
classification of funds and to report the use of certain instruments.  IOSCO, for its part, 
promotes a global approach to leverage reporting by focusing on leverage by asset class. 

Insufficient data makes monitoring of market developments and identifying risk built-ups 
in the system difficult, which increases risks to financial stability.  

43 Report on the Operation of the Alternative Investment Fund Managers Directive (AIFMD) - Directive 
2011/61/EU, retrieved from: 
[ https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/19011
0-aifmd-operation-report_en.pdf ] (KPMG Report), pp.75 and 115. 
44 Ibid. 

21 

 
 
 
 
 
 
 
 
 
                                                           
2.2.2 Market Developments 

a)  Growth in AIFMs managing Loan Originating Funds (LOFs):  

The  tighter  regulation  and  increased  capital 
requirements  imposed  on  traditional  lending 
banks  through  Basel  III  have  reduced  the 
capacity for banks to issue loans to higher risk 
borrowers  such  as  SMEs  or  to  already  highly 
indebted entities (leveraged loans).45  

Graph 3. EU Bank’s Share of Leveraged Loan 
Market. Source: Standard and Poor’s LCD Q3 
2020 Leveraged Lending Review. 

In comparison to traditional lenders such as banks, funds are not subject to the same type 
of capital requirements, as they do not hold customer deposits in order to serve as a base 
to extend credit, albeit their AIFMs are subject to rules on liquidity risk management.46 
This feature enables these funds to continue lending even during times of extreme market 
stress while avoiding liquidity mismatches. 

According  to  the  OECD47,  loan-originating  funds  constitute  an  important  and  widely-
used source of funding for SMEs, which in Europe face more limited borrowing options 
and are typically reliant on banks. At the same time, institutional investors have looked to 
diversify their assets in the search for yield in the current low-interest rate environment. 
These factors have created a gap in the market that loan-originating funds have sought to 
fill (Graph 3 below). Market research indicates that the global private debt funds reached 
$887  billion  with  nearly  $188  billion  in  capital  raised  during  2020.48  According  to  a 
report  by  Deloitte,  private  debt  is  now  the  third  largest  fund  class  behind  only  private 
equity and real estate funds.49  

45 FSB paper Vulnerabilities associated with leveraged loans and collateralised loan obligations defines 
leveraged loans as follows: 
“There is no commonly agreed definition for leveraged loans. However, criteria used by regulators and 
data providers to classify a loan as “leveraged” typically include: (i) high indebtedness of the borrowing 
corporate (e.g. gross debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio 4x 
or higher); (ii) below investment grade credit rating for the loan (or borrower) (i.e. below BBB); (iii) loan 
purpose is to finance an acquisition (e.g. management buy-out (MBO) or leveraged buy-out (LBO)); (iv) 
presence of a private equity sponsor in the transaction (e.g. financing of borrowers owned by financial 
sponsors); or (v) high loan spread at issuance (e.g. +125 basis points).” 
46 A close-ended AIF does not repurchases or redeems its shares or units with its investors, at the request of 
any of its shareholders or unitholders, prior to the commencement of its liquidation phase or wind-down. 
Article 1 of Commission Delegated Regulation (EU) No 694/2014 of 17 December 2013 supplementing 
Directive 2011/61/EU of the European Parliament and of the Council with regard to regulatory technical 
standards determining types of alternative investment fund managers, OJ L 183, 24.6.2014, p. 18–2. 
47 New Approaches to SME and Entrepreneurship Financing:  Broadening the Range of Instruments, 
OECD 2015. 
48 Preqin: Private Debt Fared Well During a Strained 2020; available at: 
https://www.preqin.com/Portals/0/Documents/PD-Global-Feb21.pdf?ver=2021-02-04-132616-123 
49 Deloitte Alternative Lender Deal Tracker Autumn 2020; available at: Deloitte ALDT - autumn 2020 
Belgium.pdf. 

22 

 
 
 
                                                           
While  the  pandemic  led  to  reduced  growth  in  2020,  25  new  direct  lending  funds  still 
raised  $23.4  billion  in  funding  with  the  largest  fund,  the  GSO  European  Senior  Debt 
Fund II raising $6.1 billion.50 Given the low returns on government debt generally, it is 
expected that investors will continue to increase their allocation to this fund class. 

With particular regard to leveraged loans, ESMA statistical report on EU AIFs concludes 
that  over  the  past  few  years  EU  AIFs’  exposures  to  leveraged  loans  and  collateralised 
loan  obligations  (CLOs)  have  increased  by  15%  reaching  €  108bn  by  the  end  of  2018 
compared  with  €95bn  in  2017.51  The  growing  attractiveness  of  this  asset  class  is 
evidenced by the fact that “the increase in exposures comes from AIFs with no previous 
exposures to the leveraged loan market.”52  

In a proper functioning and effectively supervised Capital Markets Union (CMU), loan-
originating  funds  have  the  potential  to  provide  an  alternative  source  of  financing  to 
Europe’s corporates and SMEs allowing them to access  a wider range of competitively 
priced  funding  options.53  This  allows  these  funds  to  directly  support  job  creation, 
economic  growth,  innovation  and  contribute  to  the  recovery  from  the  Covid-19 
pandemic. Loan-originating funds can also serve as a backstop or shock absorber when 
liquidity  is  constrained  by  continuing  to  provide  loan  financing  when  more  traditional 
lenders such as banks have pulled back from the market. At the same time, the lack of a 
proper  incentive  structure,  in  terms  of  governance  and  risk  management,  aiming  at 
avoiding excessive risk-taking by loan originating funds, may lead to potential financial 
stability risks, especially if we consider the interconnectedness of the investment funds’ 
sector with the banking and insurance sector in the EU. 

As set out in the Evaluation, the divergent approaches across Member States can prevent 
funds  from  accessing  certain  national  markets,  limit  cross  border  competition  and  the 
ability of the funds to scale up their portfolios. It can also present a challenge with regard 
to  the  level  playing  field  in  the  internal  market  as  funds  in  some  jurisdictions  may  be 
subject  to  more  stringent  rules  or  total  prohibitions  on  engaging  in  loan  origination, 
which produces inefficiencies in the internal market.  

The syndicated loan market54 has a level of inherent discipline around credit assessment 
and monitoring because loans must be structured and priced accurately in order to satisfy 
potential lenders. In the absence of specific EU regulatory requirements, it is not certain 
that similar levels of discipline exist in direct debt financing or loan origination activity 
by AIFs and a number of risks can arise as a result.  

This is particularly important in the context of an observed deterioration of underwriting 
standards and lower credit quality of leveraged loans.55 Some national frameworks have 

50 Ibid., Deloitte. 
51 ESMA Annual Statistical Report EU Alternative Investment Funds 2020, 10 January 2020 ESMA50-
165-1032, p.42. 
52 Ibid. 
53 Ibid. 
54 A syndicated loan, or syndicated bank facility, is financing offered by a group of lenders - referred to as 
a syndicate - who work together to provide funds for a single borrower. 
55 ESMA Annual Statistical Report EU Alternative Investment Funds (2020), 10 January 2020 ESMA50-
165-1032, p.44. Cf. Financial Stability Board (2019), Vulnerabilities associated with leveraged loans and 
collateralised loan obligations, section 2. 

23 

 
 
 
 
 
 
                                                           
imposed requirements on funds governing their credit assessment and granting processes 
or  requiring  stress  testing  of  the  portfolios  to  determine  the  resilience  of  the  loan 
portfolio to general economic shocks such as interest rate changes. However, there are no 
common  set  of  rules  applicable  to  all  AIFMs  managing  loan  originating  funds  to 
establish  a  minimum  level  of  good  practice  in  the  EU  and  to  support  the  growth  in 
sources of alternative financing in the Union.  

It is important to note that loan-originating funds generally do not have access to public 
backstops or central bank liquidity. If a fund encounters difficulties due to poor lending 
practices  or  a  failure  to  properly  manage  its  risk  exposures  and  bad  debts,  this  may 
negatively  affect  investors  in  the  fund  and  its  borrowers,  particularly  in  the  event  of  a 
fund’s  failure.  Generally,  this  is  a  positive  feature  as  a  failure  would  be  limited  to  the 
fund and its investors.  However, in certain circumstances, it could translate into broader 
systemic  risk  depending  on  the  fund’s  overall  size,  its  interconnectedness  with  the 
broader  financial  system  and  the  degree  of  concentration  of  its  loan  book  in  certain 
sectors of the real economy.  

For  funds  engaged  in  loan  origination,  it  is  important  that  they  have  staff  with  the 
relevant  skills  and  expertise  in  loan  origination  to  ensure  a  robust  and  effective  credit 
assessment  and  granting  process  to  prevent  the  accumulation  of  or  concentration  in 
excessively risky loans or bad debts that may impair the fund’s performance. In terms of 
best practices among loan originators to effectively manage their risks, research suggests 
a  highly  involved  selection  process  requiring  specialist  skills  to  identify  projects, 
undertake due diligence, negotiate loan terms, extending credit and monitoring the loans 
once they are on the books. Different national requirements in this respect undermine a 
development of expertise and an efficient loan-originating fund market in Europe.   

b) Limited supply of depositary services in smaller markets 

One  of  the  main  pillars  of  the  AIFMD  framework  protecting  investors  is  a  depositary 
regime. AIFMs are required to appoint a single depositary for each AIF they manage to 
safe-keep  AIF  assets,  monitor  cash  flows  and  ensure  the  AIF’s  compliance  with  the 
relevant  regulations  and  fund  rules.56  AIFMD  requires  the  depositaries  to  have  their 
registered  office  or  a  branch  in  the  same  country  as  an  EU  AIF  under  their  care.57  As 
established by the Evaluation, the regime is deemed to be robust and is functioning well. 
However, there is an outstanding problem of  a limited supply of depositary  services  in 
smaller markets.  

Originally,  during  a  transitional  period  that  lasted  until  July  2017,  the  competent 
authorities  of  the  home  Member  State  of  an  AIF  could  allow  the  appointment  of  a 
depositary  established  in  another  Member  State.58  Several  competent  authorities  made 
use of this possibility in order to avoid a market concentration, which could pose risks to 
the  financial  stability  in  the  concerned  Member  States.  However,  after  that  date,  this 
avenue  for  AIFMs  or  AIFs  reliant  on  depositary  service  providers  established  in  other 
Member States was closed. 

56 Article 21 AIFMD. 
57 Article 21(5) AIFMD. 
58 Article 61(5) AIFMD. 

24 

 
 
 
 
                                                           
The  ending  of  the  transitional  period  caused  difficulties  for  certain  AIFs/AIFMs  in 
smaller markets where there is still a sufficient lack of supply of depositary services. A 
few Member States have an extremely concentrated depositary market. For example, in 
one Member State two depositaries hold over 40% of the financial instruments and four 
depositaries hold 70% of the financial instruments.  In another Member State only three 
depositaries offer their services.  

Table 1: AIF Net Assets compared to number of depositaries for a selection of Member 
States 

Member State 

AIF  Net  Assets  at  end 
2020 

Number of 
depositaries 

Germany 

France 

2.1 € trillions  

1.2 € trillions 

Netherlands 

1.0 € trillions  

Luxembourg 

0.8 € trillions 

Ireland 

Malta 

Cyprus 

0.8 € trillions 

11,115 millions €  

4,463 millions €   

35 

18 

27 

49 

22 

7 

3 

Sources: AIF Net Assets: EFAMA quarterly statistics March 2021; Number of 
depositaries: national competent authorities and asset management associations 

Respondents  to  the  public  consultation  observe,  that  such  market  structures  have  cost 
implications for fund managers and investors and can cause limitations to the provision 
of  more  cost-efficient  packaged  services  that  could  for  example,  also  include  fund 
administration (NAV calculation, unit/shares issuing service). Therefore, AIFMs have to 
internalise these services, which can be highly inefficient and expensive for some AIFMs 
(that  have  to  create  and  maintain  dedicated  teams  regardless  of  their  size)  and 
consequently  for  the  investors.Indicatively,  AIFMs  operating  in  the  Baltic  markets 
usually bear 20 -70 bp on the basis of the assets under management (and depending on 
the types of assets, where they are issued and if they are held outside the EU). EU only 
assets  attract  5-10  bp.  This  is  much  higher  than  what  the  AIFMs/AIFs  bear  in 
competitive  markets  (1-2  basis  points  for  larger  AIFMs  and  up  to  10  basis  points  for 
smaller AIFMs  and AIFMs  specialising in  Private Equity  and Venture Capital)  59.  This 
anecdotal evidence dates from 2009; contractual information is confidential and therefore 

59 Charles River Associates, Impact of the proposed AIFM Directive across Europe (prepared for the 
Financial Services Authority, UK), October 2009, p.102. 

25 

 
 
  
 
 
                                                           
 
in  general  not  accessible. Given that the  number  of depositaries has  remained stable or 
decreased60,  there  are  no  grounds  to  believe  that  the  costs  for  depositary  services 
lowered. Inefficiencies in certain Member States persist and cause decreased competition 
in the internal market for AIFs. Moreover, a failure of a depositary holding a large share 
of the AuMs would have significant repercussions on the AIF sector and investors. 

2.2.3 Inconsistent application of rules in Member States 

 Delegation  

The  AIFMD  and  UCITS  rules  permitting  fund  managers  to  delegate  their  core  or  non-
core  functions  to  third  parties  are  designed  to  ensure  that  it  is  possible  to  control  the 
delegate  effectively  and  to  ensure  a  proper  execution  of  the  delegation  mandate  thus 
serving  investor  interests.  However,  differing  interpretation  and  application  of  the 
AIFMD  and  UCITSD  rules  on  delegation  by  NCAs  is  leading  to  potential  investor 
protection concerns depending on where the fund manager is domiciled. The delegating 
fund manager may not  be subject  to  the same level  of substance requirements in  every 
Member State.  

A lack of clear legal requirements in the Union law leads instead to national regulatory 
guidelines,  which  impose  divergent  substance  requirements  for  AIF  and  UCITS 
managers.  For  example,  there  are  differing  national  guidance  on  the  number  and 
classification  of  employees,  conducting  officers  or  senior/board  members  an  AIF  or 
UCITS manager in the Union should have so that it can be deemed sufficiently staffed to 
ensure  the  effective  monitoring  of  activities  of  the  entity  receiving  the  delegation  of 
portfolio or risk management.61 Depending on the Member States of their establishment, 
AIF  and  UCITS  managers  are  subject  to  different  regulatory  standards  when  they  use 
delegation, which results in different levels of investor protection.  

Pursuant  to  the  AIFMD  and  UCITSD,  managers  of  AIFs  and  UCITS  are  allowed  to 
delegate  core  functions  (portfolio  or  risk  management)  and  non-core  functions  (fund 
administration, marketing or record keeping) to third parties while retaining the liability 
and  obligation  to  control  the  delegate.  The  AIFM  must  properly  supervise  the  delegate 
and be able to withdraw delegation immediately, while being liable at all times towards 
the managed AIF and investors, who remain covered by the investor protection measures 
provided for in the Union laws.62  

Before delegation arrangements become effective, AIFMs must notify NCAs so they can 
assess  whether  the  delegation  structure  is  objectively  necessary.  The  acceptable 

60 Cases of insolvency or closing of business which reinforce the concentration in the concerned markets 
were reported. 

61 Example of substance requirements in Luxembourg (Circular CSSF 18/698): an AIFM should have (i) at 
least three board members/members in its  governing bodies  with some conditions on the other  mandates 
they can have (e.g. less than 20 mandates in regulated entities and operational companies and they cannot 
dedicate  more  than  1920  hours  per  year  to  their  professional  commitments),  (ii)  at  least  two  conducting 
officers in Luxembourg who should be members of the senior management committee. 
Example of substance requirements in Ireland: an AIFM should have (i) a minimum of two directors, (ii) 
other  constraints  may  be  imposed  by  the  CBI  based  on  its  risk-based  assessment  (e.g.  conditions  on  the 
board members residence or on the designated persons in charge of key functions). 
62 Article 20(1)(f) of the AIFMD, Article 75(f) of the AIFMR. 

26 

 
 
 
                                                           
justifications  most  commonly  include  optimisation  of  business  functions  and  costs, 
seeking  expertise  of  the  delegate  in  specific  markets  or  accessing  global  trading 
capabilities.63 Often delegation serves a useful purpose by connecting European investors 
with  investment  opportunities  and  expertise  in  third  country  markets  to  meet  their 
investment needs and properly diversify their investment portfolios.  

However, AIFMs can no longer be considered as a fund manager under the Directive, if 
through  an  improper  use  of  delegation,  they  become  letterbox  entities.  An  entity  is  no 
longer considered to be an AIFM where it does not ensure a permanent supervision of the 
delegate,  or  where  it  does  not  retain  the  prescribed  standard  of  decision  making.64  The 
AIFMR  states  that  performance  of  investment  management  functions  by  a  delegate 
should not exceed by a substantial margin such functions performed by the AIFM itself. 
When  the  AIFMD  and  AIFMR  delegation  rules  are  not  respected,  the  AIFM  may  no 
longer be considered  as  a manager of the  AIF  concerned and the AIFM  licence  can be 
taken  away.  However,  the  ‘substantial  margin’  criterion  is  too  vague  leading  to  its 
divergent application and enforcement by different NCAs.  

The relevant rules in UCITSD are even less detailed or prescriptive than the AIFMD. The 
UCITS  regulatory  framework  mirrors  some  of  the  principle  rules  laid  down  in  the 
AIFMD by outlawing the formation of letter-box entities and requires UCITS managers 
to monitor effectively the activities of the delegates.65 The Commission is only invited in 
a  recital  to  examine  the  possibilities  for  further  harmonising  delegation  arrangements 
applicable to UCITS at Union level but no such specific requirements have been adopted 
yet.66 In effect, the same issue persists in this market.    

ESMA  has  issued  guidelines  advising  NCAs  to  apply  the  AIFMR  approach  to  UCITS 
funds but there are persistent disagreements among the NCAs, some of which argue that 
the  UCITS  regime  is  less  prescriptive  and  therefore  more  permissive.67  This  results  in 
different supervisory outcomes across Member States producing a varying protection for 
European investors. 

An  absolute  majority  of  industry  representatives  believe  that  the  current  AIFMD  and 
UCITS rules on delegation are sufficient and warn against tampering with the valuable 
tool,  which  benefits  European  investors  and  European  fund  industry.  They  agree, 
however, that proliferation of letter-box entities should be prevented and would welcome 
clarifications around substance requirements. At least a third of the European NCAs, on 
the  other  hand,  have  advocated  for  greater  clarification  of  the  Union  rules  to  prevent 
regulatory arbitrage and to ensure the necessary levels of investor protection.   

63 This list is not exhaustive. Article 20(1)(a) of the AIFMD and Article 76 of the AIFMR. 
64 Article 20(3) of the AIFMD, which is further detailed in Article 82 of AIFMR. 
65 Article 20(3) of the AIFMD. 
66 Recital 17 of the UCITS Directive. 
67 https://www.esma.europa.eu/sites/default/files/library/esma34-45-
344_opinion_to_support_supervisory_convergence_in_the_area_of_investment_management_in_the_cont
ext_of_the_united_kingdom_withdrawing_from_the_european_union.pdf 

27 

 
 
                                                           
2.3 Consequences 

2.3.1 Impaired identification, monitoring and management of potential threats to 
financial stability   

The AIFMD does not  contain specific rules that  would address  the potential  micro and 
macro  risks,  which  increases  potential  risks  to  the  broader  financial  stability.  The 
differing national legal frameworks imposing varying leverage caps and other limits on 
risk enhancing techniques as well as insufficient  market wide data does not allow for a 
sufficient  market-wide  monitoring.  This  regulatory  situation  impairs  the  identification, 
monitoring  and  management  of  potential  threats  to  financial  stability  arising  from  loan 
originating funds. 

The lack of a harmonised set of LMTs across the Union means that managers in different 
Member States may be limited in their ability to respond to periods of market stress and 
liquidity shortages thus possibly engaging in  forced asset sales that can further amplify 
systemic shocks across the financial system. 

Timely,  high  quality  reporting  of  relevant  data  is  vital  for  supervisors  to  monitor 
developments  in  the  markets  and  address  potential  risks  to  financial  stability  stemming 
from  AIFM  and  AIF  activities.  The  reporting  of  data  is  of  particular  importance  for 
supervisors  and policy  maker in  the times of stressed markets. Where there are gaps  in 
the supervisory reporting, these will limit the effectiveness of the supervisory oversight 
and the ability to identify and intervene to address emerging risks. 

Given that protecting financial stability is one of the core objectives of the AIFMD, it is 
important  to  ensure that  supervisors  have  access  to  sufficiently detailed fund level  data 
and  that  the  framework  remains  up  to  date  to  account  for  developments  in  the  market 
such as the use of liquidity management tools and new investment products with specific 
risk profiles. 

2.3.2 Inefficiencies in the internal market    

Overlapping  reporting  requirements  lead  to  inefficiencies  for  fund  managers,  investors 
and  supervisors.  This  duplicative  administrative  burden  increases  costs  for  managers, 
reducing  fund  returns  for  investors  and  impairing  the  competitiveness  of  EU  AIFMs.  
Lack of competition among service providers, particularly in smaller markets can lead to 
increased  costs  for  managers  and  less  efficient  fund  structures  due  to  a  lack  of  local 
service  providers  and  insufficient  competition.  The  internal  market  efficiency  is 
undermined  where  fund  managers  are  subject  to  differing  national  requirements,  in 
particular  where  those  restrict  economic  rights  by  reserving  them  for  domestic  market 
participants.    

2.3.3 Reduced protection for AIF investors undermining trust in the market   

The  different  national  rules  applied  to  AIFMs  managing  LOFs  can  lead  to  divergent 
levels  of  investor  protection  due  to  different  fund  level  requirements  for  disclosure  of 
supervisory  data,  different  risk  management  requirements  and  the  lack  of  harmonised 
rules for the granting of credit. 

28 

 
 
 
 
 
 
Different interpretations and implementation of the rules on delegation can pose risks to 
investors, particularly where there is a lack of effective oversight of the delegate. 

Different  regulatory treatments  of the custodians of AIFs assets  can impair supervisory 
monitoring  and  pose  a  risk  to  investor  protection  where  depositaries  are  not  provided 
with all the data necessary to perform their oversight role of the funds activity. 

2.4 How will the problem evolve if not addressed?  

This section contemplates how the defined problems would evolve should the European 
Commission  propose  to  do  nothing  to  address  them.  The  considerations  below  are 
“baseline  scenarios”  –  ‘Option  0’  –  followed  by  the  possible  policy  options  for  each 
problem discussed in Section 7. 

2.4.1 Difficulties in monitoring and managing financial stability risks  

a) Potential risks emanating from AIFs originating loans  

The retreat  of the banking sector and  growth of non-bank lending is  one of the biggest 
and most significant trends in the European economy and financial system during the last 
decade. In the EU, the non-bank financial sector has already reached the same size as the 
banking  sector  in  terms  of  financial  assets  –  a  trend  that  is  expected  to  continue.68  In 
Eurozone non-bank credit, where the ultimate lender is  a non-bank financial institution 
rather than a bank irrespective of the mode of financing, makes up around one-third of 
total credit from financial institutions.69 ESMA and NCAs have observed the continued 
expansion of private equity funds, which are active in extending loans. It is estimated that 
European  focused  AuM  makes  up  30%  of  the  total  or  approximately  €266  billion  up 
from 25%.70  It is also predicted that the global private debt market will nearly double in 
size to $1.4 trillion by 2025.71   

Further  progress  towards  the  CMU  will  strengthen  the  role  of  market-based  finance  in 
Europe and lead to a more diversified financial system. Without common EU standards 
the  potential  risks  generated  by  loan-originating  funds  are  likely  to  increase  and 
concentrate in some parts of the internal market making it difficult to control and address 
them at the EU level.  

In addition, this market segment will remain fragmented by a patchwork of national rules 
(see  Annex  7  mapping  national  regimes  across  the  Union)  impeding  its  coherent 
development  without  being  subject  to  the  appropriate  safeguards  and  restrictions,  for 
example,  regarding  the  use  of  leverage  or  limiting  inter-connectedness  with  the  other 
components of the financial system.  This may limit the ability of supervisory authorities 
to  effectively  monitor  and  manage  potential  risks  from  this  sector,  particularly  as  it 
continues to grow in size.  

68 See e.g. ESRB NBFI Monitor 2020, p.60 
https://www.esrb.europa.eu/pub/pdf/reports/nbfi_monitor/esrb.202010_eunon-
bankfinancialintermediationriskmonitor2020~89c25e1973.en.pdf?588be9e8391cfb17584d2a283dfe0abe 
69 Financial Stability Review, November 2020 (europa.eu). 
70 Industry estimate [not published information]. 
71 Supra 60; Preqin. 

29 

 
   
 
 
                                                           
b) Constrained management of liquidity risk under stressed market 
conditions 

In the absence of appropriate liquidity management tools, asset sales by fund managers 
facing  increased  redemption  requests  in  response  to  negative  market  developments  can 
further  exacerbate  asset  price  falls  creating  a  negative  loop  between  fund  redemptions 
and asset sales and endangering systemic financial stability. If the necessary LMT tools 
remain unavailable in certain parts of the Union to fund managers or to NCAs for their 
activation  this  will  limit  the  availability  of  an  effective  and  coordinated  response 
mechanism  to  the  market  stress  and  liquidity  shortages.  Failing  to  tackle  the  perceived 
reputational cost and competitive pressure whereby fund managers refrain using certain 
LMTs tools even if they are more effective, would continue having detrimental effects on 
financial stability and on investor interests.  Failing to activate the relevant liquidity tools 
where  it  is  warranted  the  fund  managers  are  likely  to  fail  in  protecting  the  value  of 
investors’ money.  

c) Inadequate supervisory data reporting  

Failing  to  harness  potential  synergies  between  the  ECB  statistical  reporting  and  the 
AIFMR supervisory reporting will lead to AIFMs bearing a double burden of mandatory 
reporting  to  different  authorities  regarding  the  same  activities.  Securities  markets 
supervisory  efforts  to  monitor  markets  closely  will  continue  to  be  impeded  by 
insufficient  granularity  of  the  reported  data  under  the  AIFMR  because  many  of  the 
submitted values are aggregated (e.g. 5 main exposure, 5 main counterparties, etc.). The 
existing  data  gaps  will  continue  impeding  supervisors’  understanding  of  market 
developments and accumulating risks.  This reduces their ability to respond to emerging 
risks  in  a  timely  and  effective  manner.  This  is  particularly  relevant  during  times  of 
market stress or crisis with unforeseen market shocks where the immediate need to react 
is impaired by an incomplete understanding of the market situation.  

2.4.2 Inefficiencies in managing investment funds  

a) Market inefficiencies linked to uneven playing field for loan-originating 
AIFs  

The loan originating funds sector is expected to become an ever more important source 
of  financing  to  the  real  economy.  This  is  supported  by  market  data  and  research  as 
explained in section 3.2.  In the absence of harmonised EU rules, the sector will continue 
to rely on fragmented national frameworks to operate in Europe, which will impair funds 
ability to scale up in size, realise cost savings through economies of scale or access new 
markets  where  they  are  currently  prevented  from  carrying  out  loan  origination.    Fund 
managers would continue to incur higher compliance costs due to differing requirements 
between Member States leading to uncertainty and limiting their ability to operate on a 
cross  border  basis.  This  would  also  impair  the  development  of  the  CMU  and  the 
development  of  alternative  sources  of  finance  for  the  real  economy.    Harmonising  the 
requirements  for  loan  originating  funds  will  improve  their  ability  to  operate  across  the 
Union,  lower  compliance  costs  and  level  the  playing  field  between  the  different 
jurisdictions. 

30 

 
 
 
b) Market inefficiencies linked to limited supply of depositary services in 
smaller markets  

The current status quo whereby EU AIFs must appoint a depositary in the same Member 
State or that the depositary has established a branch in the Member state where the fund 
is  established  would  perpetuate  the  situation  in  smaller  markets  of  a  limited  supply  of 
depositary services.  This  means that the number of depositaries active in  these markets 
would remain low. For depositaries to run a profitable operation, they need scale, which 
is  not  possible  in  smaller  markets.  This  implies  a  potential  lack  of  sufficiently  robust 
depositaries; e.g. some depositaries have a low investment grade. A lack of sufficiently 
robust depositaries, as well as the predominance of depositaries offering limited services 
(e.g.  no  fund  administration),  poses  in  particular  a  problem  for  AIFs  with  a  high(er) 
number  of  AuM  and  might  also  concern  AIFs  with  certain  underlyings  (e.g.  private 
equity  or  yet  exotic  derivatives).  Market  concentration  in  smaller  markets  would  also 
perpetuate  insufficient  competition  and  therefore  inefficient  functioning  of  the  AIF 
market. In these highly concentrated depositary markets funds often do not have access 
to packaged services. As a result, the investment funds market in such Member States is 
likely to remain underdeveloped, the investment choice for the investors would continue 
to be restricted.  

Having  such  barriers  is  at  odds  with  the  rationale  and  spirit  of  the  internal  market  and 
prevents managers from accessing the most cost efficient service propositions. 

2.4.3 Inadequate protection of investors 

a) Investor protection issues where the fund manager delegates its 
functions to third parties 

Failing to take measures at the Union level, NCAs would continue enforcing AIFMD and 
UCITSD  rules  of  delegation  with  divergent  interpretations  and  implementation  at 
national level. This leads to divergent supervisory outcomes to the detriment of ensuring 
a  uniform  level  of  investor  protection  in  the  Union.  Entities  willing  to  exploit 
accommodative national guidance may seek to establish in the Member States where the 
standards  are  perceived  as  being  lower  leading  to  possible  regulatory  arbitrage.  At  the 
same time, the current rules on delegation are important to European fund managers as a 
cost  saving  measure  and  means  to  access  foreign  market  expertise  and  knowledge 
allowing investors safely diversify their investment portfolios. The purpose of clarifying 
and  specifying  existing  rules  on  delegation  is  to  seek  better  alignment  of  supervisory 
practices across the EU in order to ensure the protection of investors.  

b) Investor protection issues with CSDs as custodians of funds’ assets  

Not  putting  CSDs  on  an  equal  footing  with  other  custodians  when  they  provide 
competing  services  will  perpetuate  an  unjustified  advantage  for  the  CSDs  and  impede 
depositaries in carrying out their duties in accordance with the AIFMD and UCITSD.  

c) Diverging protection of investors in loan originating funds 

In  addition  to  new  and  growing  risks  to  the  financial  stability  and  limiting  the 
development of the internal market for loan originating AIFs, differing national rules can 
lead to divergent levels of investor protection as AIFMs of such funds will be managing 
micro  risks  and  will  be  providing  investor  disclosure  information  according  to  the 

31 

 
nationally  designed  regulatory  standards.  NCAs  may  not  have  access  to  the  full  set  of 
information they need to ensure effective oversight of these funds and the monitoring of 
potential risks. As these funds grow in size these issues will amplify further. 

3. WHY SHOULD THE EU ACT? 

3.1 Legal basis 

The  Treaty  on  the  Functioning  of  the  European  Union  (TFEU)  confers  upon  the 
European  institutions  the  competence  to  lay  down  appropriate  provisions  that  have  as 
their object the establishment and functioning of the internal market (Article 114 TFEU).  

For the policy options chosen and the specific design of the rules, the appropriate legal 
base  could  be  Article  53(1)  TFEU  on  the  taking-up  and  pursuing  of  activities  by  self-
employed  persons,  which  is  used  to  regulate  financial  intermediaries,  their  investment 
services and activities.  

Divergent national approaches to the issues discussed in the preceding sections can make 
the  cross-border  provision  of  services  difficult  and  impede  the  development  of  internal 
market  for  such  AIFs.  Insufficient  supply  of  depositary  services  and  different  national 
regulatory  standards  for  loan-originating  AIFs  undermine  level  playing  field  for  AIFs. 
Moreover,  the  patchwork  of  national  rules  on  loan-originating  AIFs  make  it  more 
difficult for supervisors  to monitor risk to the financial stability and to preserve market 
integrity.  

The  proposed  improvements  to  the  AIFMD  seek  to  promote  sound  processes  for  loan 
origination by AIFs and to further market integration in this segment. Facilitating access 
to cross-border provision of depositary services aim to facilitate a further integration of 
EU  AIF  market  ensuring  high  level  of  investor  protection.  It  is  sought  to  achieve  a 
coherent  approach  to  delegation  activities  by  European  investment  funds.  Unilateral 
actions  of  Member  States  cannot  fill  in  the  AIFMD  gaps  to  achieve  these  objectives 
individually. Therefore, the Union may adopt measures in accordance with the principle 
of subsidiarity as set out in Article 5 of the Treaty on European Union.  

3.2 Subsidiarity: Necessity of EU action 

The AIFMD has been adopted in full respect of the principle of subsidiarity pursuing the 
objective to remove market fragmentation and address the risks to the financial stability 
that are inherently transnational. The Directive was a choice of instrument for finding an 
appropriate balance between EU-level and national action.  

The  proposed  improvements  to  the  AIFMD,  which  aim  at  completing  this  regulatory 
edifice  with  additional  regulatory  amendments  and  clarifications,  aims  to  preserve  the 
balance  between  harmonising  key  risk  control  measures  and  preserving  Member  State 
flexibility to continue regulating sub-threshold AIFMs that operate in a purely domestic 
environment or the distribution of certain types of AIF to retail investors. 

Action  at  EU  level  must  respect  the  principle  of  proportionality.  Any  amendments 
proposed will respect the principle of proportionality, as set out in Article 5 of the Treaty 
on European Union, and would not go beyond what is necessary in order to achieve the 
objectives  of  completing  a  Single  Market  for  AIFs  and  contributing  to  the  process  of 
building the CMU, while ensuring a coherent approach to macro-prudential oversight of 
the EU AIF market. 

32 

 
The chosen options do not go beyond what is necessary to achieve the set objectives and 
are  restrained  in  their  level  of  interventionism.  Where  appropriate,  new  requirements 
imposed  on  AIFMs  managing  loan-originating  AIFs  are  designed  as  general  principles 
and  more  specific  regulatory  requirements  would  not  unnecessarily  disrupt  existing 
business models (e.g., leverage cap which would be appropriate to limit the risks to the 
financial stability and would not interfere with the current prudent market practice). As 
regards  investor  protection,  the  proposed  additional  disclosure  requirements  are  in  line 
with the best market practice, which should be extended to all investors in the Union to 
ensure the same level of investor protection.  

The  proposals  to  enable  cross-border  access  to  the  depositary  services  strikes  the  right 
balance  between  the  AIF  and  investor  needs  and  averting  risks  that  may  materialise 
without appropriate Union regulation of the depositary services. 

The  clarification  proposed  to  the  delegation  regimes  preserve  the  valuable  features  of 
these  activities  at  the  same  time  ensuring  that  there  are  requisite  human  resources 
provided  to  supervise  the  delegate  and  retain  the  core  functions  by  an  AIF  or  UCITS 
manager.  

3.3 Subsidiarity: Added value of EU action 

Harmonising  requirements  for  the  AIFMs  managing  loan  originating  AIFs  should 
address  risks  generated  by  such  funds  to  the  financial  system  and  at  the  same  time 
facilitate internal market creation, which is currently fragmented by the differing national 
rules. Investors must be afforded the same level of protection regardless where the loan-
originating fund or its manager is established in the Union.   

The  now  expired  transitional  provision  in  Article  61(5)  AIFMD,  which  allowed  the 
necessary  cross-border  supply  of  depositary  services,  has  already  proven  to  add  EU 
value,  especially  for  smaller  Member  States.  Therefore,  finding  a  European  solution  to 
reopen  the  abruptly  closed  channels  of  such  service  flows  is  an  imperative  for  the 
functioning of the internal market.   

Attempts  to  ensure  supervisory  convergence  regarding  the  delegation  regime  under  the 
AIFMD and UCITSD have been exhausted. A legislative intervention is now required to 
clarify what the binding requirements are for the fund managers based in the Union that 
outsource their activities to third parties while still being considered as the managers of 
those investment funds.   

These market wide effects can be achieved only by taking measures at the EU level.  

4. OBJECTIVES: WHAT IS TO BE ACHIEVED? 

4.1 General objectives 

The general objective of the proposed improvements to the AIFMD is the same as of the 
original proposal for this Directive - to have a complete and consistent framework for the 
supervision  and  prudential  oversight  of  AIFMs.  Notably,  the  AIFMD  pursues  the 
objectives  of  ensuring  financial  stability,  high  protection  of  investors  and  an  integrated 
AIF  market.  Managing  micro-prudential  risks  is  intrinsically  linked  to  the  macro-
prudential  risks,  in  particular  where  the  AIF  is  large  and  interconnected  with  other 
financial  intermediaries  and  thus  able  to  generate  and  spread  fund-level  risk  across  the 
whole financial system.   

33 

 
 
4.2 Specific objectives 

The proposed improvements would pursue the following specific objectives to: 

 

 

 

 

implement operational requirements for the managers of loan originating AIFs to 
ensuring that risks to financial stability are mitigated and investors are protected 
whilst levelling the playing field for those funds in the internal market;  

increase  competition  for  depositary  services  provided  to  AIFs  in  those  markets 
where there are a limited number of depositary service providers;  

improve effectiveness of the AIFMD and UCITS rules on delegation to ensure the 
necessary level of investor protection across the Union;  

improve supervisory reporting by providing supervisors with more granular data 
for  market  monitoring  while  removing  the  reporting  duplications  for  AIFs  and 
UCITS managers;  

 

improve the availability of LMTs for open-ended AIFs and UCITS across the EU;  

  ensure the equal treatment of custodians upholding investor protection regardless 

of the type of entity that safe keeps AIFs’ or UCITS assets. 

5. WHAT ARE THE AVAILABLE POLICY OPTIONS? 

This  section  discusses  the  proposed  policy  choices  for  achieving  three  specific 
objectives:  (i)  implement operational requirements for the managers of loan originating 
AIFs to ensuring that risks to financial stability are mitigated and investors are protected 
whilst  levelling  the  playing  field  for  those  funds  in  the  internal  market,  (ii)  to  increase 
competition for depositary services provided to AIFs in those markets where there are a 
limited number of depositary service providers and (iii) to improve effectiveness of the 
AIFMD  and  UCITS  rules  on  delegation  to  ensure  the  necessary  level  of  investor 
protection across the Union. 

Annex  6  contains  technical  proposals  for  achieving  the  remaining  three  specific 
objectives:  (iv)  to  improve  supervisory  reporting  by  providing  supervisors  with  more 
granular data for market monitoring while removing the reporting duplications for AIFs 
and UCITS managers; (v) to improve the availability of LMTs for open-ended AIFs and 
UCITS  across  the  EU  and  (vi)  to  ensure  the  equal  treatment  of  custodians  upholding 
investor protection regardless of the type of entity that safe keeps AIFs’ or UCITS assets. 
Given  that  the  broad  policy  direction  is  clear  with  the  technical  proposals  already 
provided by ESMA and/or ESRB, the debate in Annex 6 centres on the possibilities for 
the best technical execution.  

5.1    Options  to  implement  operational  requirements  for  the  managers  of  loan 
originating  AIFs  ensuring  that  risks  to  financial  stability  are  mitigated  and 
investors  are  protected  whilst  levelling  the  playing  field  for  those  funds  in  the 
internal market 

Establishing  a  harmonised  framework  for  managers  of  loan-originating  funds  would 
support overall stability of the financial system, while facilitating the development of an 
efficient  loan  origination  sector  across  the  EU  with  effective  supervisory  oversight  and 
ensuring  investor  protection.  Based  on  the  analysis  of  national  frameworks,  there  are 

34 

 
 
 
 
 
certain  common  requirements  imposed by certain Member States that  could  be adapted 
as a basis to develop similar requirements at EU level.  

5.1.1 Option 1 and Option 2 discarded early in the process 

Option 1 prohibiting AIFs from originating loans or participating in the credit market as 
direct lenders was considered early in the process and discarded as disproportionate and 
in conflict with the overall goals of the CMU to create new sources of finance for the real 
economy in Europe.  

On a positive side, Option 1 would also remove the concerns that private credit markets 
are competing with the banking sector while subject to different rules leading to possible 
regulatory  arbitrage  opportunities.  This  approach  would  lead  to  a  clear  separation  of 
function  between  financial  intermediaries  and  the  requirements  attached  to  a  particular 
licence,  as  it  is  not  possible  to  subject  close-ended  loan-originating  funds  to  capital 
requirements  similar  to  those  applicable  to  the  credit  institutions.  The  banking  model 
creates  liquidity  mismatches  on  the  banks’  balance  sheets  because  long-term,  illiquid 
loans are provided mainly from the demand deposits, which can be redeemed daily. The 
closed-ended  structure  of  loan  originating  funds  mitigates  maturity  transformation  as 
such  funds  are  not  vulnerable  to  redemption  demands  and  can  hold  originated  loans  to 
maturity. 

On a negative side, however, Option 1 would produce significant negative effects on the 
real economy. Loan originating funds provide a valuable source of alternative financing 
to Europe's corporates and SMEs, particularly to those that find it difficult to access more 
traditional sources of finance.  Option 1 would reduce availability and access to finance 
with  associated  increased  costs  for  the  businesses.  Therefore,  this  approach  would  also 
conflict with  the objectives  of CMU to  develop  alternative sources of financing for the 
real economy.  

Moreover,  a  total  prohibition  for  AIFs  to  originate  loans  would  severely  restrict 
economic  freedom  of  AIFMs/AIFs  and  have  an  immediate  impact  on  existing  loan 
originating fund managers precluding them from  engaging in  new lending. Conversely, 
Option 1 would result in a more limited product offering and therefore  have a negative 
impact on the investment choice for investors that are in search for a yield in low interest 
environment.  

A total prohibition would have mixed effects on financial stability. On one hand, it would 
address the problem to financial stability by eliminating interlinkages with other parts of 
the financial system thus cutting the channels of potential contagion. On the other hand, 
loan-originating  funds  can  provide  an  additional  liquidity  buffer  or  shock  absorber  in 
times of market stress. Prohibiting AIFs’ taking up such a role would leave the financial 
markets more vulnerable. 

Finally,  pursuing  this  option  would  place  European  funds  at  a  disadvantage  in 
comparison to other international markets such as the US. Therefore, it was discarded at 
an early stage and not considered further. 

Option  2  as a  partial  harmonisation of only  certain  measures modelled on the common 
elements  of  existing  national  frameworks  was  also  considered  at  an  early  stage.  This 
approach was discarded as it would not sufficiently address the potential risks to financial 
stability  that  the  loan-originating  fund  sector  may  pose.  Increasingly  interconnected 

35 

 
 
European  financial  markets  require  a  sufficiently  harmonised  approach  on  a  number  of 
aspects, at a minimum those presented under Option 3 in the section below.  

A partial harmonisation would suffer from significant drawbacks in terms of monitoring 
financial stability risks, particularly as the sector continues to grow in size and becomes a 
more important source of finance for the real economy. To prevent the emergence of new 
risks,  it  is  important  that  the  proposed  EU  rules  establish  a  minimum  number  of 
safeguards  regarding 
the 
recommendations made by the ESAs and the potential risks highlighted in their research 
on  loan-originating  funds,  a  lighter  framework  would  not  fulfil  the  objective  of 
supporting  the  continued  development  of  this  sector  in  a  safe  and  sustainable  way  and 
would  not  fully  address  the  issues  raised  by  the  ESA’s  in  their  feedback  to  the  pubic 
consultation and other research that has been conducted.   

the  funds  activities  and  risk  profiles. 

  Based  on 

While industry feedback is more mixed, there is general support for the overall objectives 
of the proposal – to improve the supervisory oversight of loan funds and protect against 
potential  systemic  risks.    This  element  was  acknowledged  in  subsequent  follow-up 
consultations with industry stakeholders.   

5.1.2 Description of Option 3 

Policy option 

Description  

Option 3: Harmonise 
requirements for AIFMs 
managing loan-originating 
AIFs 

a)  Establish  common  EU  rules  allowing  AIFs  to 
originate loans but  requiring  AIFMs  to  develop 
robust  credit  assessment  procedures,  valuation 
methodologies  and  specific  risk  management 
frameworks to ensure sound credit origination  

b)  Impose  concentration  limits,  limit  the  funds 
inter-connectedness  with  the  broader  financial 
system  and  in  particular  credit  institutions,  and 
impose the closed-ended nature on these funds. 

c)  Require retention of an economic interest when 
a  loan  is  originated  and  sold  by  an  AIF  on  the 
secondary market.  

Option 3 proposes a set of comprehensive measures to address risks of loan originating 
AIFs  as  set  out  by  the  ESAs,  including  counterparty  and  credit  risk  and  mitigating  the 
potential  risks  of  this  alternative  financing  channel,  level  the  playing  field  for  AIFMs 
managing loan-originating funds and increase transparency around the activities of such 
funds. Whilst the AIFMD already contains requirements related to a fund managers risk 
management  processes  and  reporting  but  these  only  cover  standard  fund  risks  such  as 
liquidity, counterparty or broadly refer to ‘other relevant risks’.  

By establishing a harmonised set of EU rules based on the guidance of the ESAs and the 
potential  risks  highlighted  in  their  research,  loan  originating  funds  would  be  able  to 
originate  credit  in  all  Member  States  allowing  them  to  scale  up  their  funds  and  realise 

36 

 
 
 
 
 
additional economies of scale and cost savings.  This would increase the aggregate level 
of  non-bank  financing  available  in  Europe  leading  to  greater  competition  effects  and 
association reductions in the cost of non-bank financing for borrowers such as SMEs. 

Fund  managers  would  have  greater  certainty  about  the  regulatory  requirements 
applicable  to  their  loan  origination  activity  which  compares  to  the  present  fragmented 
landscape  where  there  are  different  requirements  in  each  Member  State  increasing 
compliance costs for managers and restricting cross-border investments. 

This  is  also  in  line  with  the  objectives  of  the  CMU  and  the  development  of  the  Single 
Market  to  establish  common  rules  across  the  Union  and  support  supervisory 
convergence. 

This  proposal  would  add  requirements  for  managers  to  manage  credit  risks  effectively 
specific to their loan originating  activities. Such  credit risk specific requirements could 
include: 

a) Organisational requirements 

It would require the implementation of specific organizational requirements and policies 
to improve the robustness of the process of originating loans and the management of loan 
portfolios  by  AIFMs.  Under  this  option,  AIFMs  would  be  required  to  ensure  that  the 
granting  of  credit  is  based  on  sound  and  well-defined  criteria  and  that  the  process  for 
approving, amending, renewing and re-financing credits is clearly established (including 
the  risk  management  process  to  reassess  and  monitor  the  risk  on  an  ongoing  basis). 
AIFMs  would  be  required  to  establish  and  regularly  update  procedures,  policies  and 
processes  for  the  assessment,  pricing  and  granting  of  credit  as  well  as  for  credit 
monitoring. AIFMs would be required to use internal methodologies to assess the credit 
risk of exposures to  individual obligors, securities  or securitization positions and credit 
risk at the portfolio level under the supervision of their NCAs (authorisation process and 
ongoing monitoring). 

b) Stress-testing  

Level 2 measures regarding stress testing would be specified to require AIFMs to identify 
possible  events  or  changes  in  economic  conditions  that  could  impact  the  AIF’s  credit 
exposures  and  improve  the  fund’s  resilience  to  market  shocks.72  AIFMs  would  be  also 
required to take into account the principal market risk factors for such funds, including 
interest  rates,  FX  and  credit  spreads  in  order  to  identify  and  address  outsized 
concentrations  in  specific  directional  risks.  The  potential  liquidity  risks  caused  by 
maturity  transformation  of  loan  funds  and  the  illiquid  nature  of  their  loan  portfolios 
should  be  better  captured  in  reporting  with  appropriate  risk  management  and  stress-
testing put in place.  

c) Risk retention requirement  

To avoid moral hazard, AIFs that directly engage in loan origination should be required 
to retain a degree of economic interest in the loans they originate if they subsequently sell 
those  loans  on  to  another  party.  However,  AIFs  that  only  purchase  loans  on  the 

72 Article 48 (2) AIFMR.  

37 

 
                                                           
secondary market and subsequently sell those purchased loans would not be required to 
retain a portion of the risk as they did not originate the loans.  

d) Limit inter-connectedness with the broader financial system 

Furthermore, as recommended by ESMA73 and to ensure the independence of the funds 
activities  and  limit  inter-connectedness  with  the  broader  financial  system,  in  particular 
traditional credit institutions, AIFs should not be permitted to lend to: 

a)  the AIFM, management company, general partner, depositary, or to  delegates or 

group companies; 

b)  other financial institutions.  

Data from Lipper (2011) and the ECB show that in 2013, 18 out of the 25 largest asset 
managers in the EU are run by banks. Commission services calculations based on ECB 
data on investment funds (Q1 2021) and the Orbis database show that, as of Q1 2021, at 
least  43.7%  of  all  investment  funds  in  EU27  having  a  management  company  are 
managed by companies that are part of banking/insurance groups.74 Given that since the 
late 1990s banks have been diversifying into non-interest earning activities such as asset 
management (the trend is global, but particularly pronounced in Europe), such structural 
ties serve as potential channels of contagion. The failure of a large loan-originating fund 
could pose a systemic risk to the extent that it is interconnected with other components of 
the  financial  system  and  in  particular,  credit  institutions  or  fiduciary  investors  either 
through the loan portfolio itself, or the provision of backstop credit facilities. To contain 
the potential for such contagion, AIFs should be limited to originating loans to financial 
intermediaries  by  respecting  a  concentration  limit  of,  for  example  20%  for  a  a  single 
borrower, which is another financial institution.  

e) Impose a closed-ended fund structure 

To  prevent  excessive  liquidity  transformation  risk,  loan  originating  funds  should  be 
closed-ended.  This  would  avoid  the  impact  of  redemption  pressures  particularly  under 
stressed market conditions. 

f) Investor disclosures 

AIFMs would be required to provide investors periodically with the specific information 
on the AIF loan portfolios. Such reports would include a breakdown of: a) the originated 
loans debt classes; b) the amortising and bullet loans; c) the loan to value of  each loan. 
Information on non-performing loans and loans subject to forbearance should be included 
in such reports. Investors should be also informed without delay of any material changes 
to  credit  assessment  and  monitoring  processes.  This  would  keep  the  investors  well 
informed  about  the  activities  of  the  fund  and  permit  supervisors  to  better  monitor  the 
evolution of risks to the financial system associated with the activities of loan originating 

73 Additional information cf. Annex 7.  
74 However, this represent a lower limit and a downward biased estimate which implies that the real 
interconnectedness is much higher as it is based on direct upstream ownership links where the asset 
management companies were part of banking/insurance groups or having a global ultimate owner that is a 
banking or insurance company. Further to this, contractual relationships are other forms of 
interconnectedness that were not considered and more difficult to identify. 

38 

 
 
 
 
 
                                                           
AIFs.  In  addition  information  on  AIFs  loan  portfolio  could  be  useful  to  feed  European 
Single  Access  Point  (ESAP)  for  financial  and  non-financial  information  publicly 
disclosed by companies. 

g) Transparency 

AIFMD  reporting  will  be  further  detailed  to  provide  regulators  with  additional 
information  on  loan  origination  (cf.  infra,  section  on  amendment  to  the  AIFMD 
supervisory reporting requirements in Annex 6). 

Feedback  to  the  public  consultation:  Just  over  half  of  the  respondents  to  the  public 
consultation  did  not  have  an  opinion  on  whether  there  is  a  need  to  harmonise 
requirements for AIFMs managing loan-originating AIFs. This group included the largest 
industry associations.  

23%  of  the  respondents  opined  that  no  further  rules  are  needed,  while  7  out  of  10 
Member States  represented by the public authorities replying  to  the public consultation 
agreed  that  there  is  a  need  to  harmonise  at  EU  level  the  requirements  for  AIFMs 
managing loan-originating AIFs. They considered that Union rules are necessary to level 
the playing field and address the risks that may arise as a consequence of this activity 

The authorities, however, expressed their support selectively for different elements of the 
discussed option. For example, imposing leverage limits (2 MS), restricting marketing of 
loan-originating AIFs to professional  investors  only  (2 MS) or imposing diversification 
(2  MS)  and  concentration  requirements  (3  MS)  were  supported  by  different  public 
authorities (for more results of the public consultation see Annex 2).  

One  dissenting  industry  association,  however,  favours  a  continuous  reliance  on  the 
existing  AIFMD  framework  without  adding  further  statutory  restrictions  for  AIFMs  of 
LOFs.  In  their  view,  the  AIFMD  rules  on  resourcing,  organisational  and  operational 
requirements, risk management, investment due diligence requirements, as well as rules 
designed to cover risks related to, for example, liquidity and leverage already suffice.  

According to that respondent: (a) the structures of private credit funds are closed-end, or 
funds apply closed-end features to semi open-ended funds that do not redeem investors 
before maturity; (b) typically there is no more than one unit of debt for one unit of equity 
in  a  credit  fund.  In  other  words,  the  leverage  rarely  exceeds  100%  of  the  funds’  NAV 
(equivalent of equity); (c) interconnectedness should not be overestimated as in the most 
optimistic scenario where the size of private credit industry could increase six-fold to € 
1.5tn by end of 2030, it would still be 24 times smaller than the €36tn EU banking sector. 

5.1.3 The impacts of the retained Option 3 

PROs:  Measures  proposed  under  Option  3  focus  on  addressing  micro  and  macro 
prudential  risks  taking  into  account  the  specificities  of  loan  originating  AIFs  and  are 
aligned  with  elements  of  the  established  national  frameworks.  Proposed  targeted 
restrictions on the activities of loan originating AIFs would support financial stability and 
limit  the  potential  spill  over  effects  to  other  parts  of  the  financial  system.  The  internal 
processes  would  be  upgraded,  which  would  contribute  to  a  sound  management  of  loan 
portfolios. In addition, transparency about the activities of loan originating AIF for both 
investors and regulators would be increased.  

39 

 
 
The proposed measures would not be at odds with the current market practice but would 
tackle  managers  that  fall  out  or  could  fall  out  of  the  best  practice  and  thus  pose  more 
significant micro or macro risks.  

CONs: This option would entail costs for AIFMs that manage LOFs unconstrained by the 
rigor of internal processes and procedures for a sounds credit origination. Transparency 
requirements  would  also  add  some  costs  to  those  AIFMs,  which  are  not  divulging 
portfolio composition to other than their investors.  

Impact on 
investors 

Impact on 
AIF/AIFMs 

Impact on 
financial 
stability 

Impact on 
SMEs 

  Positive impact on the investment choice for investors in search for a 

yield in low interest environment. 

  Better managed loan-originating AIFs with the adequate internal credit 
issuance and monitoring processes and procedures are likely to result 
in better investment outcomes for investors. 

  More transparency for investors about the activities of loan-originating 

AIFs enabling more informed decision-making. 

  Substantial  compliance  efforts  and  costs  for  costs  for  AIFMs  that 
manage  loan-origination  funds  unconstrained  by  the  rigor  of  internal 
processes and procedures for a sounds credit origination.  

  Adjusting  activities  to  respect  the  legal  limits  in  terms  of  various 

restrictions.  

  Costs to adhere to the transparency requirements. 
  Opening  up  growth  opportunities  by  further 

integrating 

loan-

originating AIF market. 

  Positive  impact  on  the  financial  stability  as  the  AIFMs  of  loan 
originating  AIFs  would  be  expected  to  engage  in  sound  loan 
origination. 

  Limited potential contagion to the other parts of the financial system. 
  Establishing  a  harmonised  framework  will  facilitate  greater  activity 
and  increase  competition  in  this  sector  as  managers  will  have  a 
consistent  set  of  rules  applicable  across  the  Union.  This  will  lead  to 
the  increased  availability  of  credit  for  corporates  and  SMEs  in  the 
broader real economy including on a cross-border basis as more funds 
are launched and existing funds grow in size.  
It could also reduce the cost of such financing for SMEs. 

 

5.1.4 Comparison of the Option  

This section compares the retained Option 3 against the objectives listed in Section 4. In 
addition, it assesses the efficiency of the Option and its impact on SMEs. The economic, 
environmental,  social  and  fundamental  rights  impacts  and  coherence  with  EU  policy 
objectives is also considered. 

Objective  

Option 3 

Single market for 
AIFs 

++ 

Harmonising requirements for loan originating AIFs across the 

40 

 
 
 
 
Union contributes to creation of the AIF Single market and would 
potentially offer scaling up opportunities for loan-originating AIF 
market. 

Wider choice for investors of available investment strategies 

Investor protection  ++ 

Strengthened investor protection due to the better managed loan 
originating funds and more transparency around their activities 

Financial stability   ++ 

Efficiency (cost-
effectiveness) 

Impact on SMEs 

Other economic, 
environmental, 
social and 
fundamental rights 
impacts 

Strengthened via sound credit origination and by containing risk 
contagion to the financial system  

-- 

Substantial compliance efforts and costs for AIFMs if they have not 
had sound credit originating practices in place already 

Costs for all AIFMs adjusting activities to respect the legal limits in 
terms  of  various  restrictions  and  to  adhere  to  the  transparency 
requirements 
+ 

SMEs  are  expected  to  benefit  from  this  approach  through  the 
establishment of a stable and diversified supply of alternative credit 
to the market.  Increased availability and competition between loan 
originating funds will increase the availability and lower the cost of 
credit, particularly for SMEs and other corporate entities in Member 
States where this activity is currently prohibited. 
++ 

Increasing availability of alternative sources of financing to the real 
economy 

LOFs’ activities in the credit market are likely to facilitate transition 
to the sustainable future by investing in green economy 

Coherence with EU 
policy objectives 

++ 
Aligned with overall CMU strategy to continue building internal 
market for financial services and with the objectives of the 
European Green Deal 

Legend: +++ = Very positive ++ = Positive  + = Slightly positive   +/-  =  Mixed  effect                

0 = no effect 

- = Slightly negative  -- = Negative  --- = very negative 

41 

 
 
5.1.5 Costs  

The  introduction  of  a  harmonised  framework  should  not  create  significant  new 
obligations  as  the  AIFMD  already  requires  effective  internal  processes  for  risk 
management. Measures specific to management of credit risk would normally form part 
of the overall internal/organisational costs related to the risk management and monitoring 
of  the  fund.  The  proposal  would  provide  greater  clarity  and  harmonisation  of  the  risk 
management  function.  The  adoption  of  a  common/standardised  approach  is  likely  to 
reduce  operational  costs  by  providing  greater  clarity  on  the  actual  standards  managers 
must  apply  and  minimise  additional  ‘undue’  costs  incurred  from  reporting  or 
management that may be performed by managers due to the lack of clear guidelines but 
may  not  actually  be  required  for  effective  risk  management.  Additional  costs  in  this 
respect  would  likely  concern  AIFMs,  which  do  not  have  sound  credit  originating 
practices in place already. 

Given  the  potential  risks  such  funds  can  pose,  the  benefits  of  introducing  consistent 
requirements  in  terms  of  risk  management  process  and  procedures  will  outweigh  the 
additional fund costs as this will ensure the better management of micro and macro level 
risks  while  decreasing  the  risks  for  investors  and  improving  the  effectiveness  of  the 
supervisory oversight of these funds. 

Introducing concentration limits would require all AIFMs adjusting their managed AIFs’ 
activities to respect the legal limits in terms of various restrictions. This may entail some 
costs  but  most  of  the  AIFMs  are  likely  to  maintain  internal  systems  to  monitor  and 
ensure  respect  for  various  investment  and  borrowing  limits  set  forth  in  the  fund 
documentation that they could use to adhere to the new restrictions. On the benefits side, 
these requirements would address the credit risk at portfolio level and mitigate an impact 
of a single  event  credit  involving another financial  institution  on  the entire portfolio of 
loans as well as contain risk contagion to the financial system.  

These more detailed disclosure requirements would entail some costs for the AIFMs but 
these  should  not  be  significant  and  in  any  event  justified  by  the  policy  objectives. 
Increased  transparency  of  loan  originating  AIFs  would  have  a  positive  impact  on 
financial  stability  and  investor  protection.  AIFMs  would  periodically  communicate  the 
composition  of  their  loan  portfolio  so  that  the  investors  could  appraise  the  risks  and 
monitor the fund’s performance. The same information communicated to the supervisors 
would  provide  the  missing  data  that  is  necessary  to  monitor  the  development  of  the 
private credit markets and for making informed policy decisions.  

5.1.6 Preferred Option  

Option  3  suggesting  to  harmonise  EU  requirements  for  AIFMs  managing  loan-
originating  funds  is  the  preferred  option  as  it  is  the  most  effective  and  efficient  for 
reaching  the  specific  objective  listed  in  section  4.  It  implies  limited  compliance  costs, 
while  ensuring  coherence  with  the  existing  AIFMD  rules  on  internal  processes,  risk 
management and reporting and with the general objectives of AIFMD to ensure financial 
stability,  investor  protection  and  AIF  market  integration.  This  Option  is  also  coherent 
with the broader objectives of the CMU and the European Green Deal. 

42 

 
 
Loan  originating  funds  provide  a  valuable  alternative  source  of  financing  to  the  real 
economy, particularly for those entities that may not be able to access traditional lenders 
such  as  SMEs  or  where  the  costs  of  such  finance  are  prohibitively  expensive.  The 
proposed  harmonisation  should  facilitate  the  greater  availability  of  attractively  priced 
credit  across  the  Union  and  increase  market  access  for  AIFMs,  particularly  in  those 
markets that currently have total bans on this activity in place. Supporting the continued 
growth  of  this  sector  and  maximising  its  contribution  to  economic  growth  and  job 
creation  in  Europe  is  also  consistent  with  the  overall  policy  goals  of  developing  the 
Single  market  for  AIFs,  the  CMU  as  well  as  advancing  European  economy’s  green 
transition. However, it is preferred that the market of such alternative sources develops in 
a  sustainable  and  safe  way  having  the  effective  measures  in  place  to  address  the 
emergence of new potential sources for systemic risk. 

By  establishing  a  harmonised  set  of  EU  rules,  loan  originating  funds  would  be  able  to 
originate  credit  in  all  Member  States  allowing  them  to  scale  up  their  funds  and  realise 
additional economies of scale and cost savings.  This would increase the aggregate level 
of  non-bank  financing  available  in  Europe  leading  to  greater  competition  effects  and 
association reductions in the cost of non-bank financing for borrowers such as SMEs. 

Proliferation of national  frameworks for loan-originating funds has  led to a fragmented 
regulatory  landscape  for  managers  and  divergent  supervisory  approaches,  which  in 
isolation  cannot  guarantee  the  stability  of  the  borderless  financial  system.  Further 
harmonisation of requirements at EU level will effectively mitigate against new risks to 
financial  stability  that  activities  of  loan-originating  funds  may  generate.  This  would  be 
achieved  by  increasing  data  flow  to  the  supervisors  enabling  better  market  monitoring, 
limiting risk contagion to the financial system whilst preserving the ability of such funds 
to  act  as  additional  liquidity  buffer  or  shock  absorber  in  times  of  market  stress  and 
liquidity shortages. LOF do not need to maintain the same capital buffers as banks and 
this flexibility allows them to continue lending.   

Finally, the preferred Option would serve investor interests best. The proposed measures 
would increase transparency of loan-originating AIFs and enabling harmonisation has the 
potential to facilitate growth of AIF market offering a choice of investment strategies that 
offer an attractive yield for investors in low interest environment. 

5.2  Options to increase competition for depositary services provided to AIFs in those 

markets where there are a limited number of depositary service providers 

5.2.1 Description of Options 

Policy option 

Description  

Option  1:  Create  an  EU 
depositary passport. 

Propose common EU rules to create an EU depositary 
passport  permitting  a  cross-border  provision  of  such 
services. 

Option  2:  Allow  NCAs  to 
permit  AIFMs 
sourcing 
depositary  services  across 
the border. 

Maintain  the  general  rule  requiring  the  depositary  to 
be  based  in  the  same  Member  State  as  the  EU  AIF. 
However,  NCAs  in  smaller  markets  may  permit 
AIFMs  to  source  such  services  from  the  depositaries 
established in other Member States. 

43 

 
 
 
Option 1 would insert another building block into the internal market by creating an EU 
depositary  passport,  which  would  exist  alongside  the  AIFM  managing  and  marketing 
passports.  This  would  allow  managers  to  appoint  a  depositary  regardless  where  it  is 
situated  in  the  EU.  For  its  part,  the  depositary  would  be  able  to  provide  services  on  a 
cross-border basis. However, there is virtually no support for this Option (see stakeholder 
views in a text box infra), except from certain third country fund managers.  

Stakeholder feedback to the public consultation: The vast majority of stakeholders share 
the  concern  that  an  EU  depositary  passport  is  likely  to  lead  to  a  concentration  of  the 
depositary  market  in  a  few  Member  States  with  the  increased  significant  risks  for 
financial  stability,  which  is  considered  undesirable  by  the  potential  hosts  of  such 
concentrated  markets.  A  few  stakeholders,  mostly  based  outside  the  Union,  expect  the 
opposite, i.e. an increased competition and lower depositary serve costs (ILPA).75  

Feedback  to  the  public  consultation  shows  that  a  large  majority  stakeholders  (84.2%) 
either  reject  the  idea  of  a  depositary  passport  altogether,  or  see  it  as  a  long-term 
perspective (with a deeper EU harmonisation of the rules applicable to depositary service 
providers as being a prerequisite). 

Respondents  to  the public consultation  opined that ‘in the event  of  a loss of the fund’s 
assets,  or  any  investor  harm  provoked  by  the  depositary’s  negligence  or  misconduct, 
legal certainty can only be enhanced by having the depositary in the same jurisdiction as 
the fund allowing investors swift means of redress through any litigation and ultimately 
compensation’ (EFAMA). 

It  is  worth  recalling,  that  the  Commission  proposal  for  the  AIFMD  contained  a 
depositary  passport,  which  was  rejected  by  the  Council  and  the  European  Parliament. 
Feedback  from  a  number  of  Member  States  indicates  that  at  least  in  the  Council  the 
majority still rejects this idea.  

Option  2  proposes  to  enable  a  cross-border  access  to  the  depositary  services  for  the 
AIFMs located in smaller markets where supply of such services is limited until the time 
when the EU law harmonisation reaches the necessary level to support the creation of an 
EU depository passport. The enabling provision could draw on Article 61 of the AIFMD, 
which  contained  transitional  provisions  to  the  same  effect.  Until  22  July  2017,  NCAs 
were  allowed  to  authorise  the  AIFs  or  AIFMs  concerned  to  appoint  a  depositary 
established in another Member State.  

This  time the enabling provision  will not  be limited in  time because it is disruptive for 
AIFs/AIFMs  to  have  access  to  the  services  they  need  in  the  EU  for  a  while  and  then 
abruptly  fall  into  an  illegal  zone  while  practically  still  relying  on  the  service  providers 
located in other Member States.  

Stakeholder  feedback  to  the  public  consultation:  Responding  to  the  public  consultation 
public authorities from the smaller depositary markets indicated their support for Option 
2. Those not concerned do not harbour strong views.  

75 ILPA: Institutional Limited Partners Association. 

44 

 
                                                           
5.2.2 The impacts of the Options 

a) Option 1: Create an EU depositary passport 

PROs: Option 1 would open-up supply of cross-border depositary services in all Member 
States.  It  is  in  the  spirit  of  internal  market  and  would  be  most  effective  in  increasing 
competition  in  depositary  market.  Opening  up  market  access  for  more  players  could 
bring  down  the  costs  of  depositary  services,  which  are  ultimately  borne  by  the  fund 
investors, anywhere in the Union.  

CONs:  First,  this  Option  would  not  be  a  proportionate  policy  response  to  the  limited 
problem identified in the Evaluation, i.e. a limited provision of depositary services in  a 
few smaller markets. It would mean a major overhaul of the AIFMD depositary regime, 
which is deemed to be working in most of the Member States efficiently and ensures a 
high level of investor protection. 

Second,  according  to  some  stakeholder  feedback,  pursuing  Option  1,  may  lead  to  new 
risks  for  financial  stability  and  to  their  accumulation  in  a  few  jurisdictions  if  the 
depositaries were to concentrate there.   

Third, it may have a potentially negative effect on investor protection. Introducing an EU 
depositary  passport  would  mean  that  the  AIF,  the  AIFMs  and  the  depositary  could  be 
situated in three different Member States. Given the lack of the EU harmonisation of the 
different  and  relevant  national  rules,  functioning  and  supervision  of  such  a  service 
triangle  would  be  challenging  to  supervise  with  a  potential  detriment  of  investor 
protection. Notably, insolvency, securities law and fund accounting rules are national and 
relevant for, to mention but a few examples: (a) the sale, issue, re-purchase, redemption 
and cancellation of units or shares of the investment fund; (b) the calculation of the value 
of the units or shares of an AIF; (c) the instruction of the AIF to the depositary (e.g. in 
relation to the setting up and authorisation of a fund, the investment policy of a fund, the 
merging  of  a  fund);  (d)  the  distribution  or  reinvestment  of  an  AIF’s  income.  The 
depositary would have to know those rules and apply them correctly.  

The  NCA  supervising  the  AIFM/AIF  would  need  to  supervise  the  depositary  too 
otherwise supervision of the AIF/AIFM would be ineffective and vice versa. This means 
that the NCA would be required to know the regulation of the home Member State of the 
AIF  or  the  depositary  to  supervise  a  correct  application  of  the  relevant  rules.  Investor 
protection  could  be  harmed  if  the  depositary  or  its  supervisor  would  be  unable  to  act 
properly  and  efficiently  due  to  the  above-mentioned  challenges.  Whilst  some  of  the 
challenges described above could be overcome contractually between the AIFM and the 
depositary (e.g. with respect to fund domicile rules), other, however, are contingent upon 
a  further  harmonisation  of  rules  at  EU  level  prior  to  introducing  of  an  EU  depositary 
passport (e.g. supervisory set-up). 

Consequently,  considering  the  existing  regulatory  gaps,  potential  risks  to  financial 
stability  and  investor  protection,  introducing  an  EU  depositary  passport  in  this  review 
would be disproportionate compared to the limited problem identified in the Evaluation. 

For  the  different  mentioned  reasons  84.2%  of  stakeholders  from  the  public  and  private 
sector expressed their disapproval of this Option.  

45 

 
 
Impact on 
depositaries 

Impact on 
AIFMs/AIFs 

Impact on 
investors 

Impact on 
financial 
stability  

 

Increased  market  access  covering  all  the  Member  States  creating 
business opportunities for the EU based depositaries.  

  Depositaries  operating  cross-border  would  be  subject  to  a  complex 
set  of  responsibilities  as  fund  accounting,  insolvency  and  securities 
laws are not harmonised in the Union. 

  Wider  choice  of  depositary  service  providers  potentially  increasing 
effectiveness  of  service  provision,  including  because  of  gaining 
access to the packaged services. 
Investor  protection  may  be  undermined  due  to  the  difficulties  for 
depositaries  to  comply  with  the  different  national  laws  in  the  key 
areas and for the NCAs to supervise service triangles scattered across 
the Union.  

 

  An  EU  depositary  passport  would  increase  supply  of  depositary 
services where supply is poor and  reduce the fund costs, which the 
investors are ultimately to bear.    

  An expected depository market concentration in a few jurisdictions of 
the  Union  could  negatively  affect  financial  stability.  A  failure  of  a 
depositary holding a significant volume of the market’s assets would 
have outsized implications for the financial stability.  
Impractical cross-border supervision may lead to an overlooked risk 
accumulation. 

 

b) Option 2: NCAs to permit cross-border sourcing of depositary services 

PROs: Option 2 offers a targeted solution to address the problem of the limited supply of 
depositary service in some national markets with the least market disruption. It seems to 
strike  the  right  balance  between  offering  a  solution  to  address  the  identified  problem 
while minimising the potential risks to financial stability and investors. Option 2 enjoys 
majority  support  from  the  stakeholders  that  have  expressed  their  views  in  the  public 
consultation.  Option  2  does  neither  define  the  term  “smaller  market”  nor  define  which 
competent authorities are allowed to permit cross-border sourcing of depositary services. 
This Option provides sufficient flexibility to the Member States, which suffer from a lack 
of  depositary  services  and  identify  risks  for  financial  stability  in  their  territory.  As  the 
depositary markets within the EU are very heterogeneous, any attempt to define a group 
of concerned Member States (e.g. linked to the number of depositaries, the Asset Under 
Management, or  a ratio of both  elements) would  also  capture Member States which do 
not suffer from a lack of depositary services. The positive experience with article 61(5) 
has shown that it was not necessary to define the concerned Member States and that this 
provision was used restrictively, i.e. only those Member States made use of the provision 
which suffered from a lack of depositary services. 

CONs: Option 2 falls short of a perfect internal market solution but still represents a step 
forward in increasing the supply of the depositary services where the supply is weak. A 
potential  negative  effect  on  investor  protection  would  concern  a  limited  number  of  EU 
investments  funds and would be justified by the  objectives reasons.  This  Option would 
not produce outsized negative effects to the financial stability and actually would address 
financial stability concerns in the smaller markets. 

46 

 
 
 
Impact on 
depositaries  

Impact on 
AIFMs/AIFs 

Impact on 
investors 

 

Increased,  whilst 
business opportunities for the EU based depositaries. 

limited  cross-border  market  access  creating 

  Depositaries  servicing  AIFs  established  in  other  Member  States 
would  be  subject  to  a  complex  set  of  responsibilities  as  fund 
accounting, insolvency and securities laws are not harmonised in the 
Union, but the cases concerned would be limited. 

  Wider choice of depositary service providers where currently there is 
a  weak  supply  side  potentially  increasing  effectiveness  of  service 
provision,  including  because  of  gaining  access  to  the  packaged 
services.  

  No impact in most of the Member States.  
 

Investor protection may be undermined in the Member States, where 
AIFs/AIFMs would be permitted to source depositary services across 
borders, due to the difficulties for the depositaries to comply with the 
different  national  laws  in  the  key  areas  and  for  the  NCAs  of  those 
Member  States  to  supervise  service  triangles  scattered  across  the 
Union.  
In  the  permitting  Member  States  where  the  supply  side  is  poor, 
supply of depositary services could increase, which may reduce fund 
costs that the investors are ultimately to bear. 

 

Impact on 
financial 
stability 

  No impact at the EU level.  
  A  positive  impact  in  some  Member  States  where  the  depositary 

market concentration is very high.  

5.2.3 Comparison of the Options  

Comparison table 

This section compares the Options against the objectives listed in Section 4. In addition, 
it assesses the efficiency and their impact on SMEs. The economic, environmental, social 
and  fundamental  rights  impacts  and  coherence  with  EU  policy  objectives  is  also 
considered. 

Objective  

Option 1 

Single market for 
AIFs 

++ 

Completing an internal market 
for depositary services 

Option 2 

+ 

Enabling wider choice of 
depositary service providers for 
AIFs/AIFMs from smaller 
markets would address the 
established problem of limited 
supply of such services in these 
markets. 

Investor protection 

- 

+- 

Investor protection may be 

High level of investor protection 

47 

 
 
weakened because of a complex 
set of responsibilities for 
depositaries arising due to the 
lack of Union harmonisation in 
the key areas of regulation 

is maintained as depositaries in 
most Member States continue to 
be based in the AIF domicile 

However, protection of some 
investors, which are invested in 
AIF located in smaller market 
where cross-border access to 
depositary service is permitted, 
may be weaker due to the lack of 
Union harmonisation in the key 
areas of regulation 

Financial stability  

- 

++ 

The concentration of depositary 
service providers in a few 
jurisdictions may amplify risks 
for financial stability 

At the EU level: no effect as 
currently risks that could emanate 
from depositary service providers 
are dispersed 

At the level of some Member 
States with the smaller depositary 
markets: financial stability risks 
will diminish with the new market 
entrants. 

Efficiency (cost-
effectiveness) 

+/- 

+/- 

Increased competition is likely 
to reduce depositary costs in 
highly concentrated markets.  

Increased competition is likely to 
reduce depositary costs in highly 
concentrated markets. 

Availability of packaged 
services is likely to increase 
service efficiency 

Complex supervision may be 
costly for all NCAs 

Availability of packaged services 
is likely to have a positive effect 

Complex supervision may be 
costly but would concern a few 
NCAs only 

Impact on SMEs 

+  

+ 

SMEs AIFMs are likely to 
benefit from this Option.   

SMEs AIFMs are likely to benefit 
from this Option.   

Other economic, 
environmental, 
social and 
fundamental rights 

0 

0 

No impact  

No impact 

48 

 
impacts 

Coherence with EU 
policy objectives 

++ 
Aligned with overall CMU 
strategy to continue building 
internal market for financial 
services  

+ 
Aligned with overall CMU 
strategy to continue building 
internal market for financial 
services, however, taking an 
incremental approach 

Legend: +++ = Very positive ++ = Positive  + = Slightly positive   +/-  =  Mixed  effect                

0 = no effect 

- = Slightly negative  -- = Negative  --- = very negative 

5.2.4 Costs  

Both options would reduce costs for depositaries and AIFs/AIFMs in more concentrated  
markets as the depositary would not need to take out another licence (a new depositary 
licence costs between € 6,000 – € 9,200 depending on a Member State) and would save 
on annual supervisory fees (between € 4,400 – € 9,400 depending on a Member State) in 
the Member States where the cross-border service provision would be authorised by the 
NCAs.  AIFs/AIFMs  would  benefit  from  a  wider  range  of  services  providers  and 
increased  price  competition  reducing  their  operating  costs.  Option  1  would  capture  a 
larger  pool  of  depositaries  although  it  is  not  clear  how  many  in  fact  would  avail 
themselves of the new business opportunities.  

The  supervisory  challenges  and  costs  associated  to  supervising  depositaries,  which  are 
based  in  a  different  Member  State  from  the  AIFM/AIF,  are  likely  to  be  substantial. 
Therefore, establishing an EU depositary passport would increase the costs significantly 
for the NCAs that would have to supervise depositary activities across the EU.  

5.2.5 Preferred Option  

Option 2 appears to be the most appropriate option. It would address the problem of the 
weak  supply  of  depositary  services  in  smaller  markets  in  a  targeted  and  proportionate 
way. It should increase competition among the service providers where there is the need. 
This  should  increase  efficiencies  in  managing  AIFs  in  smaller  markets  through 
potentially  more  competitive  pricing  and  availability  of  packaged  services.  It  will  also 
lead to significant savings for the depositaries deciding to offer their services across the 
border, which otherwise would not be economical to provide.  

In comparison to a full EU depositary passport, the retained option does not run a risk of 
creating outsized negative side effects, such as increased overall market concentration in 
a  few  jurisdiction  thus  potentially  increasing  significant  risks  to  financial  stability.  An 
EU  depositary  passport,  at  this  stage  of  the  development  of  the  Union  law,  is  likely  to 
complicate  supervisory  activities  thus  also  jeopardising  investor  protection.  It  is  also 
bound  to  come  at  a  great  public  expense  to  ensure  cross-border  supervision.  The 
discarded  option  is  supported  neither  by  the  European  fund  industry,  nor  by  the  public 
authorities. 

49 

 
 
The retained option does not go beyond what is strictly necessary to address the problem 
and provides an effective remedy.  

5.3 Options to improve effectiveness of the AIFMD and UCITS rules on delegation 

to ensure the necessary level of investor protection across the Union 

5.3.1 Description of Options 

Policy option 

Description  

Option  1:  Specify  further 
AIFMD and UCITS rules on 
delegation  

a)  Align 

with 
AIFMD/AIFMR in the area of delegation. 

framework 

UCITS 

the 

b)  Further  specify  rules  on  delegation,  notably 
requiring  AIFM/UCITS  to  designate  individuals 
who  would  be  carrying  out  or  supervising 
delegation  of  the  key  AIFM  functions  and 
identifying  AIFM  functions 
that  cannot  be 
delegated. 

c)  Require  NCAs  forwarding  to  ESMA  delegation 
notifications  concerning  an  entire  delegation  of 
investment  or  risk  management  to  the  third 
country entities. 

Option  2:  Empower  ESMA 
to enforce delegation rules  
Impose 
3: 
Option 
quantitative threshold   

a 

Empower  ESMA  to  enforce  delegation  rules  in  the 
Union where the delegates are based in third countries.  
Establish a legal threshold on AuM managed by the third 
parties crossing which would signify that the AIFM or a 
UCITS manager has become a letter-box entity. 

Option  1 would provide the lacking details  to  the AIFMD delegation regime and bring 
UCITS  delegation  regime  to  the  same  level.  AIFMR  contains  concepts,  which  require 
further  specification  to  ensure  a  uniform  and  effective  enforcement  of  AIFMD  rules 
against the establishment of letter-box entities in the Union. This Option proposes further 
defining  the  key  areas,  which  fall  under  the  responsibility  of  the  AIFM’s  senior 
management  and  which  cannot  be  delegated.76  Furthermore,  authorisation  procedures 
would  be  clarified  to  require  the  designation  of  individuals  responsible  for  the  key 
managerial functions.77 Those individuals engaged full time would be carrying out those 
functions in the AIFM/UCITS or oversee the delegates entrusted with those functions.78 
The  same  person  would  not  be  allowed  to  carry  out  and  oversee  the  performance  of 
certain  functions.    For  example,  the  same  person  should  not  have  oversight  of  the 
investment management function and risk management functions.  

In  addition,  under  Option  1,  ESMA  would  receive  and  store  notifications  where 
investment  or  risk  management  is  fully  delegated  to  entities  based  outside  the  Union. 
Central  gathering  of  such  information  would  enable  better  analysis  of  the  delegation 
activities by the European investment fund managers. ESMA then could assist NCAs in 

76 Article 82(1)(b) AIFMR. 
77 Specifying further Article 8 (1) (c) AIFMD at least two full-time equivalents (FTE) EU residents, which 
addresses secondment issues too.  
78 Article 82 (1) (a) AIFMR with regard to the expertise and resources retained within the AIFM to 
supervise the delegated tasks effectively and manage the risks associated with the delegation.  

50 

 
 
                                                           
enforcing delegation rules under the AIFMD and UCITS legal frameworks in accordance 
with  its  existing  powers  to  support  closer  supervisory  cooperation  and  convergence. 
However,  it  would  still  be  the  responsibility  of  the  NCA  to  approve  delegation  and 
enforce the delegation rules ensuring that the AIFM or UCITS comply therewith.  

Stakeholder  feedback  to  the  public  consultation:  The  majority  of  the  respondents 
consider  the  delegation  rules  sufficiently  clear  to  prevent  the  creation  of  letter-box 
entities in the EU. Some respondents wish for a further clarification whether a business 
practice falls within the scope of management delegation, since significant differences in 
the  interpretation  by  the  Member  States  exist.  They  consider  that  further  clarification 
could be carried out by ESMA, providing guidance to enhance supervisory convergence 
and consistency.  

A  large  number  of  respondents,  among  which  5  public  authorities  out  of  12  that 
participated  in  the  public  consultation,  would  prefer  more  convergence  on  letter-box 
rules between AIFM and UCITS. The UCITS framework provides general statements on 
the impossibility of delegating functions, whereas the AIFM framework is more specific. 
In  particular,  public  authorities  stressed  that  the  rules  regarding  delegating  the 
performance of investment management should be clarified. 

4  public  authorities  support  defining  core  or  critical  functions  that  would  be  always 
performed  internally  and  may  not  be  delegated  to  third  parties.  2  public  authorities 
consider  that  AIFMs  should  not  be  allowed  to  delegate  portfolio  management  and  risk 
management  functions  at  the  same  time.  1  public  authority  advocates  subjecting  fund 
depositaries to additional responsibilities to report on non-compliance with the rules on 
delegation and breaches from the delegate and two public authorities has no opinion.  

Option  2  proposes  to  empower  ESMA  to  enforce  the  AIFMD  and  UCITS  delegation 
rules where the delegate is based in a third country. This Option would require equipping 
ESMA with all supervisory and investigatory powers akin to those currently available to 
the  NCAs.79  While  this  is  likely  to  guarantee  a  uniform  enforcement  of  the  delegation 
rules  in  the  Union,  it  would  leave  an  AIFM  with  an  increasing  number  of  competing 
supervisors.  ESMA  would  be  added  to  a  web  of  home  and  host  NCAs,  which  are 
presumed to  be able to  carry out  their supervisory  functions effectively. Therefore, this 
Option may be judged as inefficient and disproportionate. 

Stakeholder  feedback  to  the  public  consultation:  There  was  no  specific  question  asked 
with regard to Option 2. However, 40,91 % respondents replied to the general question 
regarding  enhancing  ESMA’s  powers  that  there  was  no  such  need.  However,  7 
respondents  supported  the  idea  of  ESMA  being  entrusted  with  authorisation  and 
supervision of non-EU AIFMs and AIFs and 4 - with authorisation and supervision of all 
AIFMs, none of which are public authorities. 46,21% provided no answer.  

Option  3  suggests  putting  in  place  quantitative  thresholds  in  relations  to  the  AuM 
delegated for management thus defining the exact point where an AIFM or a UCITS may 
be deemed to have become a letterbox entity and would no longer be considered a fund 
manager  of  a  European  fund.  This  would  clarify  the  AIFMR  rule  outlawing  delegation 
which  would  ‘exceed  by  a  substantial  margin’  functions  performed  by  the  AIFM  itself 

79 A list of competent authorities powers are provided in Article 46 AIFMD. 

51 

 
                                                           
and introduce such a requirement in the UCITS regulatory framework. However, such a 
threshold is likely to be impractical and lead to the detriment of the investor outcomes.  

Follow-up  bilateral  consultations  with  stakeholders  regarding  ESMA’s  letter  proposing 
quantitative  limits  on  delegation  was  extremely  negative.  Industry  highlighted  the 
benefits delegation brings to ensuring a wide range of product offerings for EU investors 
at  competitive costs and ensuring the  global competitiveness  of Europe’s fund industry 
where  many  managers  rely  on  delegation  as  a  key  part  of  their  management  activity.  
Stakeholders  reaffirmed  their  view  that  the  AIFMD  rules  on  delegation  are  generally 
robust and effective while accepting that certain clarifications are necessary.   

Overall,  this  Option  is  deemed  to  be  impractical,  overly  complex  and  of  limited  added 
value in the broader context of the current rules on delegation.  There would be particular 
difficulties in setting the quantitative limits and assessing a manager’s compliance with 
those limits.  It would also be difficult for supervisors to monitor and enforce the regime.  
It could also be foreseen that such a rigid approach would generate a significant number 
of  industry  queries  and  possible  Q&As,  particularly  regarding  how  the  limits  are 
calculated, situations where a manager temporarily trips the threshold or where managers 
were  only  marginally  over  the  set  limits.  The  overall  complexity,  burden  and  potential 
cost of this option outweighs its limited additional benefit to either investor protection or 
financial stability.   

Stakeholder  feedback  to  the  public  consultation:  42.42  %  of  the  respondents,  industry 
representatives, replied that there is no need to compliment AIFMR rules; 8 respondents, 
which are public authorities, had the opposite view and 36.36 % had no opinion. 3 public 
authorities  supported  the  listing  of  core  or  critical  functions  that  would  be  always 
performed internally and may not be delegated to third parties. ESMA in its letter to the 
Commission on the AIFMD review includes this element as a potential improvement of 
the AIFMD rules on delegation. 

5.3.2 The impacts of the Options 

a) Option 1: Specify further AIFMD and UCITS rules on delegation 

PROs:  Further  specifying  the  substance  requirements  and  identifying  the  relevant 
functions that must be retained by the AIF and UCITS managers licenced in the Union as 
suggested  under  Option  1  would  create  a  better  base  for  a  uniform  application  of  the 
AIFMD  and  UCITS  rules  against  letterbox  entities.  Equipped  with  the  relevant 
information contained in the received notifications, where risk or portfolio management 
is  fully  delegated  to  third  parties,  ESMA  could  effectively  exert  its  current  powers  by 
assisting  and  advising  NCAs  in  enforcing  delegation  regimes  across  the  Union.  This 
would  ensure  the  same  supervisory  outcomes  preserving  level  playing  field  for  AIFMs 
and  UCITS  regardless  of  the  place  of  their  establishment  in  the  Union.  In  turn,  this 
should  translate  into  the  same  level  of  investor  protection  across  the  EU.  Moreover, 
Option 1 is a proportionate response to the identified issues and respects the principle of 
subsidiarity preserving the competences of NCAs.  

CONs: Revising existing and new notifications of delegation arrangements will take time 
and  could  strain  the  current  ESMA  resources,  although  mostly  at  the  beginning  of 
notification process. In any event, Option 1 is much less resources intensive than Option 

52 

 
2  discussed  below,  under  which  ESMA  would  be  enforcing  delegation  requirements  in 
the Union instead of NCAs.   

Impact on 
AIFMs 

  More clarity on the ‘substance’ requirements and hence increased legal 

certainty. 

  Level  playing  field  for  AIFMs  and  UCITS  regardless  where  they  are 

established in the Union. 

  No compliance costs for AIFMs or UCITS based in the Union that are 

Impact on 
investors 

 

not letter-box entities. 
Improved  investor  protection  if  the  delegation  requirements  are  better 
enforced  hence  ensuring  that  all  the  safeguards  laid  down  in 
AIFMD/AIFMR  and  UCITS  legal  regimes  are  observed,  including  an 
effective monitoring of the delegate. 

Impact on 
financial 
stability  

Impact of 
EU budget 

  Better monitoring of the delegate is likely to lead to a more responsible 
investment management by the third parties lowering the probability of 
spillover effects to the financial system by a failed fund.  

  ESMA  would  not  need  additional  resources  to  receive  and  process 
notifications with the delegation arrangements and carry out their duties 
in  line  with  the  current  powers  although  it  may  feel  a  strain  on  its 
resources at start of notification process. 

b) Option 2: Empower ESMA to enforce delegation rules 

PROs:  ESMA  taking  over  enforcement  of  AIFMD  and  UCITS  delegation  rules  would 
ensure  that  the  Union  laws  have  the  same  effect  anywhere  in  the  Union.  It  would 
preserve the same level of investor protection by ensuring that fund managers and funds, 
purportedly  European  entities,  are  not  shell  companies  with  the  whole  operation 
outsourced  off-shore.  This  would  also  level  the  playing  field  for  all  the  AIFMs  and 
UCITS, which entrust some of their functions to third entities.  

CONs:  This  Option  may  be  judged  as  disproportionate  to  the  issue  identified  and  not 
respecting the principle of subsidiarity as there is no evidence that the NCAs are unable 
to enforce Union rules where those are sufficiently clear. It is uncertain whether ESMA 
would be equally effective in all the jurisdictions given differences of the national legal 
systems.  It  would  require  substantial  increase  of  ESMA  resources,  thus,  this  Option  is 
also expensive. 

Impact on 
fund 
managers 

  Level  playing  field  for  AIFMs  and  UCITS  regardless  where  they  are 

established in the Union. 

  No compliance costs for AIFMs or UCITS based in the Union that are 

Impact on 
investors 

 

not letter-box entities. 
Improved  investor  protection  if  the  delegation  requirements  are 
uniformly enforced hence ensuring that all the safeguards laid down in 
AIFMD/AIFMR  and  UCITS  legal  regime  are  observed,  including  an 
effective monitoring of the delegate. 

Impact on 
financial 

  Better monitoring of the delegate is likely to lead to a more responsible 
investment management by the third parties lowering the probability of 
spillover effects to the financial system by a failed fund.  

53 

 
 
stability  

Impact of 
EU budget 

  ESMA  would  need  significant  increase  in  resources  to  take  over  the 

role of the sole enforcer of the Union delegation rules. 

  Accrued  supervision  on  the  implementation  of  the  existing  delegation 

requirements would be resources intensive.  

c) Option 3: Impose a quantitative threshold   

PROs:  Specifying  quantitative  thresholds  to  clarify  the  AIFMR  rule  outlawing 
delegation,  which  ‘exceeds  by  a  substantial  margin’  functions  performed  by  the  AIFM 
itself, could bring additional clarity on legality of delegation arrangements. Implementing 
Option 3, therefore, could ensure a uniform enforcement of the Union law on delegation 
across the Union. This would require AIFMs to retain and reinforce their own resources, 
and would, incidentally, ensure a better supervision of the delegated activities.  

CONs: The problem with imposing a hard threshold is that their inflexibility is likely to 
harm investor outcomes. In many instances, application of the delegable AuM threshold 
would be impractical and is likely to lead to the detriment of the investor outcomes.  

For  example,  an  equity  fund  holding  100%  Asian  equities  is  managed  by  an  expert 
manager in Asia. In such a case the benefit for the European investors are clear: they can 
get  exposure  to  other  markets,  diversify  their  investment  portfolios  and  profit  from  the 
requisite  expertise.  All  those  benefits  are  provided  in  compliance  with  the  EU  rules, 
which are ensured by the local manager. Artificially splitting management of these assets 
by imposing a numeric threshold would mean that half of portfolio would be managed by 
a  lesser  expert  only  to  satisfy  the  legal  requirement  but  undermining  the  investor 
interests.  Delegation  can  also  allow  managers  to  benefit  from  cost  savings  that  then 
translate  into  lower  fees  for  investors  while  supporting  the  competitiveness  of  Union 
fund  managers  and  continued  market  growth  in  line  with  the  goals  of  the  CMU.  The 
imposition of quantitative thresholds would also  impose disproportionate limitations on 
fund managers ability to structure their operations cost effectively.   

Therefore, Option 3 is judged as impractical given the diversity of investment strategies 
and investment goals. It is also difficult to determine at what point the threshold should 
be set and it would lead to difficult situations where a manager was close to the threshold 
(either  above  or  below)  leading  to  borderline  cases  where  a  small  numeric  difference 
could trigger the letterbox classification or not. 

Impact on 
fund 
managers 

Impact on 
investors 

  More clarity on the ‘substance’ requirements and hence increased legal 

certainty 

  Level  playing  field  for  AIFMs  and  UCITS  regardless  where  they  are 

established in the Union. 

  No compliance costs for AIFM or UCITS based in the Union  that are 

not letter-box entities. 

  May  have  a  negative  impact  on  investor  outcomes  given  the  diversity 

of investment strategies and investment goals.    

54 

 
 
Impact on 
financial 
stability  

Impact of 
EU budget 

  No notable impact.  

  None  

5.3.3 Comparison of the Options 

The  following  table  compares  the  Options  against  the  objectives  listed  in  Section  4.  In 
addition,  it  assesses  the  efficiency  and  their  impact  on  SMEs.  The  economic, 
environmental,  social  and  fundamental  rights  impacts  and  coherence  with  EU  policy 
objectives is also considered. 

Objective  

Option 1 

Option 2 

Option 3 

Single market 
for AIFs 

+ 

++ 

+/- 

Further clarification of 
delegation rules should 
foster their uniform 
interpretation and 
application levelling the 
playing field for AIFMs 
and UCITS based 
anywhere in the Union 

ESMA would ensure 
uniform interpretation 
and enforcement of the 
current delegation rules 
levelling the playing 
field for AIFMs and 
UCITS based anywhere 
in the Union. 

Ensured information 
flow to ESMA should 
support its coordinating 
role and facilitate a 
uniform enforcement of 
the delegation rules in 
the Union 

Providing quantitative 
thresholds would 
contribute to a uniform 
interpretation of 
delegation rules 
levelling the playing 
field for AIFMs and 
UCITS based anywhere 
in the Union 

Enforcement of the 
delegation rules would 
remain exclusively 
national 

Investor 
protection 

+ 

++ 

-- 

Strengthened investor 
protection due to a better 
enforcement of 
delegation rules 

Strengthened investor 
protection due to a 
better enforcement of 
delegation rules 

Quantitative thresholds 
may undermine investor 
interests imposing 
artificial limits to the 
desired investment 
management 

55 

 
 
  
  
Financial 
stability  

+ 

+ 

0  

Strengthened indirectly 
because of monitoring 
pressure on the delegate 
is likely to result in 
better execution of the 
management of  
investments  

Strengthened indirectly 
because of monitoring 
pressure on the delegate 
is likely to result in 
better management of  
investments 

No impact; quantitative 
threshold is not an 
objective measure for 
quality of the 
investment management 

Efficiency 
(cost-
effectiveness) 

Impact on 
SMEs 

0 

0 

- 

No cost implications for 
the AIFMs and UCITS 
which, do not operate as 
letter-box entities 

No cost implications for 
the AIFMs and UCITS, 
which do not operate as 
letter-box entities 

Potential cost 
implications for the 
AIFMs and UCITS to 
monitor compliance 
with the thresholds 

0 

 0 

-- 

No cost implications for 
the SMEs AIFMs or 
UCITS, which do not 
operate as letter-box 
entities 

No cost implications for 
the SMEs AIFMs or 
UCITS, which do not 
operate as letter box 
entities  

Compliance burden for 
SMEs AIFMs and 
UCITS to monitor the 
compliance with the 
thresholds 

0 

0 

Other 
economic, 
environmental, 
social and 
fundamental 
rights impacts 

+ 

++ 

Coherence 
with EU 
policy 
objectives 

0 

- 

Aligned with overall 
CMU strategy to 
continue building 
internal market for 
financial services and 
ensure strategic 
independence of the EU 

Aligned with overall 
CMU strategy to 
continue building 
internal market for 
financial services and 
ensure strategic 
independence of the EU 

May hurt EU efforts to 
have effectively 
regulated internal 
market for financial 
services  

Legend: +++ = Very positive ++ = Positive  + = Slightly positive   +/-  =  Mixed  effect                

0 = no effect 

- = Slightly negative  -- = Negative  --- = very negative 

56 

 
  
 
 
5.3.4 Costs 

The  clarifications  envisaged  in  Option  1  would  not  have  any  cost  implications  for  the 
AIFMs  or  UCITS  management  companies,  which  currently  do  not  operate  as  letterbox 
entities,  i.e.  which  already  comply  with  the  spirit  of  the  AIFMD  and  UCITSD  to  have 
adequate human and technical resources to conduct the business of collective investment 
management.  The  envisaged  substance  requirements  as  clarified  in  the  proposed 
amendments should have been implemented already to ensure a proper application of the 
AIFMD/AIFMR and UCITSD requirements.  

Retaining Option 1 would entail only minor additional costs, if any at all, for supervisors 
since NCAs are already receiving notifications of delegation arrangements. NCAs will be 
in  charge  of  reporting  this  information  to  ESMA.  ESMA  staff,  which  is  currently 
processing  reporting  requirements,  will  be  able  to  process  this  information  without  the 
need  for  adding  staff  to  collect  and  process  the  received  data.  Any  further  supervisory 
engagement by ESMA on the basis of the collected information would be pursued on the 
basis of the existing powers and with already allocated staff.   

Option 1 would be significantly less expensive to implement than Option 2, which would 
need to ensure that ESMA has the necessary resources to take on new functions. Option 1 
would be also less costly than Option 3, which would entail significant costs for the AIF 
and  UCITS  managers  and  supervisors  to  monitor  compliance  with  the  established 
thresholds. In comparison to Option 3, Option 1 is practical. 

5.3.5 Preferred Option  

Option  1  is  the  preferred  option  as  it  is  deemed  to  be  the  most  practical  and 
proportionate. At the moment, a  fundamental  change to  the AIFMD  delegation  rules  is 
not necessary and the legitimate use of delegation must be preserved. The proper use of 
delegation  arrangements  has  clear  benefits  for  EU  managers  and  investors.  Delegation 
allows EU managers to rely on the local expertise of the managers that operate in specific 
markets and have access to global trading capabilities. 

Furthermore, having access to information on delegation practices, ESMA would be in a 
better  position  to  support  the  NCAs  enforcing  delegation  requirements  and  thus  to 
effectively  exert  its  current  powers.  This  is  also  preferable  to  ESMA  taking  on  full 
responsibility  for  enforcing  the  delegation  rules  under  Option  2  because  Option  1  is 
proportionate  and  respects  the  principle  of  subsidiarity  absent  the  evidence  that  NCAs 
have not been effective in applying the rules, which are sufficiently clear. Option 1 will 
clarify  the  AIFMD  and  UCITS  delegation  rules  to  improve  further  understanding  and 
compliance by industry as well as supervisory convergence.   

Option  3  was  proposed  in  ESMA’s  letter  to  the  European  Commission  and  would  be 
supported  by  a  few  public  authorities  (for  more  results  of  the  public  consultation  see 
Annex  2).  However,  this  Option  scores  lower  in  terms  of  efficiency,  effectiveness  and 
would  be  overly  burdensome.  In  addition,  Option  3  would  likely  encounter  a  strong 
opposition from the fund industry as impractical and arbitrary.  

57 

 
 
6. PREFERRED COMBINATION OF OPTIONS 

The  preferred  options  were  selected  to  facilitate  and  enhance  the  monitoring  and 
management of micro- and macro risks, to further integration of the internal market and 
to ensure the same level of investor protection across the Union, while limiting the costs 
and potential negative side effects that the chosen options may entail.   

6.1 General impacts 

First of all, the options retained will have a positive effect on monitoring and managing 
risks  to  financial  stability.  Robust  regime  for  AIFMs  managing  loan-originating  funds 
would lead to better and coherent risk management at fund level within the EU, which in 
turn  would  reduce  overall  risks  to  financial  stability.  Reducing  channels  and  extent  of 
contagion  would  have  a  positive  effect  on  financial  stability.  Interconnectedness  of  the 
financial  market  players  can  propagate  potential  losses  in  case  of  negative  shocks  that 
can be transmitted to the fund’s investors, counterparties or other financial intermediaries 
and businesses and then to the broader financial system, thereby reducing the resilience 
of market participants.  

The retained option on LMTs is coherent with the AIFMD regulatory framework, which 
sets forth a general requirement to have liquidity management policies and procedures in 
place Open-ended fund managers having access to a wider range of LMTs would be able 
to manage liquidity risk more effectively and avoid forced selling thus amplifying impact 
of financial market turmoil. NCAs, similarly, will have a wider range of tools to activate 
depending on the market situation, serving financial stability needs  and also preserving 
investment value in the times of stress. Improving data granularity for NCAs, including 
data  on  loan  originating  market,  would  permit  a  better  monitoring  of  the  risk 
accumulation in the system and emerging macro trends, thus being able to time better a 
supervisory  intervention  where  necessary.  The  combination  of  the  retained  options 
therefore would achieve the primary objective of the AIFMD, which is to ensure stability 
of the financial system. 

Secondly,  in  addition  to  realising  the  imperative  of  financial  stability,  the  retained 
options would increase efficiency of the EU AIF market. Whilst AIMFs would be subject 
to  harmonising  standards,  loan-originating  AIFs  would  be  able  to  originate  loans 
anywhere  in  the  Union,  which  is  currently  an  activity  either  outlawed  or  restricted  to 
local  funds  only.  A  liberated  ability  by  AIFs  to  provide  credit  in  a  sustainable  manner 
would  increase  available  funding  for  the  real  economy  and  in  particular  to  the  SMEs, 
which often struggle to secure credit from the banks. A vibrant, yet orderly, private debt 
market will be key in advancing the Union’s transition to a more sustainable future.  

Furthermore, AIFMs/AIFs established in smaller markets could access a wider choice of 
depositary services, which expectedly would include efficient packages of services and at 
a  more  competitive  price  increasing.  This  would  increase  efficiencies  in  fund 
management  and  produce  better  returns  for  investors.  The  retained  option  may  have  a 
side effect of promoting fund market development in certain jurisdictions thus increasing 
investor choice. 

Thirdly,  the  retained  options  would  enhance  investor  protection  across  the  Union. 
Clarifying  rules  on  delegation  would  ensure  that  the  fund  managers  have  sufficient 
human  resources  in  the  Union  to  monitor  the  activities  of  the  delegate  and  that  these 
standards  are  common  in  all  the  Member  States.  The  proposed  measures  would  be 
effective in terms of attaining the pursued objective without generating unjustified costs 
for the fund managers. Levelling the regulatory standards for UCITS and AIFMs in this 

58 

 
respect would bring about  the missing coherence between the two legal  frameworks as 
there is no convincing explanation for why these differences should exit.    

Similarly, the investors would be better protected if the depositaries were in a position to 
discharge their duties as prescribed in the AIFMD regardless of the type of licence under 
which a particular custodian of the funds’ assets is operating. To this effect, the proposal 
would recognise all custodians, including CSDs, as a part of the custody chain subjecting 
them  to  a  statutory  obligation  to  share  information  with  the  depositary  on  the  funds’ 
assets  they  safe  keep.  This  would  effectively  ensure  the  level  of  investor  protection  as 
sought  by  the  Union  co-legislators.  In  the  same  vain,  investor  interests  would  be  more 
effectively  protected  by  the  proposal  requiring  fund  managers  to  provide  a  certain 
profiling of the portfolio loans of a LOF.   

The  options,  which  would  have  affected  the  supply  of  the  credit  to  the  market  to  the 
detriment  of  business  seeking  capital  injections,  options  that  would  be  disproportionate 
or impractical, were discarded. The retained options offer improvements to the AIFMD 
that  would  further  support  financial  stability,  investor  protection  and  further  market 
integration  by  means  of  proportionate  and  practical  measures.  The  retained  package  of 
options would strengthen AIFMD and UCITSD in terms of efficiency and effectiveness 
of  these  two  legal  frameworks.  They  also  increase  coherence  between  the  two  Union 
laws  where  the  divergences  are  hard  to  justified,  like  in  the  area  of  delegation,  asset 
safekeeping by CSDs, supervisory reporting requirements and availability of LMTs.   

Nevertheless,  some  of  the  chosen  options  may  entail  compliance  costs,  with  a  clear 
exception of the policy  response to  increase access  to  depositary services, which offers 
significant savings for the depositaries and AIFs/investors.  

Consistency with other Union laws 

The  proposed  measures  would  impact  the  AIFMs  managing  AIFs  governed  by 
Regulation  on  European  long-term  investment  funds  (ELTIFR)  and  to  a  very  limited 
extent venture capital funds following Regulation on European venture capital funds and 
Regulation  (EuVECA)  given  very  specific  product  rules  laid  therein  regarding  eligible 
investments.  ELTIFR  is  a  European  product  regulation,  which  is  being  reviewed  in 
parallel with the AIFMD.   

AIFMs  managing  ELTIFs  are  likely  to  benefit  from  a  facilitated  access  to  depositary 
services cross border, if those funds are located in smaller markets. An envisaged work 
on  improving  supervisory  reporting  requirements  would  have  a  positive  effect  on 
compliance burden of AIFMs managing ELTIFs in a longer run. Changes to the AIFMD 
regarding the use of liquidity management tools, which concern fund managers of open-
ended  investment  funds,  would  have  no  direct  impact  on  AIFMs  managing  ELTIFs, 
which  are  closed-ended  type  of  investment  vehicles.  Including  CSDs  into  the  custody 
chain would have a positive effect on investor interests, however, only with respect to the 
proportion of the ELTIF’s holdings, which could be held in custody by the CSDs.  

The most obvious interaction of the ELTIFR and the amended AIFMD will concern loan 
origination activities, which are governed by the product rules of the former and would 
see some general principles imposed by the AIFMD on AIFMs active in credit markets. 
For  those  ELTIFs  that  can  be  marketed  and  distributed  to  retail  investors  thus  the 
stringent  requirements,  which  already  exist  within  the  ELTIFR,  will  be  applied.  The 
proposed  thresholds  for  lending  to  the  financial  institutions  are  aligned  with  the 
diversification  threshold  applicable  to  those  ELTIFs  that  are  only  marketed  to  retail 

59 

 
investors. To make the AIFMD future and interpretations proof, the provision should be 
proposed  that  would  require  application  of  the  ELTIF,  EuVECA  and  EuSEF  product 
rules as  lex specialis  where those may conflict  with  the more  general  provisions of the 
AIFMD. 

6.2 Cost implications 

AIFMs, which give effect to the general principles of the risk management as laid down 
in  the  AIFMD  and  AIFMR  without  being  guided  by  the  specific  rules  addressing  the 
risks pertaining to the activities of LOFs will not bear significant costs. The same would 
apply to AIF and UCITS managers that, whilst delegating risk or portfolio management 
to third entities, ensure that they employ enough staff to control the delegate and make 
sure that the delegate carries out the mandate in line with the agreed terms and respecting 
the  fund  rules  as  well  as  the  relevant  legislation.  A  large  part  of  the  managers  will  be 
unaffected by the proposed clarifications. Under the current  rules, AIFMs notify NCAs 
about their delegation arrangements, therefore, an insignificant cost of NCAs’ forwarding 
this information to ESMA will not burden the fund managers.  

Working towards more granular reporting requirements will not lead to any costs at this 
stage.  At  the  later  stage,  if  and  when  the  discarded  option  is  pursued,  migrating  to  a 
streamlined supervisory reporting template may entail one-off costs for adjusting internal 
systems  (significant  costs)  and  procuring  and  maintaining  LEI  (€50-80  per  year),  but 
these  should  be  quickly  offset  by  the  introduced  efficiencies  whereby  an  on-going 
compliance with the reporting requirements would be optimised. Instead of reporting to 
two  public  authorities  under  two  different  templates,  fund  managers  would  report  to  a 
central  point  the  data  required  under  a  single  template.  As  described  in  the  relevant 
section,  feasibility  of  the  ultimate  template  must  be  assessed  by  the  public  authorities 
concerned before establishing a concrete estimate of the future costs.  

At this  stage, however, it  is  not possible to  calculate precisely the amount  of costs that 
will  be  generated  by  changing  the  AIFMR  reporting  template  before  we  receive  a 
feasibility  study  from  ESMA  involving  other  ESAs  and  the  ECB,  which  the  proposal 
would mandate. The feasibility report will provide these figures taking into account the 
overlapping  fields  and  the  reporting  needs  of  different  public  authorities  making  it 
possible to provide an indicative expense of potential changes for AIFMs and UCITS.  

Bringing  CSDs  into  the  custody  chain  will  entail  limited  one-off  cost  of  revising  the 
contractual  relationship  between  the  depositaries  and  the  CSDs.    It  is  reminded  that  a 
depositary is obliged to have a contractual relationship with all its delegates. 

Costs  linked  to  the  revision  of  the  contract  are  justified  costs  to  ensure  that  a  robust 
depositary regime is effective and depositaries are able to follow through their mandate 
regardless of the type of a custodian safe keeping the funds’ assets. 

Requesting a manager of open-ended AIFs and UCITS to choose an LMT that they could 
activate  in  the  time  of  stressed  market  conditions  would  require  changes  to  the  fund 
documentation  (including  prospectus)  for  some  products,  which  currently  do  not  have 
such tools included therein. In the most extreme scenario it may mean € 40 000 cost per 
product.  There  are  29  000  UCITS  funds,  which  are  open-ended  as  per  statutory 
requirements, and 66% out of 32 585 AIFs are open-ended, that is 21 506 AIFs. It is not 
possible to calculate an aggregate cost for the industry as there is no precise information 
on  how  many  funds  already  have  LMTs  envisaged  in  their  fund  documentation.  A 
general  practice  to  review  the  fund  documentation  once  a  year  due  to  various  other 

60 

 
regulatory requirements should be also considered. It can be, however, assumed that the 
benefits to the financial system justify these one-off costs as the fund managers will be 
able  to  manage  the  liquidity  risk  more  effectively  and  refrain  from  fire  sales  under  the 
stressed market conditions thus exacerbating already dire market situation.  

The  retained  option  addressing  a  weak  supply  of  depositary  services  in  the  smaller 
markets  would  generate  significant  savings  for  the  depositaries  willing  to  offer  cross-
border services without incurring one-off cost  for new licence and  annual licence  costs 
that  range  respectively  between  €  6,000  –  €  9,200  depending  on  a  Member  State  and 
between € 4,400 – € 9,400 depending on a Member State. If 5 to 10 depositaries would 
offer  their  services  in  the  smaller  markets  following  implementation  of  the  activated 
option, it would result in € 30 000/60 000 – € 46 000/92 000 aggregate savings of one-
off-licence costs and € 22 000/ 44 000 – € 47 000/ 94 000 for annual licence costs. The 
increased competition among service providers is likely to exert downwards pressure on 
the  service  price.  Whether  these  predictions  materialise  will  have  to  be  assessed  in  the 
next evaluation.  

6.3 Impact on SMEs 

SMEs stand to benefit from this review, notably from the harmonisation of requirements 
for  AIFMs  managing  loan-originating  AIFs.  Apart  from  facilitating  efficiencies  in 
managing  such  AIFs’,  the  retained  option  aims  to  enable  AIFs  to  extend  credit  to 
businesses across the border. In some Member States AIFs are not allowed to originate 
loans  or  this  right  is  reserve  to  locally  established  funds.  This  review  would  further 
integrate  the  LOF  market  and  would  create  more  business  opportunities  for  the  LOFs 
consequently  opening  up  alternative  sources  of  financing  for  SMEs  in  particular  where 
they  are  unable  to  secure  credit  from  the  banks  or  where  loan  originating  funds  are 
currently  prohibited  from  operating.  Small  companies  and  start-ups  involved  in  green 
technologies are likely to feel the benefit of availability of financing thus participating in 
the green transition.   

6.4 REFIT (simplification and improved efficiency) 

The proposal aims to reduce or minimise any additional regulatory costs for investment 
managers.  Increasing access to depositary service providers is designed to increase the 
range  of  providers  accessible  to  managers  particularly  those  in  smaller  markets  where 
there is a lack of price competition and packaged service offering. 

With  regard  to  the  other  proposals,  it  is  likely  that  AIFMs  managing  LOFs  will  face 
additional costs due to the new risk management requirements to account for the specific 
credit risk these funds face.  It is important to note that these requirements are based on 
the  existing  national  regimes  so  managers  that  are  currently  engaged  in  effective  risk 
management  of  their  credit  portfolio  under  those  regimes  should  not  incur  significant 
new costs.  However, managers that do currently manage their credit risk effectively may 
incur costs to meet the requirements but these are deemed proportionate and necessary in 
the interests of financial stability and investor protection. 

While the KMPG reported indicated that there have been general increases in compliance 
costs,  this  was  not  among  the  core  issues  identified  through  the  public  consultation  or 
subsequent  bilateral  engagements.  Rather, stakeholders indicated that they  had invested 
significantly in  their reporting and  compliance systems to  meet  the requirements of the 
AIFMD. 

61 

 
Apart from the depositary costs, it is difficult to quantify the precise cost impact of the 
proposed measures as compliance costs vary between fund managers depending on their 
location,  organisational  structure,  fund  size,  choice  of  service  providers  and  the 
complexity of their investment  strategies.   In addition,  fund level  cost  data is  generally 
confidential information not widely shared by investment managers. 

The  harmonisation  of  LMTs  may  lead  to  one  off  costs  for  managers  in  jurisdictions 
where  the  funds  legal  documentation  must  be  updated.    However,  this  is  deemed 
proportionate to allow for the more effective management of liquidity risk.  New funds 
that  are  completing  their  initial  registration  should  not  incur  any  new  costs  as  the 
additional LMTs will be part of their application. 

More  granular  data  reporting  should  be  implementable  through  existing  reporting 
systems with only minor administrative costs to add the new data fields.  Again, this is 
deemed  proportionate  given  the  need  to  ensure  effective  supervisory  oversight  and 
reporting of fund specific and market developments. 

The additional requirements related to delegation may lead to additional costs for certain 
funds  that  currently  do  not  have  the  necessary  FTEs  responsible  for  oversight  of  their 
delegates.    However,  the  proposed  change  is  a  clarification  of  an  existing  requirement 
under  the  AIFMD  so  should  not  lead  to  significant  new  costs  for  managers.  Any 
additional costs are deemed to be proportionate to the need to ensure adequate levels of 
investor protection and to protect against potential stability risks where managers misuse 
delegation. 

Description  Amount (in €) 

REFIT Cost Savings – Preferred Option(s) 
Comments 

Enabling 
cross-border 
sourcing of 
depositary 
services  

Potential saving 
of up to 30 
000/60 000 – € 
46 000/92 000 
for  one-off-
licence and € 22 
000/ 44 000 – € 
47 000/ 94 000 
annually by 
depositaries 

According  to  the  KPMG  study  on  the  scope  and  functioning  of  the 
AIFMD  one-off  licence  cost  and  annual  licence  costs  that  range 
respectively  between  €  6,000  –  €  9,200  and  between  €  4,400  –  €  9,400 
depending  on  a  Member  State.  If  5/10  depositaries  would  offer  their 
services in the smaller markets following implementation of the activated 
option, it would result in mentioned aggregate savings (€ 30 000/60 000 – 
€ 46 000/92 000 aggregate savings of one-off-licence costs and € 22 000/ 
44 000 – € 47 000/ 94 000 for annual licence costs.)  

7. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? 

The  supervisory  reporting  data  under  the  AIFMR,  when  additional  data  that  would  be 
required to be provided by AIFMs to the NCAs and ESMA following the adoption of the 
proposed  amendments,  would  allow  them  to  monitor  and  evaluate  the  actual  impact  of 
the proposed amendments. The collected information on the private credit market and on 
the types of originated loans will allow conducting analytical work by NCAs, ESMA and 
the  Commission.  Data  from  trade  associations  and  from  individual  market  participants 
will complement the official sources of information.  

62 

 
 
 
The primary factors to monitor will be the size of the EU AIF market originating loans in 
terms  of  AuM  and  the  number  of  such  AIFs,  the  loan  portfolio  compositions  breaking 
down the types of loans and the use of leverage by such funds. Measuring cross-border 
activities  of  such  funds  will  be  instrumental  in  ascertaining  whether  the  harmonisation 
measures have created an internal market for the EU loan originating AIFs.  

The  number  of  Member  States  using  the  possibility  to  allow  sourcing  the  depositary 
services  and  the  number  of  such  service  providers  available  in  the  smaller  markets  as 
well as the impact on depositary costs should be monitored and evaluated to appraise the 
effects of the adopted improvements. It will be requested ESMA to expand the scope of 
its  annual  statistical  report on the  cost  and performance of European  Union (EU) retail 
investment  products  to  include  depositary  fees  for  investment  funds.80  The  changes  in 
depositary services market in smaller markets will be obtained by using commercial data 
and running a general survey. 

Receiving data on delegation arrangements submitted to ESMA would allow producing 
analysis  on  the  usage  of  these  arrangements  in  terms  of  geographical  location  of  the 
delegates  and  evaluate  whether  investor  interests  are  well  protected  by  the  laws  of  the 
jurisdictions where the delegates are located.  

An  evaluation  of  this  initiative  will  be  carried  out  five  years  after  its  entry  into 
application. 

Objective 

Indicator 

Source of 
Information 

Data 
already 
collected? 

Actor(s) 
responsible for 
collection 

Cross border 
access to 
depositary 
services for 
smaller markets 

Number and market 
share of depositaries 
offering services in 
smaller markets  

Level of fees charged 
to fund managers in 
smaller markets  

Supervisory 
reporting data/ 

ESMA 
reporting 

No 

ESMA/NCAs 

No 

Clarify legal 
requirements of 
delegation 
regime 

Number of Q&As 
received  

ESMA 
reporting 

Yes 

NCAs 

Number of ESMA 
advisories issued to 
NCAs 

Harmonisation 
of Liquidity 
Management 

Implementation of 
LMTs in domestic 
fund rulebooks and 

ESMA 
reporting 

Yes  

ESMA/NCAs 

80 Retail clients continue to lose out due to high investment products costs (europa.eu) 

63 

 
 
 
 
 
 
 
                                                           
Tools 

legal documentation 

Harmonise EU 
requirements 
for AIFMs 
managing Loan 
Originating 
Funds 

Number and type of 
LMT activations 

Number and size of 
loan originating 
funds 

Number of MS in 
which loan 
originating funds 
may extend credit 

ESMA 
reporting 

Partly 

ESMA/NCAs 

ANNEX 1: PROCEDURAL INFORMATION 

Lead DG, DEcide Planning/CWP references 

Directorate-General for Financial Stability, Financial Services and Capital Markets 
Union.  

PLAN/2019/6271 

Organisation and timing 

The initiative is included in the Commission Work Programme 2021. 

Consultations 

Inter-service Steering Group (ISSG) 

The  first  ISSG  meeting  took  place  on  18  September  2020  with  the  attendance  of  the 
representatives  from  the  following  Directorates-General  (DGs)  of  the  European 
Commission:  Competition;  Economic  and  Financial  Affairs;  Taxation  and  Customs 
Union;  Justice  and  Consumers;  Internal  Market,  Industry,  Entrepreneurship  and  SMEs; 
Climate  Action;  Secretariat  General;  Financial  Stability,  Financial  Services  and  Capital 
Markets Union. There were three more ISSG meetings that took place on 9 April 2021, 5 
May 2021 and 10 June 2021. 

64 

 
   
 
 
 
 
 
 
 
 
 
Consultation of the Regulatory Scrutiny Board 

An upstream Regulatory Scrutiny Board (RSB) meeting took place on 19 May 2021. The 
RSB members made the following recommendations: 

 

 

It is important to consider carefully the presentation of the impact assessment, as 
this is a highly technical file. The report should be a digestible document with a 
clear  and  strong  context  description  of  the  AIFMD  that  sets  the  scene  for  the 
(uninformed) reader. 

In this  context,  Board members invited DG FISMA to  develop  a clear narrative 
that  presents  the  real  options  and  policy  choices  for  the  decision  makers.  They 
recalled the need to find a good balance between issues covered in the main text 
and the annexes.  

  Board  members  recalled  the  need  to  clearly  present  and  define  the  problem 
drivers,  regulatory  failures  and  gaps,  providing  evidence  of  the  existence  and 
magnitude of the problems. Evidence should be provided to demonstrate the level 
playing field issues.  

  Board members advised to be clear on the role of ESMA’s recommendations. The 
report  should  be  transparent  about  the  extent  to  which  the  options  follow  or 
deviate  from  ESMA  recommendations.  The  analysis  should  focus  on  where  the 
latter  is  the  case.  Similarly,  the  options  and  corresponding  analysis  should  be 
clear on and address potential diverging positions of stakeholders.  

  The  report  should  make  clear  whether  the  options  are  complementary  or 
alternative to each other. If there is a lack of alternative options, the report should 
explain why. If the report concludes on a preferred option that is a combination of 
measures from different options, the impacts of the combination should be clearly 
analysed.  

  Board  members  recalled  the  importance  of  integrating  stakeholder  views 
throughout  the  report.  Stakeholder  views  should  be  disaggregated,  with  a  clear 
overview of agreements and disagreements and how these are addressed.  

  Board  members  invited  the  DG  to  keep  the  ‘one in,  one  out’  principle  in mind, 
especially as this is a REFIT initiative. The report should pay particular attention 
to  identifying  new  costs  and  cost  savings  stemming  from  simplifications  of  the 
current  Directive.  A  clear  overview  should  be  provided  on  compliance  and 
administrative costs, and how these balance off with the foreseen benefits. While 
full quantification of costs and benefits is often not available, the report should be 
transparent  on  quantification  limitations.  Qualitative  evidence  can  complement 
the lack of quantification.  

The consultation of the Regulatory Scrutiny Board (RSB) took place during the meeting 
on 14 July 2021.  

The Board's recommendations on the impact assessment are summarised as follows:  

65 

 
 
 
 
 
 
 
 
 
 
 
Consultation with the Member States 

  On  27  September  2019  and  on  27  November  2020  the  Commission  consulted  the 

Expert Group of the European Securities Committee (EGESC).  

  On  17  of  March  2021  the  Commission  consulted  the  Financial  Services  Committee 

(FSC) of the Council of the European Union. 

  The  Commission  engaged  with  the  NCAs  and  ESMA  staff  in  ESMA  Investment 

Management Standing Committee. 

Evidence, sources and quality 

In  line  with  the  general  principles  in  the  Better  Regulation  guidelines  on  the  need  for 
evidence-based  impact  assessments,  this  impact  assessment  is  based  on  the  following 
data and information sources: 

  European  Commission’s  report  dated  10  June  2020  assessing  the  scope  and  the 
functioning  of  the  AIFMD  (COM(2020)  232  final)  and  respective  Commission 
Staff  Working  Document  (SWD(2020)  110  final)  assessing  the  application  and 
the scope of the AIFMD. 

  KPMG  Report  on  the  Operation  of  the  Alternative  Investment  Fund  Managers 

Directive (AIFMD)  –  Directive 2011/61/EU dated 10 of December 2018. 

  Feedback  to  the  Public  consultation  of  the  AIFMD  review  published  on  22 
October 2020 containing 102 questions on various aspects of the AIFMD review.  
  Takeaways  from  a  virtual  conference  on  the  AIFMD  review  organised  on  25 
November  2020  involving  MEPs,  NCAs,  ESRB,  ESMA,  representatives  of  the 
industry and investor interests.   

  ESMA letter dated 18 August 2020 to the EVP Dombrovskis regarding Review of 

the Alternative Investment Fund Managers Directive. 

  ESMA  Annual  Statistical  Report  EU  Alternative  Investment  Funds  2019  and 

2020. 

  FSB  Policy  Recommendations  to  Address  Structural  Vulnerabilities  from  Asset 
Management Activities dated 12 January 2017 and Vulnerabilities associated with 
leveraged  loans  and  collateralised  loan  obligations  (CLOs)  dated  22  November 
2019. 
IOSCO  Final  Report  on  Recommendations  for  Liquidity  Risk  Management  for 
Collective Investment Schemes of February 2018.  

 

  Recommendation of the European Systemic Risk Board of 7 December 2017 on 
liquidity and leverage risks in investment funds ESRB/2017/6, 2018/C 151/01.     
  Documentation surrounding the CMU Action Plan, including the Communication 
from the Commission on “Capital Markets Union: Progress on Building a Single 
Market for Capital for a Strong Economic and Monetary Union” dated 15 March 
2019. 

  Analysis  of  academic  and  commercial  publications  on  the  topic  of  the  practical 

issues pertaining to the functioning of the AIFMD framework. 

  Market  data  on  the  size,  asset  flows  and  respective  stakeholders  in  the  area  of 

alternatives by using Morningstar and the SAFE SURVEY. 

  Publicly  available  reports,  studies,  surveys,  position  papers  and  other  relevant 

documents drawn up by private and public stakeholders.  

66 

 
 
 

Input  from  workshops,  bilateral  meetings  and  consultation  with  Member  States 
and industry stakeholders, including asset managers, product manufacturers, retail 
investors’ representatives and investment funds active in alternatives investment.  

67 

 
 
 
 
 
ANNEX 2: STAKEHOLDER CONSULTATION  

On  22  October  2020  a  public  consultation  on  the  AIFMD  review  was  published 
containing  102  questions  on  various  aspects  of  the  AIFMD  review.  It  closed  on  29  of 
January 2021 yielding 133 responses. A snapshot analysis of the feedback on the issues 
addressed in this impact assessment is presented, including responses to the questions on 
a)  delegation  regime;  b)  regulating  AIFMs  managing  loan-originating  AIFs;  c) 
harmonisation of LMTs.  

Chart 1 – Type of respondent 

Academic/research institution

Business association

Company/business organisation

Consumer organisation

EU citizen

Environmental organisation

Non-EU citizen

Trade union

Non-governmental organisation

Public authority

Other

No answer

Chart 2 – Field of activity of private sector respondents

90
80
70
60
50
40
30
20
10
0

68 

 
 
 
 
Charts 3 – Location of respondents 

Austria

Belgium

Czechia

Denmark

Finland

France

Germany

Guernsey

Ireland

Italy

Japan

Jersey

Luxembourg

Malta

Netherlands

Poland

Romania

Spain

Sweden

Switzerland

United Kingdom

United States

0

5

10

15

20

25

30

Responses to the consultation 

II. Investor protection 

32. What would be the potential benefits and risks associated with the introduction of the 
depositary passport? Please explain your position, presenting benefits and disadvantages 
of your suggested approach as well as potential costs of the change, where possible: 

The  vast  majority  of  the  respondents  expressed  their  concerns  whether  the  financial 
market  would  profit  from  the  introduction  of  a  depositary  passport.  Nevertheless,  the 
responses have been varied across the respondents.  

69 

 
 
 
 
 
 
 
The arguments in favour of the introduction of a depositary passport have mentioned the 
following  arguments.  The  introduction  of  the  depositary  passport  would  lead  likely  to 
promote  a  greater  competition  across  the  EU  and,  therefore,  to  lower  costs  and  a 
decreased  counterparty  risk.  Especially  in  smaller  jurisdictions,  the  depositary  passport 
would mitigate the market power of a few local  depositaries while granting access to  a 
higher  number  of  depositaries.  This  enhances  competition,  increases  the  choice  of 
services  and  leads  to  a  more  efficient  market.  Depositaries  could  offer  their  services 
simply in more Member States which reduces the costs, and would lead to economies of 
scale and operational efficiencies. As a result this could lead to lower costs for investors. 
Depositary  pass  porting  can  support  creating  centres  of  excellence  by  allowing 
depositaries  to  work  from  abroad  and  accumulating  knowledge.  The  respondents  have 
suggested  the  following  pass  porting  procedure  for  depositaries.  Depositaries  shall 
inform the NCAs when intending to provide services on a cross-border basis and sets out 
the details of which services it plans to provide. It shall notify the details which AIF the 
services  will  be  provided  to  and  then  the  NCA  of  the  home  Member  State  notifies  the 
NCA of the host Member State. Furthermore, the respondents hope that the introduction 
of  the  depositary  passport  reduces  regulatory  burdens  among  Member  States  and 
supports  the  harmonisation  of  regulatory  conditions  across  the  EU.  Otherwise,  the 
respondents do not expect the introduction of a depositary passport a success. 

The respondents that have opposed the introduction of a depositary passport have made 
the following statements.  Firstly, every Member States implemented an own regime on 
its  supervisory  agencies,  which  can  lead  to  confusing  when  it  is  not  clarified  which 
regimes  applies  to  a  depositary  which  operates  in  a  host  Member  State.  Depositary 
functions are defined by the AIFMD Directive, however, the interpretations given by the 
NCAs  vary  profoundly  among  the  Member  States  with  the  consequence  that  the 
procedures,  the  methodologies,  the  organisational  systems  and  the  human  resources 
required  to  the  depositaries  to  conduct  their  functions  are  very  different.  Secondly,  in 
case the AIF and its depositary are not located in the same state, different laws may apply 
which can cause legal uncertainties. Having the depositary in a jurisdiction other than of 
the fund’s domicile would additionally complicate the effective supervision by the fund’s 
NCA, as well as the depositary’s oversight over the fund and its management company. 
Thirdly, a future change of an AIF’s depositary may lead to a change in the applicable 
material  law.  Therefore,  a  procedure  needs  to  be  set  in  place  how  other  actors  such  as 
investors could be informed in this case. Fourthly, an AIF and its depositary located in 
two  different  states  would  entail  that  the  supervision  would  be  conducted  by  different 
NCAs  and,  therefore,  creates  challenges  and  risks  unless  the  division  of  supervisory 
authority  is  not  fully  clarified.  The  passport  is  likely  to  create  challenges  for  NCAs  to 
supervise  depositaries,  which  perform  key  oversight  obligations  in  respect  of  the  AIF. 
Fifthly,  investors  and  the  depositary  itself  bear  the  risk  that  the  depositary  does  not 
sufficiently  understands  local  regulations  and  oversight  is  less  robust,  when  the 
depositary has not presence in the home country of the AIF. Sixthly, the enforcement of 
investor’s  right  might  be  more  complex  or  uncertain.  Seventhly,  smaller  market 
participants  could  be  forced  to  leave  the  market,  which  could  lead  to  a  systemic  risk, 
when  merely  bigger  depositaries  remain.  A  few  remaining  depositaries  would  reduce 
competition  which  could  cause  higher  costs  and  a  concentration  of  depositaries. 
Furthermore, local knowledge and experience could be lost.  

Having said that, it might be important to acknowledge that the responses varied widely 
across the field of activity of the respondents. Public authorities have nearly exclusively 
expressed their concerns about depositary pass-porting. 

70 

 
33.  What  barriers  are  precluding  introducing  the  depositary  passport?  Please  explain 
your position providing concrete examples and evidence, where available, of the existing 
impediments: 

The  vast  majority  of  the  respondents  mentioned  the  lack  of  harmonisation  across 
Member  States  the  most  important  barrier,  which  is  precluding  the  introduction  of  a 
depositary  passport.  In  particular,  national  laws  vary  on  securities  and  insolvency  laws 
vary among Member States and can lead to confusion about the applicability in case of 
bankruptcy.  Moreover,  the  depositary  has  to  ensure  the  applicable  national  laws  while 
carrying out sales, issues, re-purchases, redemptions and cancellations of units or shares 
of the investment fund, calculating the value of the units or shares of the investment fund, 
distributing  or  reinvesting  an  AIF’s  income,  introducing  the  AIF  to  the  depositary.  As 
well as insolvency and securities legislation, regulatory frameworks in terms of custody 
regulations  and  investor  protection  lack  effective  harmonisation.  The  approval  process 
and  the  requirements  applied  vary  from  Member  State  to  Member  State  and  are  not 
harmonised at an EU level, which is why a few respondents suggested creating an EU-
AIF  similarly  to  the  introduction  of  the  Societas  Europaea  (SE).  Due  to  a  lack  of 
harmonisation  among  Member  States,  AIFs  are  currently  subject  to  significant  local 
regulatory  requirements  outside  of  the  AIFMD  framework,  which  are  set  out  by  the 
Member States. 

Furthermore,  respondents  have  emphasised  the  lack  of  trust  among  NCAs  in  different 
Member States and the centralisation of the depositary industry in a few Member States. 
The  respondents  have  expressed  their  concern  that  the  introduction  of  a  depositary 
passport could lead to new forum shopping practices, which would benefit states, which 
have introduced the best practices. 

34. Are there other options that could address the lack of supply of depositary services in 
smaller markets? Please explain your position presenting benefits and disadvantages of 
your suggested approach as well as potential costs of the change: 

The  majority  of  the  respondents  emphasised  that  the  possibility  for  depositaries  to 
provide cross border services would address the lack of supply of depositaries in smaller 
markets at best. The obligation to appoint a depositary located in the same jurisdiction as 
the fund shall be replaced. Nevertheless, the respondents express the in question 32 and 
33 mentioned concerns about the risks of allowing cross border services for depositaries 
by  introducing  a  depositary  passport.  Some  respondents  suggested  modernising  the 
current  banking  and  investment  firm  regime  to  simplify  opening  branches  for  MiFID 
firms  by  reducing  the  level  of  organisational  requirements.  It  would  entail  more 
flexibility  in  the  human,  technical  and  infrastructure  requirements  for  opening  new 
branches.  New  branches  would  benefit  anyhow  from  its  headquarters  predominantly 
located  in  bigger  asset  markets.  Other  respondents  suggested  a  review  of  the  current 
framework,  which  has  been  introduced  after  the  financial  crisis  in  2008  and  might  be 
outdated  which  could  discourage  the  industry  from  starting  new  operations  in  smaller 
markets. The respondents stressed in particular requirements concerning cash monitoring, 
safekeeping and oversight duties. 

However,  some  respondents  -  predominantly  public  authorities  from  smaller  markets  – 
stressed that they were not aware smaller markets would suffer from a shortage of supply 
of depositaries. 

III. International relations 

71 

 
50. Are the delegation rules sufficiently clear to prevent creation of letter-box entities in 
the EU? Please explain your answer to question 50: 

The vast  majority of the respondents  considers the delegation rules sufficiently clear to 
prevent the creation of letter-box entities in the EU. Some respondents wish for a further 
clarification  whether  a  business  practice  falls  within  the  scope  of  management 
delegation, since significant differences in the interpretation by the Member States have 
occurred. The further clarification could be carried out by ESMA, providing guidance to 
enhance supervisory convergence  and consistency.  Nevertheless, intra-group delegation 
and advisory by external investment advisers plays a key role in the AIFM sector, which 
is why this business model shall be considered as delegation and shall not fall within the 
definition of letter-box entities. 

Furthermore, a  considerable number of respondents  would prefer more convergence on 
letter-box  rules  between  AIFM  and  UCITS.  The  UCITS  framework  provides  general 
statements on the impossibility of delegating functions, whereas the AIFM framework is 
far  more  specific.  In  particular,  public  authorities  stressed  that  the  rules  regarding 
delegating the performance of investment management should be clarified. 

Some  respondents  consider  the  current  framework  robust  enough  to  prevent  the 
occurrence of letter-box entities and see, therefore, no necessity to amend or change the 
current provisions of the AIFMD. 

51.  Are  the  delegation  rules  under  the  AIFMD/AIFMR  appropriate  to  ensure  effective 
risk  management?  Please  explain  your  answer  to  question  51,  presenting  benefits  and 
disadvantages  of  the  current  rules  and  where  available  providing  concrete  examples 
substantiating your answer: 

The vast majority of the respondents considers the AIFMD/AIFMR appropriate to ensure 
effective  risk  management.  The  respondents  emphasise  that  effective  risk  management 
depends  critically  on  the  ability  of  the  manager  to  control  the  delegated  function. 
Whether  the  manager  can  control  the  delegated  function  depends  on  the  type  of 
delegation.  There  are  three  different  types  of  delegation  mentioned  by  the  respondents. 
Firstly,  the  portfolio  management  functions  are  delegated  partially,  which  enables  the 
manager to control the activities of the delegate due to retaining sufficient expertise on 
the functions, which have been delegated. Secondly, the portfolio management functions 
are delegated fully within the EU and though to an intra-group entity. In this model, the 
delegate and the manager are subject to the same rules and are supervised by EU NCAs, 
which  share  a  common  regulatory  framework.  Thirdly,  the  portfolio  management 
functions are completely delegated to an extra-group entity within or outside of the EU. 
In this scenario, the manager does not retain sufficient expertise on the portfolio which 
causes  difficulties  on  supervising  the  delegate.  Further  problems  occur,  when  different 
regulatory frameworks apply to the delegate and the manager which is the case when the 
manager is not located within the EU. The delegate does not fall within the scope of an 
EU NCAs. Which is why respondents suggested to strengthen the applicable rules on the 
delegation of risk management to third-country undertakings. 

IV. Financial stability 

In  the  public  consultation,  91  respondents  replied  to  the  section  on  financial  stability, 
which  includes  question  on  liquidity  risk  management  and  reporting.  Notably,  almost 
three fourths of these respondents (67) consisted of business associations, companies or 
business organisations (industry), and 10 were public authorities.   

72 

 
The  full  sample  is  split  on  the  need  to  further  enhance  AIFMD  framework  to  more 
effectively  address  macroprudential  concerns  (question  56),  with  40  respondents 
expressing a positive opinion, 40 a negative one and 11 no opinion. Public authorities are 
broadly in favour (9/10), just like a significant minority of the industry (35 no, 23 yes, 9 
no  opinion).  Among  those  supportive,  most  support  is  gathered  for  the  options  to 
harmonise  LMTs  (28/40  overall,  8/9  public  authorities,  15/23  industry),  to  improve 
supervisory reporting requirements (22/40 overall, 7/9 public authorities, 9/23 industry) 
and to further detail cooperation of NCAs in case of activating LMTs (15/40 overall, 5/9 
public  authorities,  6/23 
in  situations  with  cross-border 
implications.  

industry),  in  particular 

The full sample is also split on the need to report the activation of LMTs by AIFMS to 
NCAs, with 33 in favour, 33 against, and 18 expressing no opinion (question 59). Again, 
this is broadly supported by public authorities (9/10) and also by a significant minority of 
industry respondents (20 in favour, 28 against, 15 no opinion). 

The  questions  on  the  appropriateness  of  the  supervisory  reporting  requirements  as 
provided  in  the  AIFMD  framework  and  potential  improvements  led  to  more  mixed 
replies.  50  respondents  agree  that  it  is  somewhat  or  fully  appropriate,  17  somewhat  or 
fully disagree that it is appropriate, 7 are neutral and 10 have no opinion. The mandatory 
introduction  of  a  LEI  to  identify  an  AIF  and  an  AIFM  gathered  broad  support,  also 
within the industry (questions 63 and 64). The same is true for giving relevant national 
and/or EU institutions with responsibilities in the area of financial stability access to the 
AIFMD supervisory reporting data (question 68). Improving the fund classification under 
the  AIFMR  supervisory  reporting  template  (question  70)  is  supported  by  an  overall 
majority in the full sample, including broad support among public authorities a majority 
of industry respondents.  

On several other topics there is broad agreement among public authorities, whereas the 
industry has a different  view. This concerns the need to provide a more comprehensive 
portfolio breakdown in  AIFMD supervisory reporting (question 62), the inability of the 
AIFMR template to effectively capture links between financial institutions (question 69), 
the introduction of supervisory reporting for UCITS (question 76), the harmonisation of 
supervisory  reporting  requirements  for  UCITS  and  AIFs  (question  77)  and  the 
harmonisation  of  leverage  calculation  metrics  at  EU  level  and  leverage  calculation 
methods for UCITS and AIFs (questions 80 and 82). 

Only a minority in each category supports centralised data reporting (question 67). 

66. Does the reporting data adequately cover activities of loan originating AIFs? Please 
explain your answer to question 66: 

The majority of the respondents agrees that the current reporting data adequately covers 
activities of loan originating AIFs. The respondents emphasised that the current reporting 
framework  provides  regulators  with  sufficient  access  to  the  information  they  need  in 
order  to  supervise  loan  originating  AIFs  activities  effectively.  Implementing  new 
reporting  requirements  would 
loan 
originating AIFs neither present liquidity mismatches nor use a significant leverage. The 
market  for  loan  originated  AIFs  is  rather  small.  Some  respondents  recommended  to 
distinguish  between  the  several  types  of  AIFs  to  gather  more  information  about  the 
growth and risks of loan originating AIFs. Some respondents expressed their concern that 
adding  a  further  data  field  could  add  operational  burdens  and  costs  to  loan  originating 

increase  operational  burdens.  Furthermore, 

73 

 
AIFs, which could have a negative impact on providing credit to European businesses by 
loan originating AIFs. It would change the structure of the aggregated and consolidated 
AIFMD reporting to an asset-by-asset reporting. 

If not, what data fields should be added to the supervisory reporting template: 

Only one respondent has answered this question by suggesting to add loans originated by 
AIFs and leveraged loans originated by AIFs to the supervisory reporting template. 

Please explain why you think loans originated by AIFs should be added as a data fields 
the  benefits, 
template,  providing 
to 
disadvantages and costs of implementation: 

the  supervisory  reporting 

information  on 

The respondents have stated that private corporate lending has grown substantially over 
the  last  year  which  is  why  the  sector  is  lacking  transparency  and  data  provided  for 
supervisory  purposes.  Therefore,  AIFM  should  provide  NCAs  and  ESMA  with  a 
description of the type of financing and its key features in order to assess whether these 
market  practices  could  create  a  systemic  risk.  Public  authorities  have  emphasised  that 
they  are  currently  experiencing  a  lack  of  data  and,  therefore,  would  welcome  adding 
these data fields. Reporting requirements for leveraged loans could be developed by the 
Commission. 

Please explain why you think leveraged loans originated by AIFs should be added as a 
data fields to the supervisory reporting template, providing information on the benefits, 
disadvantages and costs of implementation: 

The respondents stressed that adding leveraged loans originated by AIFs as a data field to 
the supervisory reporting template would enable NCAs and ESMA to monitor the market 
and possible occurring risks. Extending the supervisory reporting template would give a 
clearer  overview  over  different  investment  strategies.  Some  NCAs  collect  already  data 
about  AIFs  which either hold  loans as part of their assets or originate loans. Currently, 
the reporting template often does not distinguish between these two different AIFs.  

Please  explain  what  other  data  field(s)  should  be  added  to  the  supervisory  reporting 
template,  providing 
the  benefits,  disadvantages  and  costs  of 
implementation: 

information  on 

The respondents suggested that a data field concerning debts and the type of debt could 
be  added.  Moreover,  the  reporting  requirements  shall  apply  to  larger  loan  originating 
funds where stability can be an issue. 

85.  Should  the  requirements  for  loan  originating  AIFs  be  harmonised  at  EU  level? 
Please explain your answer to question 85: 

A  narrow  majority  of  the  respondents  does  not  think  that  requirements  for  loan 
originating  AIFs  should  be  harmonised  at  EU  level.  The  respondents  emphasised  that 
AIFMs  managing  loan-originating  funds  are  already  subject  to  the  authorisation,  due 
diligence, risk management, liquidity and transparency requirements that generally apply 
to  AIFMs.  They  are  as  well  subject  to  the  supervision  of  EU  authorities  and  NCAs. 
Furthermore, loan-originating funds are usually closed-ended funds, with a low level of 
leverage  and  represent,  therefore,  low  levels  of  risk  credit  transformation.  Merely 
professional  investors  invest  in  these  funds  and  understand  the  associated  credit  and 

74 

 
liquidity risks. A few respondents recommended to collect further data to assess whether 
loan originating funds cause a systematic risk. 

Since there are very diverse types of AIFs managed by AIFMs on the market, no other 
AIFs asset class has been made subject to specific regimes under the AIFMD framework. 
It  is  stated  in  recital  10  of  the  AIFMD  explicitly,  that  the  Directive  does  not  regulate 
AIFs  and  that  it  would be  “disproportionate  to  regulate  the  structure  or  composition  of 
the  portfolios  of  AIFs  managed  by  AIFMs  at  Union  level  and  it  would  be  difficult  to 
provide for such extensive harmonisation due to the very diverse types of AIFs managed 
by AIFMs”. Some respondents suggested to wait implementing additional requirements 
for AIFs until the ELTIF review and any necessary reforms are implemented. 

If yes, which of the following options would support this harmonisation 

The  respondents  recommended  to  impose  leverage  limits,  additional  organisational 
requirements for AIFMs, diversification requirements and concentration requirements; to 
allow  only  closed-ended  AIFs  to  originate  loans;  to  provide  for  certain  safeguards  to 
borrowers; and to permit marketing only to professional investors. 

Please  explain  why  you  think  limiting  interconnectedness  with  other  financial 
intermediaries  would  support  this  harmonisation.  Please  provide  information,  where 
available,  on  the  costs  and  benefits,  advantages  and  disadvantages  of  this  option. 
Concrete examples are welcome: 

Only one public authority has replied to this question and emphasised that harmonising 
requirements for loan originating AIFs would allow more effective monitoring of credit 
intermediation activities by AIFs. Therefore, the Commission should develop consistent 
definitions  and  regular  reporting  requirements  for  leveraged  loans,  including  the 
identification of covenant-lite leveraged loans, to facilitate the regular monitoring of risks 
and vulnerabilities in the sector. 

Please explain why you think imposing leverage limits would support this harmonisation. 
Please provide information, where available, on the costs and benefits, advantages and 
disadvantages of this option. Concrete examples are welcome: 

The  respondents  made  the  following  recommendations.  One  respondent  welcomes  a 
greater harmonisation of loan originating AIFs on EU level to create a level playing field 
between  jurisdictions.  Nevertheless,  the  respondents  argued  in  favour  to  not  impose 
leverage  limits  to  AIFs  reserved  for  professional  investors.  Another  respondent 
recommend to set up loan originating funds merely as closed-ended vehicles reserved for 
professional investors, without the right of redemption of units on a regular basis. 

Public  authorities  suggested  imposing  a  definition  of  appropriate  safeguards  to  avoid 
excessive liquidity and maturity transformation or limit cash borrowing to 30% of the net 
asset  value.  Furthermore,  they  recommend  the  implementation  of  the  following 
requirements, such as: prohibition to originate loans with open-ended funds; (requirement 
for loans to be eligible to have shorter maturities than the life of the fund; limitation of 
cash borrowing to 30 % of net asset value; limited use of derivatives; requirement on the 
asset  management  company  to  gather  sufficient  expertise  and  develop  robust  valuation 
methodology  as  well  as  specific  risk  management  framework  to  ensure  sound  credit 
origination. 

75 

 
Please  explain  why  you  think  imposing  additional  organisational  requirements  for 
AIFMs would support this harmonisation. Please provide information, where available, 
on  the  costs  and  benefits,  advantages  and  disadvantages  of  this  option.  Concrete 
examples are welcome: 

Predominantly  public  authorities  answered  this  question.  They  suggested  that  loan 
originating funds shall demonstrate that they have the expertise required to select loans 
and have set  up processes for loan processing, loan processing control, intensified loan 
management,  the  processing  of  problem  loans  and  risk  provisioning.  They  should  be 
required to develop a system for analysing and measuring credit risks as well up-to-date 
knowledge  of  borrowers  and  credit  risk  selection  procedures.  These  procedures  shall 
enhance  the  early  detection  of  risks  and  to  identify  in  good  time  borrowers  whose 
exposures are starting to show signs of heightened risk. 

Please explain why you think allowing only closed-ended AIFs to originate loans would 
support  this  harmonisation.  Please  provide  information,  where  available,  on  the  costs 
and  benefits,  advantages  and  disadvantages  of  this  option.  Concrete  examples  are 
welcome: 

The  respondents,  which  are  primarily  public  authorities,  mentioned  that  loans  are 
inherently  illiquid  assets  and  can  create  risks  arising  from  maturity  mismatches. 
Therefore, the nature of loan originating AIFs is illiquid which does not suit open-ended 
AIFs. Excessive liquidity transformations of open-ended funds shall be avoided. 

Please  explain  why  you  think  providing  for  certain  safeguards  to  borrowers  would 
support  this  harmonisation.  Please  provide  information,  where  available,  on  the  costs 
and  benefits,  advantages  and  disadvantages  of  this  option.  Concrete  examples  are 
welcome: 

[The  answers  to  this  question  have  exactly  the  same  wording  given  to  the  questions 
above by the same organisations and authorities] 

Please explain why you think permitting marketing only to professional investors would 
support  this  harmonisation.  Please  provide  information,  where  available,  on  the  costs 
and  benefits,  advantages  and  disadvantages  of  this  option.  Concrete  examples  are 
welcome: 

The  responses  to  this  question  varied  among  the  respondents,  which  were  provided 
mostly  by  public  authorities.  One  respondent  suggested  that  allowing  marketing,  on  a 
cross-border basis, to retail investors shall be subject to extremely precise requirements 
and  robust  safeguards  for  investor  protection.  Another  respondent  emphasised  that 
private investors can hardly assess the risks arising from loan originating funds, but the 
investor must be enabled to assess these risks. 

Contrarily, a respondent does not see any reasons why loan originating funds cannot do 
marketing towards retail investors, when being authorised according to Art. 43 AIFMD. 

Please  explain  why  you  think  imposing  diversification  requirements  would  support  this 
harmonisation.  Please  provide  information,  where  available,  on  the  costs  and  benefits, 
advantages and disadvantages of this option. Concrete examples are welcome: 

The  respondents  state  that  concentration  and  diversification  limits  applicable  to  loan 
originating AIFs shall be harmonised. Currently, significant  differences in national  risk 

76 

 
and investment concentration and diversification regimes lead to market distortions, with 
operators  enjoying  competitive  advantages  in  raising  capital  and  flexibility  in  the 
management policies of their AIFs. 

Please  explain  why  you  think  imposing  concentration  requirements  would  support  this 
harmonisation.  Please  provide  information,  where  available,  on  the  costs  and  benefits, 
advantages and disadvantages of this option. Concrete examples are welcome: 

Merely  public  authorities  have  replied  and  suggested  that  loan  originating  AIFs  shall 
include  requirements  on  diversification  and  concentration  in  the  investment  policy  and 
ensure that investors are informed. Therefore, the loan granted to each borrower shall not 
exceed 20% of the aggregate invested fund’s capital. 

Please  explain  what  other  option  would  support  this  harmonisation.  Please  provide 
information, where available, on the costs and benefits, advantages and disadvantages of 
this option. Concrete examples are welcome: 

The  respondents  have  suggested  the  following  options,  which  would  support  the 
harmonisation.  One  respondent  suggested  introducing  liquidity  requirements,  one 
redemption option per month, a notice period for redemption of at least one month, and 
clear  communication  about  the  application  of  redemption  gates.  Other  respondents 
mentioned  to  include  private  loans  in  the  AIFMD  regime  to  enable  AIFs  to  perform  a 
role of alternative credit provider by offering financing to SMEs and smaller size deals. 
Another  respondent  recommended  enhancing  participation  of  a  broad  range  of 
counterparties to central clearing which could reduce concentration risks and enhance the 
portability of client positions. 

Table 2 below shows support by the public authorities for the different ideas concerning 
the LOFs as raised in the public consultation: 

Table 2 Public authorities supporting different elements of possible regulation 

Propositions  

Member State support 

1.  Harmonising EU level requirements 

for AIFMs managing LOF 

2.  Impose leverage limits  

3.  Impose additional organisational 

requirements for AIFMs 

4.  Allow only closed-ended AIFs to 

originate loans 

5.  Permit marketing only to professional 

investors 

6.  Impose concentration requirements 

7.  Provide for certain safeguards to 

borrowers 

8.  Impose diversification requirements 

77 

7 

2 

2 

3 

2 

3 

1 

2 

 
 
 
9.  Require for the loans to have shorter 
maturities than the life of the fund 
10. Limit cash borrowing to 30 % of net 

asset value 

11. Limit use of derivatives 

12. Limit interconnectedness with other 

financial intermediaries 

13. Restrict consumer lending by LOFs 

14. Against harmonisation of detailed 

requirements for LOFs 

15. No opinion 

1 

1 

1 

1 

1 

1 

2 

ANNEX 3: WHO IS AFFECTED AND HOW? 

Practical implications of the initiative 

Fund  managers:  AIFMs  may  be  able  to  undertake  loan  origination  across  the  Union 
including  Member  States  where  they  are  currently  prohibited  from  lending.    A  new 
framework  would  also  harmonise  requirements  across  Member  States  reducing 
compliance and reporting costs for managers.  Access to the broader market may allow 
funds to scale up quicker.  

Fund  managers  in  the  smaller  markets  may  get  access  to  cross-border  supply  of 
depositary  services  allowing  a  wider  choice  among  service  providers  and  potentially 
leading to lowers cost of service as well as to access of bundled services thus generating 
better returns for investors.  

Fund  managers  are  likely  to  benefit  from  the  clearer  delegation  rules  providing  more 
legal certainly around the substance requirements. This is going to augment compliance 
costs only for the letterbox entities, which are outlawed by the current rules anyways, but 
not for a properly functioning fund managers. 

Investors:  Investors will be able to access a wider range of larger funds engaged in loan 
origination.  Market data indicates a clear preference among investors for this asset class 
particularly given the current low interest rate environment.  Implementing a framework 
for AIFMs of LOFs will improve the resilience and transparency of these funds ensuring 
appropriate levels of investor protection while also possibly reducing funds costs due to 
increasing economies of scale as the funds grow in size. 

Investors  of  AIFs  established  in  smaller  markets  would  benefits  from  the  cross-border 
accessibility  of  the  depositary  services  as  this  is  likely  to  bring  down  the  cost  of 
depositary  services  and  improve  their  quality.  A  better  access  to  such  services  may 
benefit development of the AIF market in smaller jurisdictions leading to a wider choice 
of investment opportunities. 

Investors are likely to be better protected where the EU rules on delegation requirement 
are  clarified  to  ensure  that  AIF  and  UCITS  managers  ensure  they  have  the  necessary 
human recourses to supervise the entities to which portfolio or risk management or other 

78 

 
 
functions are delegated. This would also ensure the same level of their protection across 
the Union. 

National  Competent  Authorities  (NCAs):  NCAs  would  be  enforcing  a  common 
supervisory  framework  improving  supervisory  cooperation  and  transparency  in  their 
jurisdictions.    Additional  reporting,  disclosure  and  stress  testing  requirements  would 
reduce the potential risks posed by loan originating funds. 

NCAs in the smaller jurisdiction would have a discretion to allow cross-border sourcing 
of the services.  

NCA will have a clearer rulebook to  enforce once the rules on delegation are clarified. 
This  should reduce regulatory  arbitrage ensuring the same supervisory standards across 
the Union.  

ESMA: A European framework for AIFMs managing LOFs would increase supervisory 
convergence across the Union and provide additional reporting data to ESMA. 

ESMA  will  also  receive  additional  reporting  information  in  relation  to  delegation 
arrangement that it will need to store and process in order to distil the  market trends in 
this respect.  

SMEs: Loan  originating  funds  can  provide  an  additional  lending  channel  to  provide 
funding to the real economy and particularly SMEs that may find it difficult or costly to 
borrow  from  traditional  lenders.    Increased  competition  and  scale  may  also  reduce 
borrowing  costs  further  and  support  the  economic  recovery  from  the  pandemic.    The 
shock  absorbing  capacity  provided  by  LOFs  may  also  help  funds  obtain  credit  during 
times of market stress or liquidity shortages. 

Summary of costs and benefits 

I. Overview of Benefits (total for all provisions) – Preferred Option 

Description 

Amount 

Comments 

Direct benefits 

Increased availability of 
capital finance for 
SMEs across the Union. 

No estimate available. 

Loan originating funds 
can act as a shock 
absorber at times of 

No estimate available. 

79 

Funds will be able to provide loan 
origination services across the Union 
providing additional sources of 
finance for the real economy and 
SMEs, particularly those that may 
not be able to access traditional 
lending. 

LOFs can continue to lend during 
times of market stress and liquidity 
shortages supporting the real 

 
 
market stress 

AIFMs in smaller 
markets able to source 
depositary services 
across the border 

Reducing costs for the depositaries: no 
need to take out another licence (a new 
depository licence costs between € 6,000 
– € 9,200 depending on a Member State) 
and saving on annual supervisory fees 
(between € 4,400 – € 9,400 depending on 
a Member State). 

No estimate available as to the fees that 
could be saved by the AIFM.  

No estimate available. 

Clarifying delegation 
requirements and 
ESMA collecting 
information on a full 
delegation of 
investment or risk 
management to the 
third country entities. 

economy when traditional lenders 
may be unable to do so. 

More stringent requirements around 
lending and portfolio management 
will mitigate risks that LOFs could 
pose to broader systemic stability. 

The benefits for the depositaries are 
tangible in terms of cost savings. 

The AIFMs will benefit from a wider 
choice of service providers and more 
effective service provision 
(accessing packaged services). 

More competition is likely to bring 
the depositary services down in the 
Member States, which will permit 
sourcing depositary services  

Investors would be better protected 
by the Union rules more clearly 
imposing minimum substance 
requirements for AIFMs and UCITS 
managers delegating their functions 
to third parties  

Legal certainty and level playing 
field for AIF and UCITS managers 
when they delegate functions to third 
parties. 

Policy makers will be better 
equipped to take future decisions in 
relation to delegation regime by 
having a more information on the 
practical use of delegation by t fund 

80 

 
 
 
 
 
 
managers. 

Harmonising the 
availability of LMTs 
across the Union and 
requiring the managers 
of open-ended funds 
chose at least one LMT 
that could be activated 
in times of stress. 

More granular reporting 
of data on AIFs and 
UCITS. 

Cost indication for changing contractual 
and pre-contractual documents, 
prospectuses in particular, could be up to 
€ 40 000 per product/service. However, 
because of regulatory changes or other 
reasons, these documents are normally 
revised at least every year anyway.  

No cost impact before the next step. 

Managers will be better equipped to 
deal with liquidity pressures in times 
of stress.  

Investor interests will be better 
protected by preserving investment 
value in times of stress. 

In  line  with  the  supervisory  data 
strategy  preparing  the  ground  for 
supervisor  access  of  more  granular 
data for market monitoring. 

Indirect benefits 

Loan originating funds 
able to scale-up and 
market cross-border  

No estimate available. 

No estimate available. 

No estimate available. 

AIFMs in smaller 
markets able to source 
depositary services 
across the border 

CSDs subject to the 
AIFMD and UCITSD 
rules when they hold in 
custody funds’ assets, 
whereas ex-ante due 
diligence requirements 
for the depositary are 
waved 

The ability of loan originating funds 
to scale up and operate on a cross 
border basis will increase the 
availability of finance for SMEs and 
other commercial entities in Europe 
particularly in MS where this activity 
is not currently authorised. 

Better access and more competitive 
pricing of depositary services may 
facilitate growth of the smaller 
investment fund markets. 

Investor would be better protected as 
with the information flow from the 
CSDs to the depositaries the latter 
will be able to carry out their 
oversight duties properly. 

(1) Estimates are relative to the baseline for the preferred option as a whole (i.e. the impact of individual 
actions/obligations of the preferred option are aggregated together); (2) Please indicate which 

81 

 
 
 
stakeholder group is the main recipient of the benefit in the comment section;(3) For reductions in 
regulatory costs, please describe details as to how the saving arises (e.g. reductions in compliance costs, 
administrative costs, regulatory charges, enforcement costs, etc.; see section 6 of the attached guidance). 

II. Overview of costs – Preferred option 

Investors  

Fund Managers 

Supervisory 
Authorities 

One-off 

Recurrent 

One-off 

Recurrent 

One-off  Recurrent 

No cost 
impact 

No cost 
impact 

No cost 
impact 

Direct costs 

AIFMs 
managing 
LOF 

Indirect costs  No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

May incur 
additional 
costs 
related to 
additional 
reporting 
requirement
s. 

No cost 
impact 

No cost 
impact 

Increased 
compliance 
costs due to 
additional 
requirements 
for loan 
origination, 
reporting and 
disclosure 

May allow 
funds to 
scale up 
faster and 
provide loan 
origination 
across the 
Union.  
Increased 
availability 
of sources of 
finance for 
SMEs 

No cost 
impact 

No cost 
impact 

No cost 
impact 

Facilitatin
g cross-
border 
sourcing 
of 
depositary 

Direct costs 

No cost 
impact 

Reduced cost 
of accessing 
depositary 
services  

May incur 
additional 
supervisory 
costs 
related to 
cross 
border 

82 

 
 
 
services 

Harmonisi
ng 
availabilit
y of 
LMTs 

Indirect costs  No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

Direct 
costs 

provision 
of services 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

May allow 
funds to 
scale up 
faster and 
provide loan 
origination 
across the 
Union.  
Increased 
availability 
of sources of 
finance for 
SMEs 

Reduced cost 
of accessing 
depositary 
services  

Indirect 
costs 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

May lead to 
a slight 
increase in 
administratio
n costs to 
provide more 
detailed 
reporting 

May incur 
additional 
costs to 
receive and 
process 
additional 
reporting 
data 

Direct 
costs 

More 
granular 
reporting 

Indirect 
costs 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

Direct 
costs 

Delegatio
n 

No cost 
impact 

No cost 
impact 

Some fund 
managers 
may have to 
adjust their 
organisationa
l structure or 

83 

 
 
 
 
delegation 
arrangements 
to comply 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

No cost 
impact 

Indirect 
costs 

Some funds 
may 
increase fees 
due to costs 
from 
additional 
substance 
reqs 

(1) Estimates to be provided with respect to the baseline; (2) costs are provided for each identifiable 
action/obligation of the preferred option otherwise for all retained options when no preferred option is 
specified; (3) If relevant and available, please present information on costs according to the standard 
typology of costs (compliance costs, regulatory charges, hassle costs, administrative costs, enforcement 
costs, indirect costs; see section 6 of the attached guidance). 

Cost quantification: 
While  stakeholder  feedback  to  the  public  consultation  did  not  contain  specific 
comments  related  to  costs,  the  KPMG  report  indicated  potential  cost  issues  for 
smaller managers and funds which could limit the number of small private equity 
or  venture  capital  funds  operating  in  the  Union.    KPMG  also  highlighted 
additional costs for non-EU AIFMs that could act as a barrier to entry to the EU 
market.  AIFMs have experienced a general increase in costs with nearly 88% of 
respondents  claiming that  their supervisory  reporting costs had increased  with  a 
number  highlighting  overlapping  reporting  requirements  as  a  cost  driver.  
Respondents  also  called  for  efforts  to  address  the  overlaps  and  reduce  the 
introduction of further piecemeal or high cost reporting requirements.   

With  regard  to  the  AIFMD,  the  proposed  policy  and  technical  options  are 
designed  to  improve  the  functioning  of  the  framework  from  a  manager  and 
supervisory  perspective  and  where  possible  reduce  costs  or  ensure  that  the 
benefits of the chosen option outweigh the additional costs:   

a)  The  harmonisation  of  available  LMTs  may  lead  to  additional  costs  for 
some managers due to the need to update their legal documentation but at 
the  same  time  will  lead  to  direct  benefits  by  improving  the  resilience  of 
these  funds  by  allowing  managers  additional  flexibility  to  manage  their 
liquidity risks while maintaining the general level of investor protection.   

b)  Facilitating cross-border sourcing of depositary services will reduce costs 
for fund managers in Member States that are underserviced in this space 
and reduce concentration risks of having only a single or limited number 
of depositaries available in a Member State.    

84 

 
 
 
 
 
c)  Fund  managers  are  already  required  to  report  to  supervisory  authorities, 
there  may  be  some  costs  associated  with  more  granularity  but  the 
additional burden should be minor and is  outweighed by the supervisory 
benefits  of  greater  transparency  regarding  funds  activity.    At  the  same 
time the proposed changes may introduce additional efficiencies for fund 
managers by eliminating reporting overlaps. 

d)  With  respect  to  AIFMs  managing  loan-originating  funds,  the  proposed 
requirements  will  protect  financial  stability  and  introduce  more  effective 
credit management processes while  allowing these funds to  operate on a 
cross  border  basis  and  harmonising  their  regulatory  requirements,  which 
will  introduce  new  cost  efficiencies  and  allow  them  to  scale  up  their 
funds.   

e)  The  clarifications  of  delegation  requirements  may  impose  additional 
staffing costs on certain funds but these are outweighed by the additional 
protections  these  clarifications  will  give  to  investors  and  the  stability  of 
the  broader  financial  system  and  general  improvements  to  supervisory 
effectiveness and convergence. 

85 

 
 
 
 
 
 
 
 
 
 
 
 
ANNEX 4: ANALYTICAL METHODS 

Overview: 

The  analysis  underlying  the  impact  assessment  is  based  on  three  methodological 
approaches: 1. desk research; 2. qualitative analysis; and 3. quantitative analysis.  

The data used stems from several different data sources. Input was collected from a wide 
range  of  stakeholders,  including  asset  managers,  industry  and  trade  associations  that 
represent investors, academics and citizens.  Stakeholder feedback was gather through an 
open public consultation on the functioning  of the AIFMD, bilateral  consultations with 
the  stakeholders,  policy  dialogues  with  the  NCAs  and  ESMA  (including  previous 
technical advice received ESMA and its letter of August 2020 which made a number of 
recommendations for the review.   

Industry  research  papers  on  LMTs,  delegation  and  loan  originating  funds  were  also 
provided by stakeholders.   

A report on the functioning of the AIFMD was also prepared by KPGM. In accordance 
with the Alternative Investment Fund Managers Directive (AIFMD), on 10 June 2020 the 
Commission provided the European Parliament and the Council with a report assessing 
the effectiveness of the AIFMD. The report concludes that the AIFMD has had a largely 
positive impact and generally works well.  

1.  Desk research: 
A literature review was performed regarding the functioning of the AIFMD and 
its  impact  on  the  market  for  AIFs.  Relevant  (academic)  literature  was  also 
consulted to gain additional insight into market developments such as the growth 
and  structure  of  the  loan  origination  sector,  the  use  of  LMTs,  the  use  of 
delegation by fund managers and the need for better reporting data. 

implemented  a 

2.  Qualitative analysis: 
This  review 
the 
consultation  with  stakeholders  -  (i)  public  stakeholder  consultation  and  (ii) 
gathering additional feedback and material through bilateral follow-up interviews 
with fund managers, representative organisations, Member States and supervisory 
authorities.  

three-fold  methodological  approach 

to 

The  public  stakeholder  consultation  was  conducted  prior  to  the  impact 
assessment.  The  consultation  was  open  so  the  design  would  ensure  a  diverse 
representation of different stakeholders to gather as wide a range of views on the 
AIFMD as possible. The public consultation provided insight on the priority areas 
for stakeholders and allowed the identification of key themes and issues.  Details 
on the public consultation can be retrieved in Annex 2.  

The follow-up bilateral consultations allowed stakeholders to further explain their 
submissions  to  the  consultation  and  highlight  areas  of  specific  concern.    These 
consultations also allowed the Commission to query and clarify the submissions 
and ensure they were accurately reflected in this impact assessment.   

86 

 
 
 
 
 
 
 
 
 
 
3.  Quantitative analysis: 
Market  data  was  gathered  from  industry  research  and  ESMA  databases  on  the 
size and make-up of Europe’s AIF market and specific fund classes such as loan 
originating  funds.   Analysis  of this  data was used to  develop the various policy 
options in this impact assessment.   

4.  Limitations: 
Market data: 
Certain limitations were encountered with the quantitative data, in particular the 
inability to identify precisely the size of the loan originating funds sector due to 
the  lack  of  granularity  in  the  reporting  data.    However,  alternative  industry 
research was used to address this limitation in the regulatory data. 

Granular  cost  data  and  itemisation:  Detailed  information  on  fund  manager  or 
fund costs (including regulatory fees, compliance costs, search costs, operational 
costs, marketing costs, etc.) is not available at a detailed level. Regulatory fees are 
available at this level of detail, but they only constitute a small part of total costs.   

Overall, significant efforts have been undertaken to support the analysis of the operation 
of the AIFMD and the evaluation of policy options. As the combined evidence stemming 
from  the  various  methodological  approaches  provide  corroborating  evidence,  it  can  be 
considered  to  be  a  sound  basis  for  the  impact  assessment  despite  the  identified  data 
limitations. 

87 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX 5: RISKS OF LOAN-ORIGINATING FUNDS  

I. 

Risks emanating from the activities of the loan-originating AIFs 

According to  the CBI81, the origination  of loans by  funds has specific features that  can 
present particular fund level financial and legal risks, in particular: 

a)  Concentration Risk 

Direct lending portfolios may build up concentrations due to exposure to a certain 
sector  or  collection  of  borrowers  with  similar  economic  characteristics,  it  takes 
time to build a loan book which may mean that it is dominated by a small number 
of  initial  positions  at  the  beginning  and/or  loan  books  may  only  contain  a  few 
loans.  This concentration can also result from the sectoral expertise or focus of 
the loan team and the natural evolution of the loan book. 

b)  Illiquidity Risk 

Private lending is intrinsically illiquid.  Whereas secondary markets may facilitate 
the  trading  in  certain  types  of  standardized  loans,  this  may  not  be  the  case  for 
private loans.  This makes it particularly important that investors understand the 
quality of the performance of the portfolio, particularly where cash flows are only 
remitted to investors a number of years after the funds launch.  It is also important 
that  the  structure  of  the  investment  vehicle  does  not  permit  redemptions  that 
could force fire sales of loan assets that could adversely affect the funds investors. 

c)  Risk of investor runs 

There  is  a  risk  that  funds  may  be  structured  in  a  way  that  creates  a  mismatch 
between  their  liquidity  and/or  maturity  of  their  assets  and  liabilities.    This  can 
create  a  credit  channel  that  is  prone  to  swings  in  investor  confidence  and  may 
lead to pro-cyclicality of credit supply.  A run could also have broader systemic 
consequences if the fund holds a concentrated position in a particular segment of 
the market. 

d)  Leverage 

Where  funds  employ  leverage  to  increase  portfolio  returns  they  are  introducing 
additional  risks.    Leverage  can  lead  to  encumbrance  of  the  loan  portfolio  and 
reduce  the  claim  of  investors  on  the  fund  in  the  event  of  liquidation  or 
bankruptcy.  Leverage may confer on the lenders to the fund, rights or covenants 
that allow them to direct the operation of the fund, including the sale of assets, in 
certain instances. 

 81 Loan Origination by Investment Funds, Discussion Paper, Central Bank of Ireland July 2013. 

88 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
e)  Dominant Lenders 

Certain  originators  may  become  dominant  lenders  to  specific  sectors  of  the  real 
economy.  There is a risk that these lenders may set less stringent pricing or loan 
documentation  terms  which  could  deter  other  entrants  while  also  creating  an 
unsustainable lending channel. 

f)  Misalignment with investor risk profiles or suitability 

Loan funds will typically hold assets that are not traded on secondary markets and 
are  illiquid,  not  be  open  to  regular  redemption  requests,  invest  in  sectors  not 
closely or intensively analysed by investment advisors and not pay cash flows on 
a  regular  basis  during  the  early  life  of  the  fund.    There  is  a  risk  of  significant 
information  asymmetry  with  investors  forced  to  hold  the  investment  for  long 
periods of time. 

g)  Mispricing of credit 

There is a risk of mispricing due to a lack of incentive alignment.  This risk can 
arise as the loan issuance and pricing decision will be driven, to a large degree, by 
either an investment manager or in some cases by an external specialist, both of 
whom receive a transactional fee that may not be affected by the performance of 
the  loans.    In  addition,  excess  investor  demand  may  lead  to  a  decline  in  the 
quality  of  the  loan  origination  process  due  to  the  challenges  of  meeting  those 
demands.    As  a  result,  loan  documentation  may  be  weaker,  the  nature  of  the 
borrowers riskier of the collateral provided poorer.  

Systemic Risk 

According to the ESRB, certain key criteria can help identify the systemic importance of 
loan originating funds including substitutability, size and interconnectedness: 

a)  Substitutability 

Loan-originating funds are part of the alternative finance system. Unlike the failure of 
a traditional bank or Money Market Fund, the bankruptcy of a loan-originating fund 
should not lead to a liquidity crisis in financing the real economy as there would be 
other European credit institutions available to step in to the market. 

However, this  situation poses  risks  of regulatory arbitrage and uneven playing field 
with  other  segments  of  the  financial  sector,  in  particular  the  banking  sector.  The 
emergence  of  an  uneven  playing  field  may  be  due  to  a  wide  range  of  factors, 
including  lower  funding  and  operating  costs  than  banks  or  light  credit  risk 
management practices.  

b)  Size 

Size alone does not create systemic risk.   

c)  Interconnectedness 

89 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The  failure  of  large  loan-originating  fund  would  only  pose  a  systemic  risk  to  the 
extent that it is interconnected with other components of the financial system and in 
particular, credit institutions or fiduciary investors. 

Contagion in the financial system could be through direct and indirect risk channels. 
In the case of prudential consolidation when a fund management company, which is a 
part of a group, makes losses this reduces the capital of the entire group and this is 
called  a  direct  channel  of  contagion.  Where  there  is  no  prudential  consolidation  a 
fund  management  company  typically  reduces  dividends  paid  out  to  the  parent 
company and the shareholder value of the fund management company diminishes.  

Contingent  liabilities  and  commitments  create  an  indirect  channels  of  contagion 
through non-contractual obligations. Whilst indirect channels should limit the impact 
for  fund  management  companies  because  any  losses  suffered  by  a  fund  would  be 
borne  by  the  fund’s  investors.  However,  the  2008  financial  crisis  is  a  case  in  point 
where contagion to the financial system spread through direct and indirect channels. 
Parent companies in financial groups provided implicit guarantees to absorb various 
risks  of  fund  investors.  Consequently  risk  that  normally  is  borne  by  fund  investors 
was transferred to the balance sheet of a parent company – the bank. Moreover, direct 
support was provided in three distinct forms: foregoing fees (to enhance the return to 
the  fund  investors);  liquidity  support  (sponsoring  companies  provided  liquidity 
support  to  funds  managed  by  other  companies  in  the  same  financial  group,  when 
those  funds  suffered  net  redemptions  or  margin  calls);    capital  support  (during  the 
crisis  sponsors  took  on  losses  from  the  funds  by  or  guaranteeing  the  value  of  the 
fund’s assets).   

Further links exist if the sponsoring banks provide contingent liquidity lines, financial 
guarantees  and  other  contractual  commitments  to  investment  funds  such  as  through 
derivatives  markets  and  securities  financing  transactions.  These  “step-in”  risks, 
associated with the interconnectedness between these asset management entities and 
their sponsors (often banks) are also  the focus of the Basel  Committee for Banking 
Supervision (BCBS).   

d)  Risk of runs in investment funds 

In  the  case  of  insufficient  safeguards,  mismatches  between  the  maturity  of  funds’ 
assets and liabilities can make loan originating investment funds vulnerable to runs, 
particularly  in  the  presence  of  uncertainties  and  the  quality  of  these  funds’  assets. 
Runs could lead to asset fire sales, which, in times of stress, could spur contagion to 
other sectors.  

e)  Risks of excessive credit growth and pro-cyclicality 

As  the  industry  becomes  larger,  it  could  contribute  to  the  self-reinforcing  macro-
financial mechanisms that arise from excessive risk taking and credit growth during 
upturns.  However,  macro-prudential  authorities  may  lack  effective  instruments  to 
mitigate  such  risks,  as  their  scope  of  intervention  may  be  focusing  on  the  banking 
sector  (e.g.,  through  the  counter-cyclical  buffer).  This  asymmetry  could  further 
exacerbate  regulatory  arbitrage  and  the  un-level  playing  field  across  the  financial 
system.  

90 

 
 
 
 
 
 
 
 
 
The  ESRB  further  noted  that  it  is  essential  that  authorities  have  adequate  tools  to 
monitor  and  address  systemic  risks  associated  with  excessive  credit  growth  and 
leverage across the entire financial system, including in loan originating investment 
funds.  Authorities  must  have  macro-prudential  instruments  capable  of  impacting 
directly the cost and the availability of credit over the cycle, including by limiting the 
use of leverage by funds and by tightening the lending standards of investment funds. 
Such instruments  should be complementary to  those available in  the banking sector 
(e.g.  countercyclical  capital  buffer),  enabling  authorities  to  take  effective  and 
consistent measures across different parts of the financial system.  

In  terms  of  establishing  a  European  framework,  a  key  recommendation  from  the  2016 
ESMA study was the requirement for some form of authorization that would: 

1.  Allow  NCAs  to  assess  the  credit  origination  capability  of  the  investment 

manager; 

2.  Ensure that a framework exists from the date of inception of the loan-originating 

fund for the monitoring of the fund’s contribution to systemic risk; 

3.  Ensure that the interests of borrowers are protected; and 
4.  Ensure  that  the  interests  of  investors  are  protected  (and  that  the  regulatory 

requirements are tailored to investor types as appropriate).  

In addition, ESMA recommended that any framework should ensure that the NCAs have 
all necessary powers to monitor, supervise and enforce the requirements set for managers 
and their funds. 

 Other issues considered by ESMA included: 

1.  Loan origination funds should be setup as closed ended funds but with a degree of 
flexibility  to  allow  repayments  to  investors  during  the  life  of  the  AIF  at  fixed 
intervals; 

2.  Funds  should  not  be  allowed  to  have  liabilities  with  shorter  maturities  than  the 

loans granted by the fund; 

3.  Whether the fund should be allowed to carry out other investment activities than 

loan origination; 

4.  Whether the funds should be available to retail investors; 
5.  Additional  organizational  requirements  to  limit  the  risk  profile  of  the  funds 
including  (i)  policies  and  procedures  governing  risk  management,  (ii)    the 
assessment,  pricing  and  granting  of  credit,  (iii)  credit  monitoring,  renewal  and 
refinancing, 
risk 
management,  (vi)  operational  risk  control  appropriate  to  loan  origination,  (vii) 
assessment  and  scoring  of  borrowers,  (viii)  valuation  including  collateral 
valuation and impairment, (ix) management of forebearance and identification of 
problem debt and (x) staff capability and expertise in loan origination; 

(iv)  collateral  management  policy, 

(v)  concentration 

6.  Leverage  limits.    For  example,  Ireland  imposes  a  limit  of  200%  of  NAV  while 

Italy imposes limits of 130% to 150% depending on the investor type; 
7.  Diversification limits to spread risk and avoid concentration buildup; and, 
8.  Prohibiting funds from extending loans to (i) individuals, (ii) financial institutions 
(iii) collective investment schemes and (iv) the AIFM and related parties.  Funds 
should  also  not  be  permitted  to  engage  in  short  selling,  trading  of  derivatives 
other than for hedging or securities lending. 

91 

 
 
 
 
In its letter of August 2020, ESMA again called for the establishment of a framework for 
loan originating funds based on its 2016 study.  ESMA also reference the possible role of 
these funds in the Covid-19 recovery while taking into account the specificities of their 
structures and activity. 

92 

 
  
 
 
 
ANNEX 6: TECHNICAL IMPROVEMENTS TO THE AIFMD THAT ARE NOT IMPACT ASSESSED 

This  Annex  presents  potential  legislative  improvements  that  do  not  entail  comparing 
policy  options.  ESMA,  the  ESRB,  and  stakeholders  recommend  these  legislative 
improvements  to  address  financial  stability  concerns  (liquidity  management  tools  and 
inadequacy  of  supervisory  reporting)  or  to  address  investors'  protection  issues  due  to 
inefficient regulation (level playing field for custodians of AIFs and UCITs assets). Part 
A of this Annex discusses these legislative improvements with technical choices and Part 
B of this Annex mentions legislative improvements without technical choices and, which 
basically clarify the current rules drawing on the discussions of the NCAs in ESMA as 
well as on the interpretations of the Union law by the Commission’s legal service.  

Part A: Potential legislating improvements with technical choices  

This  part  of  the  Annex  explores  technical  execution  of  the  chosen  policies  to  address 
three problems listed in section 1.2 of this impact assessment: (1) liquidity management 
by  open-ended  investment  funds;  (2)  inadequate  data  reporting  for  market  monitoring 
and (3) unequal treatment of custodians of AIFs’ assets. 

In  the  public  consultation,  91  respondents  replied  to  the  section  on  financial  stability, 
which includes questions on liquidity risk management and on reporting. Notably, almost 
three fourths of these respondents (67) consisted of business associations, companies or 
business organisations (industry), and 10 were public authorities.   

The full sample was split on the need to further enhance the AIFMD framework to more 
effectively  address  macro-prudential  concerns  (question  56),  with  40  respondents 
expressing  a  positive  opinion,  40  a  negative  one  and  11  no  opinion.  Public  authorities 
were broadly in favour (9/10), just like a significant minority of the industry (35 no, 23 
yes, 9 no opinion). Among those supportive, most support was gathered for the options to 
harmonise  Liquidity  Management  Tools  (LMTs)  (28/40  overall,  8/9  public  authorities, 
15/23  industry),  to  improve  supervisory  reporting  requirements  for  monitoring  of 
financial stability risks (22/40 overall, 7/9 public authorities, 9/23 industry) and to further 
detail  cooperation  of  NCAs  in  case  of  activating  LMTs  (15/40  overall,  5/9  public 
authorities, 6/23 industry), in particular in situations with cross-border implications.  

1.1  Options  to  improve  the  availability  of  LMTs  for  open-ended  AIFs  and  UCITS 

across the EU 

The Options discussed in this section are relevant for considering changes to the AIFMD 
and UCITS frameworks.  

Options 1 and 2 are mutually exclusive. The legislative improvements have been chosen 
following  the  ERSB  Recommendations  issued  in  2017  to  address  liquidity  risk  in 
investment  funds  and  supported  by  ESMA,  as  well  as  by  the  majority  of  national 
supervisory  authorities.  The  ESMA  report82  issued  in  November  2020  following  the 
COVID  crisis  further  reiterates  ESMA  support  for  the  ESRB  Recommendations  on 
liquidity  risk  in  investment  funds.  In  fact,  ESMA  report  identifies  the  increase  of  the 
availability  and  use  of  liquidity  management  tools  as  a  priority  area  to  enhance  the 

82 ESMA34-39-1119 

93 

 
 
 
                                                           
preparedness  of  the  funds  to  potential  future  adverse  shocks  that  could  lead  to  a 
deterioration  in  financial  market  liquidity.  Additionally,  feedback  from  representative 
bodies  of  the  industry,  given  in  bilateral  discussions,  confirmed  that  also  these  bodies 
support  a  harmonisation  of  LMTs’  availability.  Whereas  enhancing  ESMA’s  powers  in 
facilitating  and  coordinating  NCA  actions  when  LMTs  are  activated  with  cross-border 
implications was not the option selected  frequently in the public consultation, this might 
primarily    reflect  respondents’  own  perspective.  It  is  however  desirable  from  the 
European  perspective.  Moreover,  proposed  ESMA’s  powers  are  not  binding,  so  not 
overly intrusive for national authorities. 

Option 

Description  

Option 1: Harmonise the 
availability of LMTs for the 
managers of open-ended 
investment funds to choose 
from.  

Option 2: Harmonise the 
availability of LMTs for 
open-ended investment 
funds making a minimum set 
of LMTs obligatory and 
providing for an equivalent 
range of LMTs for NCAs to 
activate. 

a)  Harmonise 

the 

liquidity 
management  tools  (LMTs)  for  open-ended 
investment funds (UCITS and AIFs)  

availability  of 

b)  Require  fund  managers  to  choose  at  least  one 
other appropriate LMT to include in the fund’s 
to 
constitutional  documents 
suspension of redemptions 

in  addition 

c)  Empower  NCAs  to  activate  gates  as  well  as 
fund 

the  LMT  obligatorily  chosen  by 
managers  

d)  Enhance  ESMA’s  powers  in  facilitating  and 
coordinating  NCA  actions  when  LMTs  are 
activated with cross-border implications 
a)  Harmonise the range and availability of LMTs 
to choose from by managers of open-ended 
funds 

b)  Require  managers  of  open-ended  funds  to 
several, 
funds’ 

a  minimum 
include 
predetermined 
LMTs 
constitutional documents  

of 
the 

set 
in 

c)  Empower  NCAs  to  activate  in  public  interest 
any  type  of  LMT  (from  among  those  LMTs 
included  in  the  minimum  set/funds’  legal 
documents) 

d)  Enhance  ESMA’s  powers  in  facilitating  and 
coordinating  NCA  actions  when  LMTs  are 
activated with cross-border implications. 

Option 1 proposes Union measures to address the potential risks that may be generated 
by open-ended funds experiencing liquidity problems under stressed market  conditions. 
As  recommended  by  the  ESRB  and  concurred  by  ESMA,  a  wide  set  of  liquidity 
management  tools,  which  fund  managers  could  choose  from  to  include  in  the 
constitutional documents of their investment funds, could be harmonised and defined at 
the EU level.  Also among respondents  to  the public consultation  that favour enhancing 
the framework, the option to harmonise LMTs is the one suggested most (28/40 overall, 
8/9 public authorities, 15/23 industry). Activating some LMTs, instead of selling assets 
to fully satisfy redemption requests, is a way to protect the value of investment and can 
thus  be  in  the  interests  of  investors.  Some  of  the  LMTs,  such  as  swing  pricing, 

94 

 
 
particularly  contribute  to  mitigating  liquidity  risks  by  reducing  first-mover  advantages. 
This  may  also  contribute  to  financial  stability  by  reducing  risks  under  stressed  market 
situations. Therefore, this Option suggests to make it obligatory for the fund managers of 
open-ended funds (both AIFs  and UCITs) to, in addition  to  being able to suspend fund 
subscriptions/redemptions,  choose  from  a  common  set  of  LMTs  at  least  one  other 
appropriate tool to include in their fund documentation.83   

It  is  also  recognised  that  the  fund  manager’s  decision  to  use  a  certain  LMT  may  be 
influenced  by  reputational  cost  and  competitive  pressure,  which  imply  that  managers 
have  an  incentive  to  avoid  deploying  an  available  LMT.  Additionally,  they  may  not 
internalise  potential  externalities  associated  with  asset  sales  in  response  to  large-scale 
redemptions  on  the  stability  of  the  financial  system.  Therefore,  when  it  is  necessary  to 
preserve  financial  stability,  the  NCAs  should  be  able  to  intervene  in  the  market  and 
activate an appropriate LMT for the vulnerable funds. Currently the AIFMD empowers 
NCAs  to  suspend  redemptions.  Some  NCAs  are  also  granted  the  power  to  activate 
redemption gates based on national laws.84 Redemption gates are a softer/more nuanced 
LMT than suspensions  of redemptions,  as they  allow investors to still redeem  a part of 
their AIF shares and thus limit the extent to which liquidity shocks are spread across the 
financial  system.  It  thus  seems  sensible  to  grant  all  NCAs  in  the  Union  the  power  to 
activate  also  this  LMT,  that  is  the  redemption  gate,  as  well  as  the  LMT  (obligatorily) 
chosen  by  the  fund  manager  and  included  in  the  fund  documentation.  NCAs  would  be 
expected to use the LMT on behalf of the managers in public interest to overcome their 
(in)action bias due to reputational/competitive reasons.  

Moreover,  since  investment  funds  often  invest  and  operate  on  a  cross-border  basis,  the 
potential  impact  of  liquidity  problems  is  not  limited  to  the  jurisdictions  in  which  the 
respective  fund  is  domiciled.  Liquidity  tensions  in  an  investment  fund  or  a  group  of 
funds  could  thus  “spill”  to  underlying  asset  markets  and/or  investors  across  borders. 
These potential cross-border effects  accentuate the need for  enhanced coordinating role 
for  ESMA,  which  has  been  called  for  to  coordinate  supervisory  responses  during  the 
Covid-19 pandemic. For the coordination to be more effective, it is also proposed under 
this Option that ESMA and the relevant NCAs are informed by fund managers when they 
activate LMTs.85 NCAs, for their part, would be required to notify ESMA and the ESRB 
before stepping in for the fund managers to activate LMTs in the public interest, which 
includes  financial  stability  concerns.  In  addition,  as  also  recommended  by  the  ESRB, 
ESMA  could  be  mandated  to  develop  guidance  for  NCAs  to  follow/consider  when 
exercising  their  powers  to  suspend  redemptions  or  activate  redemption  gates,  in 
situations  where  there  are  cross-border  financial  stability  implications.  Indeed,  also  a 
significant minority of respondents to the public consultation that favoured enhancing the 

83 Annex 8 contains a list of LMTs available in national frameworks, which could serve as a basis.  
84  ESRB  2017  Recommendations  (ESRB/2017/6),  p.  18,  “Regulators  are not usually allowed  to activate 
tools.  The  general  exception  to  this  is  the  suspension  of  redemptions,  which  may  be  imposed  by  the 
regulator  if  it  is  deemed  to  be  in  the  public  interest  which,  presumably,  also  includes  financial  stability 
factors. In a number of jurisdictions NCAs are granted the power to activate redemption gates.”. 
https://www.esrb.europa.eu/pub/pdf/recommendations/esrb.recommendation180214_ESRB_2017_6.en.pdf
?c8d7003d2f6d7609c348f4a93ced0add 
85  ESMA  points  out  in  its  latest  Annual  Statistical  Report  on  EU  AIFs  that  almost  80%  of  AIFs  do  not 
report data on their special liquidity arrangements. A total of 20% of all AIFs declare that they do not apply 
LMTs, and only 1% report applying LMTs. 

95 

 
                                                           
framework  suggested  to  further  detail  cooperation  of  the  NCAs  in  case  of  activating 
LMTs. 

The  departure  point  for  Option  2  is  the  same:  the  range  of  LMTs  is  widened  and 
harmonised  across  the  Union  so  that  the  fund  managers  based  anywhere  have  the 
possibility to consider using any of LMTs they deem appropriate by including them into 
the  fund  documentation.  The  difference  with  Option  1  is  that  under  Option  2  fund 
managers would be required to include at least a minimum set of several, predetermined 
LMTs in the fund’s constitutional and contractual documents. In addition, to ensure that 
all  LMTs  could  be  applied  in  the  public  interest,  NCAs  would  be  equipped  with  the 
power  to  activate  any  type  of  LMT  included  in  the  legal  documents  of  the  funds 
concerned.   

Option 2 goes beyond Option 1 and directly imposes on managers of open-ended funds 
the  obligation  to  include  a  minimum  set  of  several,  predetermined  LMTs  (e.g. 
suspensions  of  redemptions,  redemption  gates  and  fees)  in  their  funds’  documentation. 
This would be a major deviation from the current framework under which fund managers 
are primarily responsible for liquidity management of their investment funds86 and could 
raise serious moral hazard concerns.  

The industry warns  against  imposing certain  LMTs on managers,  for instance EFAMA 
wrote:  ‘We  would  caution  however  against  including  restrictive  definitions  or  rules  on 
the  deployment  of  LMTs.  The  ongoing  development  of  industry  standards  reflect 
changes in markets and technology that appears to be more effective than rigid rules on 
how to apply these tools under stressed market conditions. The choice of tools must be 
always  at  the  discretion  of  the  manager  because  of  existing  different  fund  types  and 
structures.’ 

Regardless  of  these  options,  the  Commission  is  also  likely  to  request  ESMA  later  to 
update its technical advice in order to provide further details in AIFMR for determining 
the liquidity profile of the fund on a regular basis and to promote effective liquidity risk 
management.  Determining  which  LMTs  to  be  included  in  the  AIFs  rules  should  be  an 
essential part of effective and sound liquidity risk management processes. Therefore, as 
regards  liquidity  management  processes  and  systems  required  to  be  maintained  by  the 
AIFMs  further  details  in  this  respect  are  likely  to  be  provided  in  level  3  guidance  by 
ESMA, in particular in the context of stress testing exercises.87    

1.2 The impacts of the Options 

a) Option 1 

PROs: Widening the range of available LMTs and requiring fund managers to include at 
least  one  other  appropriate  LMT  in  addition  to  suspension  of  redemptions  in  the  legal 
documents of their open-ended investment funds would enable them to better deal with 
fund’s liquidity issues, as considered appropriate. Including the possibility for NCAs to 
impose the activation of redemption gates (in addition to suspension of redemptions) or 

86  According  to  Article  16(2)  AIFMD  and  Article  40(4)  of  Commission  Directive  2010/43/EU,  fund 
managers are required to ensure that liquidity profiles and redemption policies of their AIFs and UCITS are 
consistent.  
87 Article 16 AIFMD. 

96 

 
                                                           
the  LMT  obligatorily  chosen  by  the  fund  manager  under  stressed  market  conditions, 
would enhance supervisory toolkit and give national authorities more flexibility to react 
to  large-scale  investor  redemptions  and  to  ensure  the  orderly  sale  of  underlying  assets. 
Obligation  to  notify  activation  of  LMTs  by  fund  managers  and  NCAs  would  increase 
market  transparency  and  contribute  to  better  coordination  among  NCAs.  In  addition, 
ESMA  Guidelines  would  clarify  the  role  of  NCAs  and  ESMA  when  fund  redemptions 
are being suspended in public interest with cross-border financial stability implications. 
This  cooperative  set-up  would  facilitate  monitoring  of  systemic  risks  across  the  Union 
and devising appropriate responses thereto in a coordinated fashion, should need be. 

CONs:  Adjustment  of  funds’  legal  documents  to  include  at  least  one  LMT  would 
necessitate  one-off  compliance  cost.  Compliance  costs  for  fund  managers  and  NCAs 
would also marginally increase due to additional reporting obligations. 

  Activating  some  LMT,  instead  of  just  selling  assets  to  fully  satisfy 
redemption  requests,  would  protect  the  value  of  investment  thus 
benefiting the investors. 

  There  would  be  transparency  for  investors  that  it  is  not  possible  to 

guarantee absolute liquidity at any market conditions.  

  Fund managers would be able to better deal with the fund’s liquidity 

issues. 

  Requiring  AIFMs  to  choose  at  least  one  LMT  that  they  deem 
appropriate will maintain enough of discretion in the hands of AIFMs.  
  There is a slight risk of moral hazard where fund managers, instead of 
trying  to  make  sure  that  liquidity  is  managed  in  such  a  way  that  the 
promise to redeem in line with contractual obligations can always be 
honoured, could become less diligent in managing liquidity risks. 

  Enhanced liquidity risk management options for all AIFMs.  
  The possibility for NCAs to impose the activation of redemption gates 
(in  addition  to  suspension  of  redemptions)  or  the  LMT  obligatorily 
chosen by the fund manager would facilitate orderly sale of underlying 
assets and thus protect interest of all investors.  

  Notification  of  the  activated  LMTs  by  fund  managers  and  NCAs 
would  increase  market  transparency  while  ESMA  Guidelines  would 
steer  fund  suspensions  by  NCAs  in  public  interest  with  cross-border 
implications.  

Impact on 
investors 

Impact on 
AIF/AIFMs 

Impact on 
financial 
stability 

b) Option 2 

PROs: The first premise of Option 1 and Option 2 being the same, i.e. that the range of 
available  LMTs  should  be  harmonised  at  the  Union  level,  Option  2  would  open  up  a 
more  diverse  liquidity  management  options  for  all  fund  managers.  Requiring  minimum 
set of several, predetermined LMTs to be included in the funds’ constitutional documents 
would  permit  fund  managers  to  better  deal  with  fund’s  liquidity  issues,  as  considered 
appropriate. A larger toolkit  at  the disposal  of supervisors allowing them  to  deploy  the 
most suitable tool would benefit financial stability.   

CONs:  Compliance  cost  to  adjust  funds’  legal  documents.  Reduced  flexibility  of  fund 
managers  to  design  products  matching  their  clients’  needs.  Increased  moral  hazard 
concerns as responsibility for liquidity management increasingly passed onto supervisors 

97 

 
 
which may not  always be best  placed to  manage liquidity tensions  (liability  and know-
how issue). 

Impact on 
investors 

Impact on 
AIF/AIFMs 

Impact on 
financial 
stability 

  Activating  some  LMT,  instead  of  selling  assets  to  fully  satisfy 
redemption  requests,  would  protect  the  value  of  investment  thus 
benefiting the investors. 

  There is transparency for investors that it is not possible to guarantee 

absolute liquidity at any market conditions.  

  An  obligatory  set  of  LMTs  for  all  open-ended  investment  funds 
without  taking into account  all the features  of the investment  vehicle 
may discourage certain investors as their needs may not be accurately 
reflected.   

  Fund managers would be able to better deal with the fund’s liquidity 

issues. 

  Mandatory  imposition  of  a  minimum  set  of  predetermined  LMTs 
would affect managers’ flexibility to choose the most appropriate type 
of  LMT  depending  on  specific  features  of  the  investment  vehicle 
affecting its attractiveness for the investors.  

  There would be a risk of moral hazard where fund managers, instead 
of trying to make sure that liquidity is managed in such a way that the 
promise to redeem in line with contractual obligations can always be 
honoured,  could  become  insufficiently  diligent  in  managing  liquidity 
risks. 

  Larger liquidity management toolkit would be available for all AIFMs 
and their supervisors but risk of moral hazard by fund managers would 
also  increase  as  responsibility  for  liquidity  management  would  be 
shared with NCAs.  

  Notification  of  the  activated  LMTs  by  fund  managers  and  NCAs 
would  increase  market  transparency  while  ESMA  Guidelines  would 
steer  fund  suspensions  by  NCAs  in  public  interest  with  cross-border 
implications. 

1.3 Comparison of the Options  

The  following  table  compares  the  Options  against  the  objectives  listed  in  Section  4.  In 
addition,  it  assesses  the  efficiency  and  their  impact  on  SMEs.  The  economic, 
environmental,  social  and  fundamental  rights  impacts  and  coherence  with  EU  policy 
objectives is also considered. 

Objective  

Option 1 

Single market for AIFs 

++ 

Option 2 

++ 

Harmonising LMT related 
rules would contribute to 

Harmonising LMT rules would 
contribute to completing an 

98 

 
 
 
 
 
completing an internal market 
for AIFs.  

internal market for AIFs. 

Fund managers 

++  

+-  

Better able to deal with high 
fund outflows 

Larger toolkit but lower 
flexibility in designing their 
funds 

Investor protection 

++ 

+- 

Investor interests would be 
better served by preserving 
value of their investment 
where possible. 

Investor interests would be better 
served by preserving value of 
their investment where possible. 

More robust but less diversified 
offer of fund products. 

Lower risk that the fund 
would have to be suspended 
and lower risk of systemic 
liquidity crisis. 

Financial stability  

 ++  

+-  

Better liquidity management 
by fund managers. 

A mandatory set of LMTs may 
improve but also compromise 
liquidity risk management by 
fund managers 

Enhanced supervisory toolkit 
and better capability of 
supervisors to deal with cross-
border situations  

Efficiency (cost-
effectiveness) 

+- 

Larger supervisory toolkit but 
increased risk of moral hazard 
by fund managers  

+- 

Justified changes to the fund 
documentation 

Justified changes to the fund 
documentation 

99 

 
 
 
 
 
 
 
 
 
 
 
 
 
Impact on SMEs 

- 

--  

Costs for all AIFMs including 
SMEs  

Costs for all AIFMs including 
SMEs, potentially higher where 
the change to the fund 
documentation is more 
extensive. 

0 

0 

No impact  

No impact 

Other economic, 
environmental, social and 
fundamental rights 
impacts 

Coherence with EU 
policy objectives 

++ 
Aligned with overall CMU 
strategy to continue building 
internal market for financial 
services  

+ 
Aligned with overall CMU 
strategy to continue building 
internal market for financial 
services, however, may be 
judged as disproportionate 

+/- It would reduce asset 
managers flexibility in taking 
decision in the best interest of 
clients 

Coherence with EU rules  + Consistent with existing EU 

rules on acting in the best 
interest of the client  

Legend: +++ = Very positive ++ = Positive  + = Slightly positive   +/-  =  Mixed  effect                

0 = no effect 

- = Slightly negative  -- = Negative  --- = very negative 

1.4  Costs 

LMTs related proposals  may create some compliance costs, but  these would  be limited 
for  following  reasons:  1)  having  internal  processes  to  manage  risks,  including  liquidity 
risk,  is  already  part  of  the  overall  internal/organisational  costs  related  to  the  risk 
management and monitoring of certain exposures, linked to the investment strategy of the 
fund and as set by the AIFMD and UCITSD conduct rules on duties towards investors. 
Duties towards investors/beneficiaries mean that relevant entities have to take investment 
decisions  in  the  best  interest  of  their  investors  or  beneficiaries,  and  in  accordance  with 
the  mandate  received  from  them.  The  proposed  amendments  would  induce  more 
harmonisation  and  make  risk  management  more  efficient  by  making  LMTs  available 
anywhere  in  the  Union.  The  adoption  of  a  common/standardised  approach  through 
ESMA  guidelines  when  the  LMTs  could  be  activated  and  what  LMTs  would  be  most 
appropriate is likely to reduce such costs. 

In  terms  of  disclosure,  based  on  feedback  from  the  industry  from  the  past  public 
consultations,  there  are  costs  attached  for  updating  contractual  and  pre-contractual 
documents, prospectuses in particular. An example of one experience is that updating a 
prospectus  costs  €  40  000  per  product/service.  However,  feedback  received  from 

100 

 
 
stakeholders and targeted interviews also highlighted the fact that, because of regulatory 
changes or other reasons prospectuses of their products are revised anyways at least once 
every year.  

1.5 Preferred Option 

Based  on  the  analysis  of  the  available  options  and  taking  into  account  stakeholder 
feedback,  the  AIFMD  review  should  proceed  with  Option  1.  This  option would  ensure 
that all fund managers in the EU would, in addition to suspension of redemptions, have 
access  to  another  appropriate  LMT  while  also  enhancing  supervisory  toolkit  and 
addressing  coordination  issues  related  to  suspensions  of  redemptions  in  public  interest 
with cross-border financial stability implications. This would allow to reach the specific 
objective  of  harmonising  the  availability  of  LMTs  across  the  EU  in  the  most  effective 
way  (see  Section  4  on  the  “Objectives”),  ensuring  coherence  with  the  overall  CMU 
strategy and the existing sectoral EU rules on duties towards investors, while not having 
the cost of reduced flexibility for fund managers, like under Option 2. 

2.1 Options to improve supervisory reporting by providing supervisors with more 
granular  data  for  market  monitoring  while  removing  the  reporting  duplications 
for AIFs and UCITS managers 

There  are  two  Options  considered  to  address  the  problem  of  insufficient  data  for  the 
purposes of market monitoring. 

 Option 

Description  

1: 

Option 
Eliminate 
restrictions  to  the  granular 
and  mandate 
reporting 
ESMA  to  work  out  together 
with  the  ECB  and  EIOPA 
for 
technical 
feasibility 
and 
statistical 
merging 
supervisory reporting 

Option 2: Impose more 
granular supervisory 
reporting requirements and 
implement IOSCO 
recommendations on the 
leverage reporting 

a)  Eliminating  data  provision  restrictions  in  the 

AIFMD (level 1). 

technical 

b)  ESMA together with the ECB and EIOPA assess 
the 
the 
feasibility  of 
reporting  of  supervisory  and  statistical  data  by 
fund  managers  through  developing  a  common 
granular  reporting  template  satisfying  the  needs 
of the relevant authorities. 

integrating 

c)  The  relevant  authorities  collect  the  data  jointly 

and share it among themselves.  

a)  Eliminating  data  provision  restrictions  in  the 

AIFMD (level 1). 

b)  Impose  more  granular  supervisory  reporting 
requirements  on  AIFMs  and  also  introduce 
reporting requirements for UCITS  

c)  Fine-tune  leverage  reporting  requirements  in 
accordance with the IOSCO recommendations  

Option 1 proposes to prepare the ground for a fundamental overhaul of the AIFMR and 
UCITS reporting obligations at the EU level. First, it would be necessary to remove the 
AIFMD  level  1  restriction  to  the  data  collection,  which  is  limited  to  the  largest 
exposures,  main  traded  instruments  and  etc.  Level  1  text  could  simply  state  that 
supervisory reporting should be provided in line with level 2 requirements.  

101 

 
 
 
Second, it will be necessary to  harmonise  granular data collection in  line with  the data 
needs of the ECB, ESMA, EIOPA and NCAs, potentially creating a centralised data hub 
accessible to multiple and different users for diverse purposes. This Option proposes to 
mandate ESMA to assess, together with the ECB and EIOPA88, the technical feasibility 
of  developing  a  common  reporting  template89  for  the  reporting  of  supervisory  and 
statistical  data  for  the  use  by  the  relevant  authorities,  collecting  the  data  jointly  and 
sharing  it  (potentially  from  a  centralised  data  hub).  Based  on  the  outcome  of  this 
assessment,  the  AIFMR  supervisory  reporting  template  could  be  reformed  and  a 
reporting regime for UCITS introduced. 

Option  2  would  skip  the  preparatory  step  aiming  to  further  integrate  supervisory  and 
statistical  reporting  and  would  require  more  granular  data  reporting  from  AIFMs  and 
would fine tune leverage reporting by taking into account the IOSCO recommendations 
also introducing supervisory reporting requirements for UCITS.  

to  better  understand  complex 

More specifically, the AIFMD reporting framework would be further enhanced to require 
reporting of unique entity identifiers (LEI) to facilitate the mapping of AIFMD data with 
other data sources (such as transaction data under EMIR, MiFID II/ MiFIR, SFTR) and 
allow  authorities 
fund  group  structures  and 
interdependencies.  A  more  specific  fund  classification  would  be  introduced  to  better 
reflect the type of funds registered as AIFs. Currently, a category of “other funds”, which 
comprises mostly equity and fixed income funds, represents around 60% of aggregate net 
asset value.  It  would also be helpful to  identify  MMFs  and ELTIFs  under the AIFMD. 
More  granular  information  on  fund  investments  and  investors  would  be  introduced  to 
allow  authorities  to  (better)  assess  the  risk  of  fire  sales  or  disorderly  markets  and 
spillovers to financial institutions.  

Finally,  IOSCO  recommends  jurisdictions  to  use  and  report  to  IOSCO  data  on  Gross 
Notional  Exposure  (GNE)  or  Adjusted  GNE  aggregated  by  asset  class.  Including 
Adjusted GNE among the AIFMD leverage measures and collecting data on it, with the 
breakdown  as  indicated  in  the  IOSCO  Leverage  framework,  would  allow  IOSCO  to 
collect consistent data points across the EU and other jurisdictions.  

2.2 The impacts of the Options 

Option 1: Mandate ESMA to assess technical feasibility and merge statistical 
supervisory reporting in cooperation with the ECB and EIOPA 

PROs:  Option  1  is  in  line  with  the  supervisory  data  strategy,  which  spells  out  the 
approach to establish a common data space in the financial sector. Therefore, this Option 
proposes to consider the on-going cross sectoral work in this area and prepare the ground 
for  making  supervisory  reporting  requirements  of  fund  managers  part  of  a  more 
integrated data collection system that would deliver granular, consistent, and timely data 
to  supervisory  authorities  at  EU  and  national  level,  while  minimising  the  aggregate 
reporting costs and burden for all parties.  

88 EIOPA needs to collect data, within Solvency II framework, on portfolios of CIU’s invested in by 
insurance companies. 
89 With aligned data points but not necessarily joint collection of data 

102 

 
                                                           
CONs:  It  would  take  longer  because  this  Option  would  address  the  issue  of  significant 
overlaps between the AIFMR supervisory reporting obligations and reporting to the ECB 
for statistical purposes. However, this is a necessary interim step to increase granularity 
of  the  data  reported  by  AIFMs  in  an  efficient  way.  This  would  well  inform  a  potential 
decision to subject UCITS to harmonised supervisory reporting requirements that would 
form a part of a more integrated and centralised supervisory reporting space. 

Impact on 
investors 

Impact on 
AIF/AIFMs 

Impact on 
financial 
stability 

  None for the time being    

  Lower  aggregate  reporting  costs 

if  more 

integrated  data 

collection system is subsequently introduced. 

  More 

timely,  granular  and  consistent  data  accessible  by 
supervisory authorities if more integrated data collection system 
is introduced  
Identified  data  needs  for  different  public  authorities  analysed  in 
the feasibility study.  

 

Option 2: Impose more granular supervisory reporting requirements and implement 
IOSCO recommendations on the leverage reporting.  

PROs: Improving fund classification and introducing LEI could improve the supervisory 
ability to link data and monitor risks at limited costs. More granular information on fund 
investments  and  investors  would  likewise  improve  the  currently  constrained  ability  of 
supervisors  to  monitor  risks.  Integrating  the  IOSCO  recommendations  in  the  leverage 
reporting would allow investors to compare leverage use by funds heading from foreign 
jurisdictions.  European  and  foreign  supervisors  would  have  a  common  ground  in 
addressing issues of risk build-up in different markets and globally.  

In  principle,  reporting  more  granular  data  should  be  less  costly  for  fund  managers, 
however, one-off compliance costs would have to be incurred departing from the current 
requirements  to  report  certain  aggregate  statistics  (which  are  based  on  more  granular 
data).  

CONs:  Option  2  would  improve  the  data  coverage  for  market  monitoring.  However,  it 
would not remove reporting duplications and would not establish a common data space 
for the supervisory authorities. These changes would bring significant compliance costs 
that  may  need  to  be  incurred  yet  again  when  moving  towards  more  integrated  data 
collection system in the future. Interim changes will not justify implementation costs for 
a short time use of these improvements.  

Impact on 
investors 

 

 

Increased  market  transparency  when  ESMA  processes  the  received 
data and issues AIF market reports. 
Investors may benefit from a more stable investment fund sector due 
to better risk monitoring. 

Impact on 
AIF/AIFMs 

  One-off compliance costs to adjust the reporting systems.  
  Limited costs for AIFMs to obtain an LEI (approximately €50-80 per 

year). 

  Over  the  medium  term  reporting  more  granular  data  could  be  less 

103 

 
 
 
Impact on 
financial 
stability 

costly  for  the  fund  managers  that  providing  certain  aggregate 
statistics (which are based on more granular data) under the current 
rules. 

  Supervisors would access more granular data for market monitoring. 
  Reporting of LEI would substantially enhance financial stability risk 

monitoring. 

  More complete information on fund investments and investors would 
allow supervisors  to  better assess the risk of fire sales or disorderly 
markets and spill-overs to financial institutions. 

2.3 Comparison of the Options  

The  following  table  compares  the  Options  against  the  objectives  listed  in  Section  4.  In 
addition,  it  assesses  the  efficiency  and  their  impact  on  SMEs.  The  economic, 
environmental,  social  and  fundamental  rights  impacts  and  coherence  with  EU  policy 
objectives is also considered. 

Objective  

Option 1 

Fund managers 

+- 

Option 2 

- 

Major change to the supervisory 
reporting requirements with 
ensuring compliance costs 

Major change to the supervisory 
reporting requirements with 
ensuring compliance costs 

Time and resource savings when 
the reporting overlaps are 
eliminated 

Investor protection  + 

+ 

Investors potentially better 
informed of the market situation 

Investors potentially better 
informed of the market situation 

Financial stability  

 ++  

+ 

104 

 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
More granular data and reporting 
of LEI for better financial stability 
risk monitoring 

More granular data and reporting 
of LEI for better financial 
stability risk monitoring  

Better data availability for and 
sharing among different 
authorities 

+- 

- 

Compliance costs for changing 
internal systems and obtaining LEI 

Eliminated reporting duplication 
would bring efficiencies 

Compliance costs for changing 
internal systems and obtaining 
LEI  

Efficiency (cost-
effectiveness) 

Impact on SMEs 

- 

- 

Costs for all AIFMs including 
SMEs 

Costs for all AIFMs including 
SMEs 

0 

Other economic, 
environmental, 
social and 
fundamental rights 
impacts 

Coherence with EU 
policy objectives 

++ 
Aligned with the supervisory data 
strategy  

0 

- 

Not aligned with the supervisory 
data strategy perpetuating 
supervisory reporting silos  

Legend: +++ = Very positive ++ = Positive  + = Slightly positive   +/-  =  Mixed  effect                

0 = no effect 

- = Slightly negative  -- = Negative  --- = very negative 

2.4 Costs 

The interim step chosen will not produce any costs just yet. It is not possible to estimate 
what the feasibly study will conclude and therefore to what extent the reporting template 
would change.   

It is very likely, however, that if the ECB statistical reporting requirements and AIFMR 
supervisory reporting requirements are merged, this could produce one-off costs to move 
to  a  single  template,  but  the  savings  are  likely  to  occur  by  eliminating  the  reporting 

105 

 
 
 
 
 
 
 
 
duplications and cutting down on reporting submissions directing the data to a centralised 
hub. Taking out LEI will result in a limited one-off and on-going cost but this is justified 
by the financial stability imperative.   

2.5 Preferred Option 

Based  on  the  analysis  of  the  available  options  and  taking  into  account  stakeholder 
feedback, the AIFMD review should proceed with Option 1. This option would require a 
mandate  for  ESMA  to  assess  technical  feasibility  and  merge  statistical  supervisory 
reporting in cooperation with the ECB and EIOPA.  

Option  1  is  preferable  to  Option  2  because  it  proposes  a  coordinated  approach  to 
achieving a comprehensive and integrated data space in the investment fund sector with 
the ensuing benefits for financial stability while also alleviating the reporting burden for 
the market participants in the near future. 

3.1 Options to ensure the equal treatment of custodians upholding investor protection 

regardless of the type of entity that safe keeps AIFs’ or UCITS assets 

There  are  two  Options  considered  how  CSD  could  be  brought  into  the  custody  chain 
along the other custodians.  

Option 

Description  

Option  1:  Subject  CSDs  to 
the  AIFMD  and  UCITSD 
in 
rules  when 
custody funds’ assets. 

they  hold 

Option  2:  Subject  CSDs  to 
the  AIFMD  and  UCITSD 
rules  when 
in 
custody  funds’  assets  with 
some facilitation 

they  hold 

a)  Propose  to  provide  in  the  AIFMD  that  investor 
CSDs  holding  AIF  assets  are  delegates  of  the 
depositary.  

b)  Propose  to  clarify  in  the  UCITSD  that  investor 
CSDs holding UCITS assets are delegates of the 
depositary for the purpose of the UCITSD. 
Subject CSDs to the AIFMD and UCITSD rules 
when  they  hold  in  custody  funds’  assets  but 
wave ex-ante due diligence requirements for the 
depositary. 

Option 1 would suggest to state clearly in the AIFMD and UCITSD CSDs, acting outside 
their primary function as market infrastructure, are subject to the delegation rules under 
the AIFMD. This would ensure level playing field for competing financial intermediaries 
and  a  proper  communication  with  the  depositary  so  that  the  latter  could  carry  out  its 
duties.  

CSDs  quote  their  specialised  legal  framework  as  sufficient  to  protect  investors.  They 
reject the idea of having to apply the asset segregation rules, which are more detailed for 
the delegates of the depositaries than for the CSD in many jurisdictions, and they refuse 
being  subject  to  further  obligations  allowing  the  depositary  to  fulfil  its  oversight 
function.  Nevertheless,  being  subject  to  the  CSDR  does  neither  match  the  asset 
segregation  requirements  as  laid  down  in  the  AIFMD  and  UCITS,  nor  ensure  the 

106 

 
 
 
 
 
 
information flow to the depository, nor allow the depositary to fulfil its due diligence and 
control.  

Option 1 is supported by the majority of the stakeholders (approximately 70%). It builds 
to a large extent on the ESMA opinion (no 34-45-277) and the extensive work performed 
by  ESMA  on  this  topic,  including  two  rounds  of  consultations,  two  roundtable 
discussions with stakeholders/experts and work by a dedicated ESMA Task Force. 

Option  1 addresses the issue of uneven playing field among different service providers 
and also  the issue of inhibited depositary duties  for the benefit of investors in  AIF  and 
UCITS. Nevertheless, it does not take into account the strengths of the CSDs where those 
could be recognised in adjusting the depositary’s duties to the proportionate extent.  

The  basis  of  Option  2  is  the  same  as  in  Option  1  suggesting  to  subject  CSD  to  the 
relevant rules of the AIFMD and UCITSD where these entities hold in custody assets of 
investment  funds.  It  is  fully  aligned  with  the  ESMA  opinion  (no  34-45-277). 
Consequently,  it  recognises  that  ex-ante  due  diligence  obligation  of  such  a  delegate  by 
the depositary may be unnecessary as a CSD licenced in the Union is properly vetted by 
the  supervisory  authorities.  Therefore,  additional  efforts  from  the  depositary  in  this 
respect would be superfluous. Option 2 is superior to Option 1 because it is reflects the 
principle of proportionality of the rulemaking removing unnecessary obligations for the 
depositaries that would duplicate a more extensive work already carried out by the public 
authorities.  

3.2 The impacts of the Options 

Option 1: Subject CSDs to the AIFMD and UCITSD rules when they hold in custody 
funds’ assets. 

PROs: Option 1 would put all the custodians would be put at the same footing and would 
enable the depositary to carry out its duties and fully respecting the AIFMD.  

CONs:  Depositary  would  be  required  to  perform  ex-ante  due  diligence  of  the  CSD, 
which  is  superfluous  given  its  being  vetted  by  the  public  authorities,  which  issues  the 
CSD licence.  

Impact on 
depositories 

Impact on 
investors 

Impact on 
CSDs 

  Depositaries  would  be  able  to  carry  out  their  duties  by  receiving  the 

necessary information flow. 

  They  would  do  ex-ante  due  diligence  to  all  third  parties,  including 

 

CSDs, to whom custody of assets is delegated. 
Improved  investor  protection  as  the  AIFMD  rules  apply  and  the 
depositary regime would be given a full effect 

  CSDs would not experience technical challenges (neither to implement 
the  requested  asset  segregation  nor  to  transmit  the  information  which 
enables the depositary to carry out its duties) 
  Legal obligation to cooperate with the depositary. 

107 

 
 
 
 
Option 2: Subject CSDs to the AIFMD and UCITSD rules when they hold in custody 
funds’ assets with some facilitation 

PROs: Option 2 would also put all the custodians would be put at the same footing and 
would  enable  the  depositary  to  carry  out  its  duties  and  fully  respecting  the  AIFMD. 
Depositary would not be required to perform ex-ante due diligence of the CSD, which is 
superfluous  given  its  being  vetted  by  the  public  authorities,  which  issues  the  CSD 
licence. 

CONs: No notable. 

Impact on 
depositories 

Impact on 
investors 

Impact on 
CSDs 

  Depositaries  would  be  able  to  carry  out  their  duties  by  receiving  the 

necessary information flow. 

  They would be able to rely on CSD authorisation or recognition when 
undertaking  ex-ante  due  diligence  in  case  they  intend  to  appoint  an 
investor CSD as delegate 
Improved  investor  protection  as  the  AIFMD  rules  apply  and  the 
depositary regime would be given a full effect 

 

  CSDs would not experience technical challenges (neither to implement 
the  requested  asset  segregation  nor  to  transmit  the  information  which 
enables the depositary to carry out its duties) 
  Legal obligation to cooperate with the depositary. 

3.3 Comparison of the options 

The  difference  between  the  two  options  is  that  the  Option  2  facilitates  appointment  of 
CSD  as  a  delegate  by  allowing  depositary  to  rely  on  the  CSD  authorisation  or 
recognition,  when performing the ex-ante due diligence requirements  as required under 
the  AIFMD.  The  on-going  due  diligence  requirements  as  defined  in  the  AIFMD  are 
maintained.  The  only  difference  when  assessing  how  well  the  Options  reach  the 
objectives, which are relevant for levelling the playing field for custodians, is that Option 
2  proposes  a  more  proportionate  solution,  as  it  facilitates/accelerates  ex-ante  due 
diligence  by  the  depositary  by  recognising  CSD  authorisation  or  recognition.  For  this 
reason, and building on ESMA’s Opinion, Option 2 is retained.  

The  following  table  compares  the  Options  against  the  objectives  listed  in  Section  4.  In 
addition,  it  assesses  the  efficiency  and  their  impact  on  SMEs.  The  economic, 
environmental,  social  and  fundamental  rights  impacts  and  coherence  with  EU  policy 
objectives is also considered. 

Objective  

Option 1 

++ 

Level-playing field 
between entities 
offering custody 
services  

Option 2 

++ 

Equal level-playing field 
between custodians and investor 
CSDs 

Equal level-playing field between 
custodians and investor CSDs 

108 

 
 
 
 
Investor protection  ++ 

++ 

Improves investor protection as 
harmonised AIFMD and 
UCITSD rules apply 

Improves investor protection as 
harmonised AIFMD and UCITS 
rules apply  

Financial stability   0 

0 

No impact 

No impact  

Proportionality 

0 

+ 

No impact, as general ex-ante 
due diligence should be applied 
by the depositary 

Facilitates/accelerates ex-ante due 
diligence check by the depositary 

Coherence with EU 
policy objectives 

+ 

+ 

Ensures application of AIFMD 
and UCITSD, including the 
strict liability regime  

Ensures full application of 
AIFMD and UCITSD, including 
the strict liability regime 

Legend: +++ = Very positive ++ = Positive  + = Slightly positive   +/-  =  Mixed  effect                

0 = no effect 

- = Slightly negative  -- = Negative  --- = very negative 

3.4 Costs 

Depositaries and CSD will have to revise their contractual relationship to ensure the flow 
of  information.  This  will  cause  limited  one-off  costs,  which  are  justified  by  the 
imperative  of  investor  protection.  Depositaries  need  to  have  a  contractual  relationship 
with all delegates, no matter which status this entity has.  

3.5 Preferred Option 

Bringing in CSDs into the custody chain will ensure that depositaries can discharge their 
duties properly and that under law CSDs will be obliged to ensure a proper information 
flow  to  the  depositaries  on  the  fund  holdings  that  the  CSDs  keep  in  custody.  Is  it 
preferred to favour the Option 2 that reduces unnecessary burden for the depositaries and 
also for the CSDs when appraising the suitability of such custodians. 

Part B: Technical clarification of the current rules  

109 

 
 
 
 
 
 
 
 
 
 
 
 
The  proposal  will  also  contain  technical  updates  of  the  cross-references  and  technical 
clarifications of the existing rules learning from the discussions in ESMA and relying on 
the legal interpretation of the current provisions by the European Commission.  

ANNEX  7.  THE  MAIN  FEATURES  OF  A  SELECTION  OF  NATIONAL  LOAN  ORIGINATING 
FRAMEWORKS  

In April 2016, ESMA published an opinion on the Key principles for a European 
framework on loan origination by fund. This opinion contained a survey which results 
are summarised below: 

Table 3:  Loan originating national practices 

Is loan origination by 
funds allowed in NCAs 
jurisdiction? 

Do NCAs have a specific legal 
framework for that activity? 

Yes 
No 
N/A 

80,0% 
16,7% 
3,3% 

33,3% 
70,8% 
16,7% 

Source: ESMA opinion (ESMA/2016/596) Key principles for a European framework on 
loan origination by funds, April 2016 (Answer for France has been updated). 

110 

 
 
 
 
 
 
 
 
 
 
  
  
  
  
  
 
 
 
Annex of ESMA opinion (ESMA/2016/596)  – Mapping on national practices as to loan-
origination by funds 

111 

 
 
 
 
112 

 
 
113 

 
 
 
 
 
 
Table 4: Loan Origination by Investment Funds, Discussion Paper, Central Bank of 
Ireland July 2013 

114 

FranceGermanyItaly IrelandSpainBelgium The NetherlandsLuxembourgFund StructureClosed and domiciled in France or otherwise rely on ELTIF regime.Closed Spezial-AIF for professional/semi-professional investors.Closed.Closed ended with finite life.  Distributions and redemptions may be allowed out of unencumbered cash and available liquid assets.Open ended.None.Closed or in limited circumstances open with redemption arrangements matching liquidity of underlying loans.Closed or open-ended Lux AIF.Leverage Limits30% of NAV for cash borrowings only.For German AIFs 30% of net capital.  For other AIFs, subject to AIFMD tests.130% for retail investor funds/150% for professional funds.Gross assets must not exceed 2005 of NAV.Borrowing not permitted for loan originating funds but use of leverage through derivatives is permitted.None.None.None.Exposure LimitsNone.Loans granted to single borrower cannot exceed 20% of net capital.Loans granted to single borrower cannot exceed 10% of total assets.Loans granted to single borrower cannot exceed 25% of net assets.Sufficiently' diversified portfolio but no fixed borrower limits.None.None.Specific to funds regime - eg. Cannot exceed 30% of gross or net assets for SIFs and RAIFs.Maturity and lock-upsLoans can only be sold during life of fund with approval of AMF or specific circumstances.None.Credit maturity cannot exceed fund's maturity.None.Use of lock-up periods is allowed that may be extended to match maturity of loans.None.None.None.Risk ManagementSpecific credit files must be held.  Loan decision procedure must be formalized.Must have adequate structures and procedures for credit processing, management of NPLs and early detection of risks.Define process for managing credit risk.Special risk management, assessment, credit granting, monitoring and valuation procedures.Risk management shall monitor non-fulfillment of commitments to repay cash or deliver securities.  Periodic simulation exercises to assess impact of adverse market conditions.None.Credit manager must take general regulatory requirements into account including those dictated by the AIFMD.In addition to general AIF requirements and investment fund laws, must: address risks of originatiion activity, avail of proper organisational and governance structures with approriate technical and human resources with focus on credit and liquidty risk management, concentration, avoidance of conflicts of interests and proper disclosure and transparency.Credit RestrictionLending to credit institutions and CI schemes prohibited.No lending to consumers and diversification requirement for credit positions.May only take loans from banks, Art. 106 financial intermediaries and other entities duly authorised to grant loans.Must limit to issuing loans, participating in loans or lending.  May not lend to natural persons, AIFM, depositary or related parties, other CI schemes financial institutions or related companies, investors in equities or traded investments or commodities. None.None.None.None.Other FeaturesDerivative contracts only for hedging.Some exceptions for funds granting loans to companies in which they hold shares.Derviatives only for hedging, restrictions on transactions with related parties and limits on fund issuing guarantees.Restrictions on acquiring loans from credit institutions, retaining exposures correlated to performance of loan or providing admin, credit assessment or monitoring service unless certain conditions met.Only available to professional or 'qualified' investors.Consumer, mortgage and SME lending are specifically regulated.None.None. 
 
 
 
 
 
 
 
ANNEX 8. MAPPING OF LIQUIDITY MANAGEMENT INSTRUMENTS AVAILABLE FOR AIFMS IN 

NATIONAL FRAMEWORKS  

Source: ESMA34-39-1119 

Graph 5 

Source: ESMA 50-165-1524 TRV report –Availability of LMTs for a sample of bond 
funds  

There are essentially two main types of LMTs, namely ex ante and ex post tools.  Ex ante 
tools,  such  as  swing  pricing  and  anti-dilution  levies,  transaction  costs  are  on 
subscriptions or redemptions rather than existing investors. They can be used to mitigate 
“first mover advantage” by ensuring that the remaining investors are not disadvantaged 
by the actions of the redeeming investors. This should, to some extent, remove incentives 
for investors to “move first” and redeem before others. Ex post tools, such as gates and 
redemptions in kind, suspension of redemptions, allow fund managers to control or limit 
outflows and thus have more time and flexibility to ensure the orderly sale of underlying 
assets,  especially  in  times  of  stressed  market  conditions.  These  tools  typically  relieve 
managers  from  the  obligation  to  immediately  sell  assets  (at  or  below  market  prices)  in 

115 

 
 
 
response to redemption requests by investors. Ex post tools are typically employed under 
stressed market conditions. 

Moreover, some LMTs (particularly swing pricing and anti-dilution levies) can be used 
(and are used by funds in some jurisdictions) to ensure equal treatment of all clients in all 
situations when there are high inflows/outflows and related transaction costs. From this 
perspective, it is also important that asset managers across the EU have the same set of 
tools available so that their clients can choose to invest in AIFs where their investments 
are managed in line with their needs. 

Currently, the availability and implementation of additional LMTs for investment funds 
varies  significantly  across  EU  Member  states.  While  the  suspension  of  redemptions  by 
the fund manager or by the NCA is explicitly allowed under AIFMD, the Directive does 
not stipulate any other LMT. There are therefore differences in the availability of as well 
as  the  specific  procedures  governing  the  availability  and  hence  use  of  additional  LMT 
across jurisdictions (see Table in the Annex with the overview of LMTs across the EU). 
In  its  September  2020  report90  on  Trends,  Risks  and  Vulnerabilities,  ESMA  states  that 
“in light of the deterioration in market liquidity and rising redemption requests [in Spring 
2020],  asset  managers  used  tools  such  as  gates,  suspension  of  redemption  and  swing 
pricing although there is significant variation in the availability of those tools across EU 
jurisdictions.”  Ensuring  the  availability  of  a  diverse  and  harmonised  set  of  liquidity 
management  tools  in  all  EU  Member  States  would  thus  increase  the  capacity  of  fund 
managers  to  deal  with  redemption  pressures  even  in  overall  stressed  market  conditions 
and thus also to better handle cross-border spill-overs of liquidity tensions. Indeed, in a 
letter to EVP Dombrovskis in August 2020 on the AIFMD Review91, ESMA states that 
“the  experience  of  market  dislocation  during  the  on-going  COVID-19  crisis  also 
demonstrates  the  need  for  all  LMTs  to  be  available  in  all  jurisdictions  in  a  consistent 
manner.”   

90 https://www.esma.europa.eu/sites/default/files/library/esma_50-165-
1287_report_on_trends_risks_and_vulnerabilities_no.2_2020.pdf (p. 32) 
91 https://www.esma.europa.eu/sites/default/files/library/esma34-32-
551_esma_letter_on_aifmd_review.pdf 

116 

 
 
 
 
 
 
 
                                                           
ANNEX 9. EVALUATION OF THE AIFMD 

117 

   EUROPEAN COMMISSION  Brussels, XXX  […](2020) XXX draft  COMMISSION STAFF WORKING DOCUMENT  EVALUATION  [Optional element] [Mandatory element] [Mandatory element]  
 
 
 
 
 
 
 
 
 
 
1. 

INTRODUCTION 

The  Alternative  Investment  Fund  Managers  Directive  (AIFMD)  was  adopted  following  the 
global  financial  crisis  of  2008  to  improve  supervisory  oversight  of  the  alternative  asset 
management sector. Whilst seeking to ensure a coherent supervisory approach to the risks of 
the  financial  system  and  to  provide  a  high  level  of  protection  to  investors,  the  Union  co-
legislators also sought to facilitate integration of the AIF market, which was suffering from 
regulatory fragmentation and thus from hampered development.  

The AIFs’ universe is  heterogeneous in  terms  of investment  strategies,  markets,  asset types 
and legal forms. The diverse investment strategies pursued by different types of AIF expose 
those  AIFs  and  their  investors  to  a  wide  range  of  potential  risks  and  may  result  in  specific 
vulnerabilities in the financial system. The EU co-legislators considered that regulation of the 
EU  alternative  investment  fund  sector  could  be  best  achieved  by  focusing  on  establishing 
common  requirements  for  the  AIFMs  as  opposed  to  their  managed  AIFs.92  As  a  result,  the 
AIFMD  governs  the  authorisation  and  operation  of  AIFMs  managing  all  types  of  AIFs, 
irrespective  of  their  legal  structure  or  the  investment  strategy  employed,  in  so  far  as  the 
managed investment funds are not covered by Directive 2009/65/EC (UCITSD).93  

The following sections set out the purpose of the AIFMD evaluation (see section 1.1 below), 
as  well  as  the  substantive  and  geographic  scope  of  the  AIFMD  evaluation  (see  section  1.2 
below). 

1.1 Purpose of the AIFMD evaluation 

Under Article 69 AIFMD, the European Commission had to start by 22 July 2017 a review of 
the application and scope of the Directive, its impact on investors, AIFs and AIFMs, within 
the EU and in third countries, and the degree to which its objectives have been achieved.  The 
Commission shall, if necessary, propose appropriate amendments.  

In  this  context,  KPMG  Law  Rechtsanwaltsgesellschaft  mbH  as  lead  firm,  with  the 
subcontractors  KPMG  AG  Wirtschaftsprüfungsgesellschaft,  Germany  and  KPMG  LLP, 
United Kingdom  supported by the European network of KPMG, has been mandated by the 
Directorate-General  for  Financial  Stability,  Financial  Services  and  Capital  Markets  Union 
(DG FISMA) to conduct a general survey and to carry out an evidence-based study.94   

The purpose of this evaluation is to gather evidence on the functioning of the AIFMD taking 
into account its objectives. It will serve as a basis for the Commission to decide whether the 
Union harmonised approach has caused any ongoing major market disruption and whether or 
not the AIFMD functions effectively in light of the principles of the internal market and of a 
level playing field. The evaluation covers the period from the application of the AIFMD on 
22 July 2013 to 31 December 2020. 

92 This shift of paradigm has even prompted some EU Member States to no longer require a separate 
authorisation for certain types of AIFs, for example, Luxembourg RAIFs. 
93 Article 4(1)(a) of the AIFMD. 
94 KPMG, Report on the Operation of the alternative investment fund managers directive (AIFMD) Directive 
2011/61/EU, FISMA/2016/105(02)/C, 7 February 2019 (hereafter: KPMG Report). 

118 

 
 
 
 
 
 
 
 
                                                           
As  required  by  the  Commission’s  Better  Regulation  Guidelines,95  the  evaluation  examines 
whether  the  objectives  of  the  AIFMD  were  met  during  the  period  of  its  application 
(effectiveness)  and  continue  to  be  appropriate  (relevance)  and  whether  the  AIFMD,  taking 
account  of  the  costs  and  benefits  associated  with  applying  it,  was  efficient  in  achieving  its 
objectives  (efficiency).  It  also  considers  whether  the  AIFMD,  as  legislation  at  EU  level, 
provided added value (EU added value) and is consistent with other Commission documents 
providing  guidance on the application of the AIFMD and related legislation with  relevance 
for alternative investment fund managers (coherence).  

1.2 Scope of the AIFMD evaluation 

The substantive scope of the evaluation includes the AIFMD, together with the AIFMR,96 in 
their entirety. Insofar as the AIMFR refers to the provisions of the AIFMD and inform their 
application and interpretation, the assessment of the AIFMD would not be complete if it did 
not include them. 

Since the adoption of the current AIFMD, there have been a number of market developments, 
notably  the  withdrawal  of  the  United  Kingdom  (UK)  from  the  European  Union  (EU),  a 
process known as Brexit. 

The evaluation will focus on the following objectives:  

(i)  Appropriate  authorisation  and  registration  requirements  for  all  AIFMs  operating  in  the 
EU:  specifically  this  would  require  all  AIFMs  to  respect  and  satisfy  a  common  set  of 
requirements (minimum capital, fit and proper, transparency, etc.) before operating across the 
EU.  

(ii)  Improved  monitoring  of  macro-prudential  risks  through  the  provision  of  relevant 
information  to  prudential  authorities. To take due account  of the cross-border dimension of 
these  risks,  relevant  information  would  need  to  be  pooled  at  European  or  global  level.  At 
operational  level,  this  objective  would  require  the  collection  of  relevant  data  on  inter  alia 
leverage, trading activity, risk concentrations and performance, and appropriate information-
sharing mechanisms to be established.  

(iii)  Enhanced  management  of  micro-prudential  risks  through  the  imposition  of  strict  risk 
management controls on market, liquidity, counterparty (credit and settlement, especially in 
case of short selling) and operational risks.  

(iv)  A  common  approach  to  protecting  investors  in  AIFM-managed  funds  is  required, 
including improvements in investor disclosures to ensure that due diligence can be performed 
effectively.  Ensuring  the  proper  management  of  conflicts  of  interest  and  imposing 
independent  controls  and  processes  in  key  risk  areas,  in  particular  valuation  and  custody 
functions, would also help to achieve this specific objective.  

95 Commission staff working document, Better Regulation Guidelines, Brussels, 7 July 2017, SWD (2017) 350. 
96 Commission Delegated Regulation (EU) No 694/2014 of 17 December 2013 supplementing Directive 
2011/61/EU of the European Parliament and of the Council with regard to regulatory technical standards 
determining types of alternative investment fund managers 

119 

 
 
 
 
 
 
 
 
 
 
 
                                                           
(v) Greater public accountability of AIFM  investing in  and managing  companies should be 
achieved  so  as  to  ensure  that  such  activities  are  subject  to  an  appropriate  level  of  public 
scrutiny.  The  operational  objective  related  to  this  is  to  impose  additional  transparency 
requirements  on  AIFM  when  they  acquire  controlling  stakes  in  companies  with  the  aim  to 
actively engage in and influence these companies' future management.  

(vi) The removal of barriers to the efficient cross-border distribution of AIF should allow an 
internal  market  in  AIF  in  the  EU  to  develop  which  is  grounded  in  a  robust  and  consistent 
regulatory supervisory framework.  

It is against these objectives that possible actions in relation to AIFM were proposed in the 
Impact Assessment.97 

The  geographic  scope  of  the  evaluation  extends  to  all  EU  Member  States.98  By  virtue  of 
Article 288 TFEU the AIFMD is binding, as to the result to be achieved, upon each Member 
State to  which it is  addressed, but  shall leave to  the national  authorities the  choice of form 
and methods. 

The  three  EFTA  States  (Iceland,  Liechtenstein  and  Norway)  are  not  part  of  the  evaluation 
since  the  AIFMD  is  not  directly  applicable  in  these  countries.  Secondary  EU  law  (such  as 
Commission  regulations)  first  has  to  be  included  in  the  Agreement  on  the  European 
Economic Area ("EEA Agreement")99 on the basis of Article 60 of the EEA Agreement and 
must  then  be  incorporated  into  the  national  legal  orders  of  the  EFTA  States  to  become 
applicable. Subject to this process, the AIFMD is applicable in the EFTA States. In view of 
the Commission’s obligation to informally seek advice from experts of the EFTA States for 
the elaboration of new legislative proposals.100  

2.  BACKGROUND TO THE INTERVENTION 

Concerns  about  AIFs  date  back  to  market  disruptions  prior  to  the  financial  crisis  in 
2007/2008 and centred on the failure of Long-Term Capital Management in 1998. This case 
highlighted  associated  risk  exposures,  market  concentrations  and  the  lack  of  regulatory 
oversight  and  –  on  the  basis  of  an  isolated  worst-case  scenario  –  brought  to  regulatory 
attention that highly leveraged funds contributed to systemic risks.101 

As a reaction to  similar particularities during the financial crisis  in  2007/2008,  the Bank of 
International  Settlement  asserted  that  hedge  funds  in  particular  played  a  key  role  in  the 
contribution  of  systemic  risks  in  the  financial  system.102  Similarly,  IOSCO  concluded  that, 

97 See p. 29 IA 2009. 
98 Since the AIFMD has been fully applicable in the United Kingdom during the period under review, the 
evaluation includes evidence gathered from stakeholders in the UK. 
99 Agreement on the European Economic Area, OJ L 1, 3.1.1994, p. 1, Annex XIV, section B. 
100 Article 99(1) EEA Agreement. 
101 For an extensive overview see D. Zetzsche (2015). Introduction: Overview, Regulatory History and 
Technique, Transition, in: D. Zetzsche (ed.), The Alternative Investment Fund Managers Directive (2nd edn); T. 
Bernhardt (2013). The European Alternative Investment Fund Managers Directive (AIFMD) - an appropriate 
approach to the global financial crisis? Lohmar: Josef Eul Verlag. 
102 Bank of International Settlement (BIS) (2010). Review of the Differentiated Nature and Scope of Financial 
Regulation; McGuire, Patrick, & Kostas Tsatsaronis (2008). Estimating hedge fund leverage. BIS Working 
Papers No. 260. Bank for International Settlements. Retrieved from https://www.bis.org/publ/work260.htm; R. 

120 

 
 
 
 
 
 
 
 
                                                           
 
inter alia, the extensive use of leverage by investment funds amplified the final stages of the 
crisis.103  Subsequently,  the  G20  Summit  in  Washington  in  2008,  as  well  as  further 
summits,104  pointed  to  the  necessity  of  a  harmonised  and  consistent  regulation  and 
supervision  of  every  participant  and  product  in  financial  markets.105  Advancing  this  policy 
approach,  the  Financial  Stability  Board  (FSB)  captured  the  G20  rationale  and  propelled  an 
action  plan  of  reforms  to  the  financial  system,  particularly  emphasising  the  resilience, 
capabilities and trends in non-bank financial intermediation.106  

In the EU, the High-Level Group on Financial Supervision, chaired by Jacques de Larosière, 
considered these issues and recommended to the EC “extending appropriate regulation, in a 
proportionate manner, to all entities conducting financial activities of a potentially systemic 
nature,  even  if  they  have  no  direct  dealings  with  the  public  at  large”.107  The  group 
emphasised  the  regulation  of  the  managers  rather  than  the  funds  and  proposed  relevant 
measures to prevent regulatory arbitrage. 

In addition, the close connection of a UCITS with entities linked to Bernard Madoff’s Ponzi 
scheme in the US called into question the adequacy of the depositary provision in UCITSD. 
This concern led to significantly enhanced provisions for UCITS, but prior to that gave rise to 
calls for AIFs also to be required to have a depositary. Against this backdrop, in 2009 the EC 
issued a proposal to regulate AIFMs, which was adopted in June 2011.  

The AIFMD Impact Assessment identified important gaps and weaknesses in European and 
national  approaches to  the regulation and supervision of the AIFM sector. The  activities of 
AIFMs  were  considered  by  the  European  Commission  to  be  associated  with  the  following 
risks for AIF investors, counterparties, the financial markets and the wider economy: 

Macro-prudential (systemic) risks  

financial  crisis  had  exposed 

The 
in  existing  systems  of 
macroprudential oversight, in particular in relation to those AIFMs that make systematic use 
of leverage and take large positions in key financial markets (primarily hedge funds and some 

important  weaknesses 

Zepeda (2014). To EU, or not to EU: that ls the AIFMD question. Journal of International Banking Law and 
Regulation 29 (2), 82-102. 
103 IOSCO (2009). Hedge Funds Oversight – Final Report. Retrieved from 
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD293.pdf 
104 The Washington Summit Declaration (November 2008) advocated a holistic regulation of the financial 
industry. The London Summit Declaration (April 2009) included an extensive set of actions referring to 
regulation and supervision of systemically important financial institutions, markets, and instruments (in 
particular, a mandatory authorisation of asset managers) so as to promote a sound and resilient risk 
management. The Pittsburgh Summit Declaration (September 2009) and Toronto Summit Declaration (June 
2010) paved the way for global financial services regulation and specifically mandated the regulation and 
supervision of the alternative investment fund industry; see D. Zetzsche (2015). Introduction: Overview, 
Regulatory History and Technique, Transition, in: D. Zetzsche (ed.), The Alternative Investment Fund 
Managers Directive (2nd edn) with various further references.  
105 Rf. see D. Zetzsche (2015). Introduction: Overview, Regulatory History and Technique, Transition, in: D. 
Zetzsche (ed.), The Alternative Investment Fund Managers Directive (2nd edn) with various further references.   
106 Rf. FSB (2011). Progress in the Implementation of the G20 Recommendations for Strengthening Financial 
Stability: Report to G20 Finance Ministers and Central Bank Governors. Retrieved from 
http://www.fsb.org/2014/11/overview-of-progress-in-the-implementation-of-the-g20-recommendationsfor-
strengthening-financial-stability-5/. 
107 Report of the High-Level Group on Financial Supervision in the EU (February 2009). Retrieved from 
https://ec.europa.eu/info/system/files/de_larosiere_report_en.pdf, 25.   

121 

 
 
 
 
 
 
                                                                                                                                                                                     
commodity funds). Given the cross-border nature of these risks, the inability to piece together 
a comprehensive picture of AIF leverage and AIFM activities in all major European markets 
was a major flaw in existing systems of macroprudential oversight.   

Micro-prudential risks  

The financial crisis had also highlighted failings in risk management and due diligence. The 
management  of  liquidity  risks  had  posed  a  particular  problem  for  some  AIFs,  where  the 
combination  of  illiquid  investments  and  pressure  for  deleveraging  and  investor  redemption 
had exposed a severe liquidity mismatch. In the hedge fund sector in particular, counterparty 
risk  management  systems  had  been  tested  by  the  failure  of  significant  counterparties.  The 
illiquidity  of  key  asset  markets  had  exposed  weaknesses  in  valuation  processes  and 
methodologies.  Effective  management  of  the  cross-border  dimension  of  these  risks  was 
thought  to  necessitate  a  common  understanding  of  the  obligations  of  AIFMs  and  clear 
arrangements  to  support  supervisors  in  ensuring  that  risk  management  systems  are 
sufficiently robust. 

Market efficiency and integrity  

AIFMs,  in  particular  hedge  fund  managers,  were  central  to  the  debate  about  the  impact  of 
certain  trading  practices  on  the  integrity  of  financial  markets.  The  activities  of  concern 
included short selling and the impact on commodity (especially food) prices of speculation in 
the futures markets.  

Three further risks were considered by the European Commission:  

Investor protection  

Most Member States had in place NPPRs, but these varied as to who was eligible to invest 
and  as  to  the  products  that  could  be  promoted.  The  importance  of  ensuring  an  appropriate 
level of investor protection had grown as the investor base of AIFs had expanded to include 
pension funds, insurance companies and some public authorities, which invested on behalf of 
a very broad investor base. The quality and content of the information provided to investors 
varied  considerably,  depending  in  particular  on  the  nature  of  the  AIFM.  Therefore,  an 
increased demand for transparent information for investors emerged.  

Impact on market for corporate control  

Some AIF strategies entail the acquisition of stakes in listed companies and an active role in 
the  governance  of  those  companies.  Some  hedge  fund  activities  include  techniques  that 
allowed investors to build stakes in listed companies in a manner that was thought not to be 
sufficiently transparent to company management and was detrimental to the interests of other 
stakeholders.  Examples  of  such  techniques  included  the  practice  of  voting  on  borrowed 
stocks and the use of certain derivative instruments, such as contracts  for difference. While 
such techniques were employed by certain categories of AIFM (notably, hedge funds), they 
were widely available to all market participants.  

122 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of control of companies by AIFM  

In the context of the financial crisis and tightening credit conditions, concerns had arisen in 
relation to the sustainability of debt assumed by private equity portfolio companies. This had 
been  a  particular  concern  for  companies  subject  to  leveraged  buy-outs  by  private  equity 
firms.  Similar  problems  were  experienced  elsewhere  in  the  financial  system.  An  additional 
concern  related  to  the  treatment  of  employees  when  a  company  was  acquired  by  private 
equity, namely that employees did not enjoy the same protection and rights as when a transfer 
of  undertaking  occurred.  The  existing  regulatory  framework  and  industry  codes  governing 
disclosure and information provisions of AIFMs did not sufficiently address the cross-border 
character of private equity transactions. Furthermore, there was no consistent standard for the 
level of transparency required in relation to such deals. 

AIFMD aimed to provide a coherent approach to the risks identified in the preceding AIF and 
AIFM  market  analysis.  To  this  end  and  as  the  Directive’s  ultimate  core  objective,  AIFMD 
sought  to  establish a secure and harmonised EU  framework for monitoring and supervising 
the risks that AIFs and AIFMs pose to their investors, counterparties, other financial market 
participants, financial integrity and stability.   

These objectives are illustrated in the recitals of AIFMD:   

“The impact of AIFMs on the markets in which they operate is largely beneficial, but recent 
financial difficulties have underlined how the activities of AIFMs may also serve to spread or 
amplify  risks  through  the  financial  system.  Uncoordinated  national  responses  make  the 
efficient management of those risks difficult.” (Recital 2)  

“This  Directive  aims  to  provide  for  an  internal  market  for  AIFMs  and  a  harmonized  and 
stringent  regulatory  and  supervisory  framework  for  the  activities  within  the  Union  of  all 
AIFMs.” (Recital 4)  

In  the  light  of  these  policy  objectives,  AIFMD  may  be  seen  as  the  provider  for  an  internal 
market for AIFs and a harmonised single rulebook for AIFM activities within the EU/EEA, 
regardless of whether the AIFM has its registered office in a Member State (EU AIFM) or in 
a third country (non-EU AIFM).108  

Another  goal  of  AIFMD  was  to  permit  AIFMs,  subject  to  compliance  with  strict 
requirements, to provide services and to market their funds across the internal market.   

In  addition  to  these  core  objectives,  AIFMD  aimed  to  bring  specific  and  operational 
objectives to the core of the EU alternative investment industry.   

Baseline and points of comparison  

Before  implementation  of  AIFMD,  there  was  no  overarching  regulation  of  AIFMs  at  a 
European  level.  Regarding  collective  investment  vehicles,  there  was  only  UCITSD,  which 
does not apply to AIFs or their managers.   

108 cf. G. Sagan (2014). Alternative Investment Fund Managers Directive Impact on Non-EU Managers. Rev. 
Banking & Financial Law, 34, 506 et seq. 

123 

 
 
   
 
 
 
 
 
 
 
 
                                                           
AIFMs were subject to EU rules that apply to all market participants, such as the Anti-Money 
Laundering  Regulation  or  the  Market  Abuse  Regulation,  and  listed  funds  were  subject  to 
disclosure requirements under the Prospectus Directive. The marketing or selling of AIFs was 
subject  to  the  Investment  Services  Directive  and  its  subsequent  incarnation,  MiFID  –  now 
MiFID II. Also, according to the AIFMD Impact Assessment, many Member States imposed 
regulations on AIFMs or on AIFs (especially those available to retail investors, i.e. product 
regulation) or both.   

The main point of comparison for the evaluation is the hypothetical situation of not having an 
AIFMD  in  place.  The  evaluation  therefore  looks  at  the  functioning  of  the  AIFMD  as 
compared  to  a  situation  in  which  an  internal  market  for  EU  and  non-EU  AIFs  as  well  as  a 
harmonised and stringent regulatory and supervisory framework for AIFMs would have been 
developed only in light of other EU guidance, relevant case law at EU and national level, as 
well as the enforcement practice of the Commission and the national supervisory authorities.  

Given that AIFMD was implemented as a consequence of the financial crisis in 2007/2008, it 
makes  it  hard  to  assess  any  ‘no  EU  policy’  scenario:  in  reaction  to  the  crisis,  many 
international  programmes  had  been  established  in  order  to  save  and  strengthen  the 
international  financial  system  or  to  avoid  another  bankruptcy  after  the  crash  of  Lehman 
Brothers.   

Consequently, in the absence of a coherent  EU-wide system, national improvements of any 
respective domestic AIFM or AIF regulation would almost certainly have been developed in 
a  number  of  national  markets.  This  would  have  led  to  the  result  that  the  already 
heterogeneous and diverse regulatory landscape of AIF regulations would have become even 
more  diverse.  A  coordinated  approach  by  all  Member  States  to  establish  a  common 
framework  would  have  required  an  even  greater  effort  and  still  would  have  had  limited 
effects.109  

The  AIFMD  impact  assessment  also  assessed  several  scenarios  (under  point  5.4  of  that 
document).  One  of  those  scenarios  considered  what  would  happen  without  any  targeted 
action regarding the regulation of AIFMs. The impact assessment indicated that although the 
behaviour of some AIFMs would possibly change in the light of the financial crisis (also due 
to  the  loss  of  investor  confidence),  the  underlying  risks  associated  with  the  AIFM  industry 
would  remain.  The  impact  assessment  also  pointed  out  that  the  incomplete  and  fragmented 
national  regulatory  framework  would  not  be  an  appropriate  foundation  for  the  European 
financial market.  

Furthermore,  the  impact  assessment  examined  a  scenario  of  “self-regulation”  by  the  AIFM 
industry.  Such  self-regulation,  at  national,  EU  or  international  level,  could,  for  example, 
include best  practice lists, codes of  conduct  or  guidelines. However, the  impact  assessment 
indicated  that  one  of  the  main  drawbacks  of  self-regulatory  measures  is  that  they  are  not 
legally  binding  and,  therefore,  are  not  as  effective  as  regulation.  In  addition,  the  impact 
assessment  indicated  that  the  risks  of  the  AIFM  industry  were  not  fully  covered  by  the 
existing self-regulatory measures.  

109 EC Impact Assessment, p. 38, No. 5.4. 

124 

 
 
 
 
 
 
 
 
                                                           
As  a  consequence,  the  Commission  concluded  that  either  doing  nothing  or  relying  on  self-
regulation  or  national  measures  would  be  much  less  effective  than  a  consistent,  coherent 
approach of harmonisation of law at EU level. 

The  pre-AIFMD  landscape  across  Member  States  was  heterogeneous  across  all  aspects: 
investor  types,  asset  classes,  investment  and  redemption  strategies,  legal  and  governance 
structures,  form  of  manager  regulation,  depositary  or  custody  requirements,  valuation  and 
accounting  practices,  and  transparency.  The  co-legislators  recognised  this  high  level  of 
heterogeneity  and  adopted  a  Directive  that  regulates  the  management  company  and  not  the 
fund itself (i.e. AIFMD is not product regulation). AIFMD therefore regulates only some of 
the aspects noted above and leaves a number of areas to national discretion, in particular for 
AIFs marketed to retail investors within the Member State.   

The  general  objective  of  AIFMD  is  to  create  an  internal  market  for  EU  and  non-EU  AIFs, 
and  a  harmonised  and  stringent  regulatory  and  supervisory  framework  for  AIFMs. 
Specifically,  it  seeks  to  ensure  that  all  AIFMs  are  subject  to  appropriate  authorisation  and 
registration  requirements;  that  there  is  proper  monitoring  of  macro-  and  micro-prudential 
risks  and  a  common  approach  to  protecting  professional  investors;  that  there  is  greater 
accountability  of  AIFMs  holding  controlling  stakes  in  non-listed  companies;  and  the 
development of the Single Market in AIFs.   

Description of the current situation 

According to the available data, the EU asset management industry has grown significantly 
since  the  adoption  of  the  AIFMD  (see  Table  1).  At  the  end  of  2018  the  net  assets  of  EU 
investment funds (UCITS and AIFs) reached a total of € 15.2 trillion, of which 39% or € 5.9 
trillion is invested in 28,600 AIFs as compared to 27% or € 2.3 trillion in 2011 and to 27% or 
€ 1.6 trillion in 2008. AIF assets have recorded continuous growth rates virtually every year 
since 2008 more than doubling in the period between the adoption of the AIFMD and now.   

 Table 1. AIFs Net Assets  

125 

 
 
 
 
 
 
 
 
Source: EFAMA Fact Book 2020, page 34.  

The EU AIF industry is concentrated in a few countries – Germany, France, the Netherlands, 
Luxembourg and Ireland – accounting for more than 82% of the net assets of the industry. At 
the end of 2018 the share of net assets of AIF market of Germany stood at 29%, 18% was the 
share  attributable  to  France,  whereas  the  shares  of  Netherlands,  Luxembourg  and  Ireland 
were 13%, 12% and 10% respectively. In 2018, the strongest growth rates in AIFs net assets 
were registered in Cyprus (48%), Czech Republic (32%), Greece (14%) and Malta (11%). 

The EU AIF market is very diverse in terms of types of funds, strategies and risk profiles of 
AIFs. The ESMA Statistical Report 2020 shows that limitations in categorising AIFs, dictated 
by the reporting template contained in the AIFMR, allow for only a crude breakdown of the 
EU AIF market. Notably, besides funds of funds, real estate funds, hedge funds and private 
equity  funds  there  were  15,180  “other  types”  of  funds,  which  have  predominantly  fixed 
income  or  equity  strategies  or  a  strategy  that  does  not  explicitly  fall  within  the  established 
categories.  

In terms of geographical focus, EU AIFs invest mainly in the EEA (63%), followed by North 
America (16%) and supranational issuers (9%). 

Table 2: EU Alternative Investment Funds: essential statistics and market structure in 2018110  

110 ESMA Statistical Report 2020, p. 6. 

126 

 
 
 
 
 
 
                                                           
The  ownership  of  AIFs  assets  tends  to  be  concentrated:  the  top  five  investors  account  for 
about 75% of NAV on average.24 This pattern applies across AIF types, except for private 
equity funds, which tend to have less concentrated investor profiles. One possible explanation 
for such a high degree of ownership concentration in the EU AIF sector is that professional 
investors tend to be the main investors in AIFs and they typically hold large stakes in funds 
they invest in. When non-UCITS funds set up under the national law were later captured by 
the  AIFMD  and  qualified  as  AIFs  this  produced  a  picture  of  a  highly  concentrated  AIF 
market.  

As regards investor categories, professional investors account for around 84% of AIFs’ NAV, 
while the retail investors account for the remaining 16%. Retail clients’ participation in the 
alternative  investment  market  appears  more  significant  in  segments  such  as  real  estate  and 
funds of funds where retail investors account for 21% and 30% of the NAV respectively. It is 
observed  that  since  2013,  both  institutional  and  retail  clients  have  been  increasingly 
migrating  away  from  traditional  actively  managed  strategies  towards  low-fee  passive 
strategies or alternative asset classes.   

127 

 
 
 
 
 
In  terms  of  leverage111,  based  on  the  reported  outcomes  under  the  gross  and  commitment 
methods  of  the  AIFMR,  most  AIFs  do  not  appear  to  engage  substantial  leverage  with  the 
exception  of  hedge  funds.  Comparing  ESMA  statistics  for  2017  and  2018,  leverage  was 
stable  for  most  types  of  AIFs,  except  for  hedge  funds.  Hedge  funds  gross  leverage  has 
reportedly increased from 730% to 1050% between 2017 and 2018, which is partly explained 
by the reliance of some strategies on derivatives. Data shows that hedge funds use synthetic 
leverage through derivatives, in particular interest rate derivatives112, as opposed to financial 
leverage  (borrowing  of  money  to  acquire  assets),  although  the  latter  stood  at  160%  of  the 
NAV at the end of 2018.   

It also is noteworthy that the hedge fund market is also composed of non-EU AIFs, which are 
marketed  almost  exclusively  to  professional  investors  (98%)  in  individual  Member  States 
through  national  private  placement  regimes.113  ESMA  concludes  that  40%  of  investors 
investing through national private placement regimes cannot be identified. At the end of 2018 
the  NAV  of  hedge  funds  marketed  in  the  Union  by  the  EU  AIFMs  stood  at  €  333  billion. 
Non-EU Hedge funds marketed by non-AIFMs through national private placement regimes in 
2018 had a NAV of € 463 billion. The UK is the main domicile for  hedge funds with more 
than  80%  of  the  NAV  managed  by  the  UK  based  AIFMs.  Also,  according  to  2018  ESMA 
data, the majority of hedge funds are domiciled in the Cayman  Islands and marketed in the 
UK.   

As  regards  liquidity  mismatches,  in  most  EU  AIFs  they  are  not  significant.  However,  it  is 
observed that certain open-ended AIFs, such as real estate and private equity funds, invest in 
inherently  less  liquid  assets,  such  as  physical  properties  or  securities  of  private  (un-listed) 
companies,  with  the  result  that  some  cases  exhibit  maturity  mismatches.  According  to  the 
liquidity profile of these AIFs, investors are entitled to redeem 28% of the NAV within a day, 
however, only 26% of the assets could be liquidated to meet these redemption requests.  

3.  METHOD 

3.1 Short description of methodology 

The  evaluation  study  was  conducted  between  December  2020  and  June  2021,  under  the 
guidance  of    an    inter-service  group    (ISG)    and    in    the    framework    of    the    terms    of  
reference.  The  methodology  included  analysis  of  available  documentation  and  data,  and 
consultation  of  EU  stakeholders.  The  evaluation  report  was  prepared  in  line  with  EU 
guidelines (including the ‘evaluation toolbox’). 

The  evaluation  was  supported  by  a  study  that  was  carried  out  by  an  external  consultant  – 
KPMG.114  It  conducted  a  General  Survey  and  evidence-based  study  providing  a 
comprehensive assessment of the AIFMD.115  

111  Article 4(1)(v) of the AIFMD defines leverage as ‘any method by which an AIFM increases exposure of an  
AIF it manages whether through borrowing of cash or securities, or leverage embedded in derivative positions  
or by any other means’. 
112  ESMA Statistical Report 2020, p. 41. 
113 ESMA Statistical Report 2020, pp. 22 and 31 
114 KPMG Law Rechtsanwaltsgesellschaft mbH as lead firm, with the subcontractors KPMG AG 
Wirtschaftsprüfungsgesellschaft, Germany and KPMG LLP, United Kingdom supported by the European 
network of KPMG. 

128 

 
 
 
 
 
 
   
                                                           
The  KPMG  findings  are  complemented  by  other  sources  of  information,  including  relevant 
data  updates  and  information  yielded  through  various  work  streams  of  the  Directorate 
General  for  Financial  Stability,  Financial  Services  and  Capital  Markets  Union  (FISMA),116 
the European Securities and Markets Authority (ESMA)117 and the European Systemic Risk 
Board  (ESRB).118  The  Commission’s  interaction  with  stakeholders,  comprising  national 
competent authorities (NCAs), industry representatives and investor protection associations, 
through  public  consultations,  bilateral  and  multilateral  meetings  also  contributed  to  the 
process.  Specific  examples  of  the  application  of  the  Union  rules  were  taken  into  account. 
Academic and statistical publications further informed this evaluation. For example, ESMA’s 
Annual  Statistical  Reports  on  EU  AIFs  was  particularly  useful  in  describing  the  EU  AIF 
market.119   

On  27  September  2019,  the  Commission  consulted  the  Expert  Group  of  the  European 
Securities  Committee  (EGESC)  representing  the  Member  States  to  receive  technical  and 
policy  feedback  on  the  application  and  the  scope  of  the  AIFMD,  including  suggestions  for 
improving  the  legal  framework.  The  European  Parliament,  the  Council,  ESMA  and  the 
European  Central  Bank  (ECB)  are  observer  members  of  the  EGESC  and  were  invited  to 
participate. EGESC members, i.e. the EU Member States, were also invited to make written 
submissions, which were taken into account.   

On 22 October 2019, the Commission presented the key elements of this report to the ESMA 
Investment  Management  Standing  Committee  (IMSC)  and  sought  its  input  drawing  on  the 
supervisory experience of NCAs. 

On 10 June 2020, the European Commission submitted its report to the European Parliament 
and  the  Council  assessing  the  scope  and  the  functioning  of  the  AIFMD.120  The  report 
concludes  that  while  the  AIFMD  has  contributed  to  the  creation  of  the  EU  AIF  market, 
provided a high-level  protection to  investors and facilitated monitoring of risks to  financial 
stability, there are a number of areas where the legal framework could be improved. Further 
details on the reached conclusions are presented in the European Commission staff working 
document.121 

115 The General Survey took the form of an online questionnaire, which was running between 6 February 2018 
and 29 March 2018. When carrying out the survey, KPMG was guided by a list of aspects laid down in Article 
69(1) of the AIFMD on which stakeholders were invited to share their experiences. 
116 Responses to the Commission's Call for Evidence on the EU Regulatory Framework for Financial Services, 
responses to the Commission's Consultation on Cross-Border Distribution of Funds (UCITS, AIF, ELTIF, 
EuVECA and EuSEF) across the EU. 
117 Opinion of ESMA on the functioning of the AIFMD passport and expected opinion on asset segregation, 
figures received by ESMA from NCAs on the use of National Private Placement Regimes, 30 July 2015, 
ESMA/2015/1235; ESMA thematic study among National Competent Authorities on notification frameworks 
and home-host responsibilities under UCITS and AIFMD, 7 April 2017, ESMA 34-43-340. 
118 Recommendation of the European Systemic Risk Board of 7 December 2017 on liquidity and leverage risks 
in investment funds ESRB/2017/6, 2018/C 151/01. 
119 ESMA Annual Statistical Report EU Alternative Investment Funds 2019, 21.01.2019, ESMA 50-165-748. 
(ESMA Statistical Report 2019) and ESMA Annual Statistical Report EU Alternative Investment Funds 2020, 
10.01.2020, ESMA50-165-1032, (ESMA Statistical Report 2020). 
120 REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL 
assessing the application and the scope of Directive 2011/61/EU of the European Parliament and of the Council 
on Alternative Investment Fund Managers. COM/2020/232 final 
121 COMMISSION STAFF WORKING DOCUMENT Assessing the application and the scope of Directive  

129 

 
 
 
 
 
                                                                                                                                                                                     
 
Between 22 October 2020 and 29 January 2021, a public consultation was running and aimed 
to  gather  views  from  the  AIFMs,  AIF  distributors,  industry  representatives,  investors  and 
investor  protection  associations,  financial  markets  authorities  and  citizens  on  potential 
changes  to  the  AIFMD.  Given  the  European  Commission’s  ongoing  efforts  to  develop  the 
capital markets union (CMU), this consultation sought the views of stakeholders on how to 
achieve a more effective and efficient functioning of the EU AIF market as part of the overall 
financial system.  It  yielded over 130 responses.122  In addition,  the Commission  organised a 
virtual  conference  on  the  AIFMD  review  involving  MEPs,  NCAs,  ESRB,  ESMA, 
representatives of the industry and investor interests to discuss the future of the AIFMD.123 

3.2 Limitations and robustness of findings 

The  findings  of  the  study  are  robust  and  reliable.  The  methodology  for  this  evaluation 
included  a  review  of  literature  and  data,  and  consultations  (some  face  to  face,  and  some 
remotely) with stakeholders in the EU. In addition, secondary sources analysis and literature 
review complemented data from interviews. 

4.  ANALYSIS AND ANSWERS TO THE EVALUATION QUESTIONS 

The evaluation of the AIFMD is structured around the five assessment criteria defined by the 
Better  Regulation  guidelines  (effectiveness,  efficiency,  relevance,  coherence  and  EU  added 
value).  

4.1. 

Effectiveness 

How  effective  the  AIFMD  has  been  can  be  assessed  from  the  relation  between  the  effects 
observed and the objectives formulated in the 2009 AIFMD Impact Assessment: 

(i) appropriate authorisation and registration requirements for all AIFMs operating in 
the EU  
(ii) improved monitoring of macro-prudential risks  
(iii) enhanced management of micro-prudential risks  
(iv) a common approach to protecting investors in AIFM-managed funds  
(v) greater public accountability of AIFMs investing in and managing companies 
(vi) the removal of barriers to the efficient cross-border distribution of AIFs  

The effectiveness analysis looks at whether the objectives of the AIFMD have been met, and 
hence looks at what has been the impact of the initiative compared to a situation without it. 
At  the  same  time,  the  analysis  looks  at  whether  there  is  still  room  for  improvement  in 
meeting the objectives.  

2011/61/EU of the European Parliament and of the Council on Alternative Investment Fund Managers. Brussels, 
10.6.2020  SWD(2020) 110 final. 
122 https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12648-Alternative-Investment-Fund-
Managers-review-of-EU-rules/public-consultation 
123 A recording of the virtual conference on the AIFMD review [https://ec.europa.eu/info/events/finance-
201125-aifmd-review_en]. 

130 

 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                                                                                                     
Based  on  available  evidence,  it  appears  that  the  Directive  has  been  largely  effective  in 
meeting  the  objectives  specified  in  Section  2,  although  there  are  areas  that  require  further 
work. The analysis below is based on the comparison between the objectives and the extent to 
which they have been achieved after the implementation of the provisions. 

4.1.1.  Specific objective: All AIFM are subject to appropriate authorisation and 

registration requirements 

Sub-threshold AIFMs 

One of the main objectives of the AIFMD is to monitor and mitigate macro and micro risks 
that stem from the activities of AIFMs.124 In practical terms, this requires identification of the 
relevant  entities, which should meet  the basic requirements enabling them to  professionally 
and  responsibly  manage  collective  investments  for  the  benefit  of  investors.  The  EU 
legislation sets thresholds for assets under management (AuM) above which the activities of 
AIFMs  may  pose  significant  systemic  risk  and  impose  additional  requirements  on  those 
AIFMs. The thresholds differ depending on whether the AIFs employ leverage or not. 

According to the AIFMD, AIFMs that manage portfolios of AIFs exceeding € 100 million of 
AuM and that  use leverage shall be  authorised  by the NCA of its home Member  State  and 
must  comply  with  all  the  requirements  of  the  AIFMD.125  For  the  AIFMs  that  do  not  use 
leverage,  the  threshold  is  raised  to  €  500  million  and  includes  the  requirement  to  not  have 
redemption  rights  exercisable  during  a  period  of  5  years  following  the  date  of  initial 
investment in each AIF.126  

Member  States  must  ensure  that  AIFMs  managing  AIFs  beneath  the  thresholds,  instead  of 
being fully licenced under the Directive, are at least registered with the NCA  and report on 
their principle exposures and most important concentrations for the purposes of system risk 
monitoring.  Member  States  have  a  wide  discretion  on  whether  to  impose  stricter 
requirements127 on smaller fund managers, which makes isolated assessment of the impact of 
the AIFMD threshold provisions difficult. A number of Member States chose to adopt stricter 
rules  for  the  sub-threshold  AIFMs  in  some  cases  simply  continuing  to  apply  national  rules 
that had been in place before the AIFMD adoption.128  

One-quarter  of  all  respondents  to  the  KPMG  Survey  considered  that  there  is  no  significant 
differentiation  in  the  national  laws  governing  smaller  and  larger  AIFMs,  despite  such  a 
possibility being provided for in  the AIFMD.129 Academic literature similarly questions  the 
of  the  registration  regime,  as  elaborated  in  the  AIFMR130,  where  supervisory  reporting 
requirements  are  for  the  most  part  the  same  for  all  AIFMs  regardless  of  the  size  of  their 
activities.131  

124 Recital 2 of the AIFMD. 
125 Article 3(2)(a) of the AIFMD 
126 Article 3(2)(b) of the AIFMD 
127 Article 3(3) of the AIFMD. 
128 KPMG Report, pp. 134-138 examining regulation in MT, IRL, DE, FR, NL, UK, LUX. 
129 KPMG Report, p. 134 
130 Articles 5 and 110 of the AIFMR. 
131  Dirk  Zetzsche,  The  Alternative  Investment  Fund  Managers  Directive,  Second  Edition,  Kluwer  Law 
International, 2015, p. 81. 

131 

 
 
 
 
 
 
 
                                                           
The AIFMD provides for national discretion to maintain lighter rules for smaller AIFMs and 
this is deemed to be in line with the principle of proportionality.132  It is true, however, that 
some Member States choose to apply the AIFMD in its entirety regardless of the volume of 
the  assets  managed  by  the  AIFM.  This  would  call  into  question  the  effectiveness  and 
proportionality  of  the  thresholds.  In  particular,  it  is  considered  burdensome  for  smaller 
AIFMs  to  comply  with  the  regulatory  reporting  requirements  (although  with  a  lesser 
frequency) to the same extent as the larger AIFMs (this is discussed further in section 5.1.2. 
on  reporting  requirements).  Nevertheless,  some  discretion  in  this  respect  exists  within  the 
AIFMD and may be implemented by the Member States.  

The problem is more acute with regard to smaller AIFMs that would like to operate across the 
Union but find it too burdensome to comply with all the requirements of the AIFMD. Some 
Member  States  restrict  the  activities  of  sub-threshold  AIFMs,  unless  they  opt  into  a  full 
application  of  the  AIFMD,  which  prevents  such  funds  from  enjoying  the  benefits  of  the 
internal market and there some respondents called for greater harmonisation of the rules for 
smaller AIFMs.133 

4.1.2.  Specific objective: Proper monitoring of macro-prudential risks 

Loan originating AIFs 

In  the  EU,  the  non-bank  financial  sector  has  already  reached  the  same  size  as  the  banking 
sector  in  terms  of  financial  assets  –  a  growth  trend  that  is  expected  to  continue.  Further 
progress towards the Capital Markets Union will further strengthen the role of market-based 
finance  in  Europe  and  lead  to  a  more  diversified  financial  system.  One  element  of  the 
expanding non-bank financial sector is attributed to the soaring private credit market - around 
50%  of  business  debt  financing  in  Europe  is  provided  by  non-bank  lenders  and  bond 
investors. ESMA and NCAs have observed the continued expansion of private equity funds, 
which are active in extending loans.  

The  retreat  of  the  banking  sector  and  growth  of  non-bank  lending  financing  is  one  of  the 
biggest and most significant trends in the European economy and financial system during the 
last  decade.  A  larger  share  of  financial  intermediation  occurring  outside  the  banking  sector 
can  be  helpful  in  absorbing  initial  shocks  and  smoothing  the  flow  of  credit  to  the  real 
economy  while  achieving  greater  (cross-border)  risk  diversification,  it  can  also  give  rise  to 
the emergence of new systemic risks.  

At present, there are no common rules for loan originating AIFs with AIFMs managing these 
funds subject to varying national rules. This presents a challenge in preserving a level playing 
field and monitoring the stability of the financial system. In this respect, the use of leverage 
by  such  funds  and  their  inter-linkages  with  credit  institutions  may  require  a  policy 
response.134 

In its letter of 18 August 2020,135 ESMA already expressed the belief that there should be a 
specific  framework  for  loan  origination  within  the  AIFMD.  On  this  topic,  ESMA  already 

132 KPMG Report, p. 149. EGESC meeting of 27.09.2019. 
133 Ibid., pp. 101 and 142. EGESC meeting of 27.09.2019 
134 ESMA issued an opinion on the matter in 2016. 
135 https://www.esma.europa.eu/sites/default/files/library/esma34-32-551_esma_letter_on_aifmd_review.pdf 

132 

 
 
 
 
 
 
  
                                                           
issued an opinion on key principles for a European framework on loan origination by funds in 
April  2016.136  The  ESMA  opinion  contains  recommendations  on  authorisation  for  loan 
originating funds, types of funds (closed-ended vehicles), admitted investors (complying with 
ELTIF rules), and organisational and prudential requirements for loan-originating funds (e.g. 
leverage, liquidity, stress testing, reporting, diversification, etc.).  

Supervisory reporting requirements   

Prior to implementation of the AIFMD, NCAs pursued different measures on Member State 
level,  which  provided  a  certain  degree  of  transparency  of  domestic  collective  investment 
management activities as well as the monitoring of macro-prudential risks. The responsibility 
for implementation and application of such measures rested with the NCAs at domestic level, 
which resulted in different types and scales of mechanisms throughout the EU.  

A  key  objective  of  AIFMD  was  to  increase  the  transparency  of  AIFMs  and  AIFs  for 
investors,  NCAs  and  other  official  bodies.  In  the  light  of  the  experiences  of  the  financial 
crisis  and  increased  recognition  of  the  range  of  risks  to  which  AIF  investors  and  markets 
were  exposed,  there  was  a  clear  need  to  devise  an  effective  mechanism  to  share,  pool  and 
analyse information at the European level enabling to effectively monitor the AIF market and 
the  aggregate  risk  transmission  channels  in  the  broader  financial  system.  Consequently, 
AIFMD introduced safeguards to ensure that, in addition to enhanced disclosures to investors, 
NCAs and ESMA are provided with sufficient information in order to monitor systemic risks 
at national and EU level.  

The  AIFMD  imposes  supervisory  reporting  obligations  on  the  AIFMs,  regardless  of  their 
place of establishment, as opposed to their managed AIFs. The recipients of the information 
are NCAs. Once the data is reported, the NCA of the home Member State of the AIFM must 
ensure that it is made available to the NCAs of other relevant Member States, ESMA and the 
ESRB.137 

The  AIFMD  reporting  framework  consists  of  69  reporting  obligations,  which  equates  to  a 
total  of 517 data points  to  be reported.138 The legal reporting obligations  for registered and 
authorised  AIFMs  cover  the  main  instruments  in  which  their  managed  AIFs  are  trading, 
principle  exposures  and  the  most  important  investment  concentrations  of  the  AIFs.139  A 
fullscope  AIFM  must  moreover  report  a  breakdown  of  its  investment  strategies,  the 
concentration  of  investors  and  the  principal  markets  in  which  the  respective  AIFs  trade  as 
well as risk profiles of individual AIFs, including market risk, counterparty risk, liquidity and 
operational risk profiles, stress test results and other risk aspects such as the leverage values 
of the AIFs.140 

Generally  speaking,  AIFMs  report  the  required  data  to  their  respective  NCAs,  on  both  the 
AIFM  itself  and  the  AIFs  it  manages.141  Thus,  part  of  the  legislative  purpose  is  effectively 

136 See the opinion issued on 11 April 2016 (ESMA/2016/596), available at: 
https://www.esma.europa.eu/sites/default/files/library/2016-596_opinion_on_loan_origination.pdf. 
137  Point (3) of Article 25 of the AIFMD. 
138 Fitness Check Report FC: SWD(2019) 403 final. The number of reporting obligations and data points are 
based on analysis provided by an external contractor BRAG. 
139 Article 3(3)(d) and Article 24(1) of the AIFMD. 
140 Point (2) of Article 24 of the AIFMD. 
141 Page 153 KPMG report.  

133 

 
 
 
 
 
 
                                                           
fulfilled:  the  harmonised  requirements  on  reporting  have  increased,  to  at  least  some  extent, 
the transparency of AIFM and AIF activities to NCAs. However, already before the AIFMD 
many NCAs required AIFMs to report data similar to that in the AIFMD reports. In isolation, 
the  improvement  in  transparency  to  NCAs  brought  by  the  AIFMD  is  therefore  limited.  In 
assessing  the  effectiveness  of  this  measure,  therefore,  the  more  pertinent  questions  are 
whether the data are appropriate, systematically analysed by NCAs, and shared and analysed 
at EU level, and whether those analyses are publically available to inform the market. 

The  results  of  the  KPMG  Survey  and  evidence-based  study  indicate  problems  concerning 
data coverage. Some respondents doubted that all the submitted data is relevant, while others, 
mostly  NCAs,  thought  reported  data  may  be  insufficient.142  Interviewed  NCAs  stated  that 
they would like to receive more information on liquidity and leverage, for example, results of 
liquidity stress tests carried on the basis of common methodology, taking into account capital 
requirements and more data on leverage.143 Data relating to loan origination was mentioned 
as desirable by some NCAs.144 ESMA opined that reporting information on the Value at Risk 
(VaR) of AIFs should be particularly relevant for AIFs pursuing hedge fund strategies.145 It 
further suggests complementing current reporting to NCAs with the information concerning:  

 - ‘the portfolio’s sensitivity to a change in foreign exchange rates or commodity prices; the 
total number of transactions carried out using a high frequency algorithmic trading technique, 
as defined in MiFID II, together with the corresponding market value of buys and sells in the 
base currency of the AIF over the reporting period;  

-  the  geographical  focus  expressed  as  a  percentage  of  the  total  value  of  AuM,  so  “that  the 
impact of financial derivative instruments is better taken into account”; and  

-  the  extent  of  hedging  through  long/short  positions  by  an  AIFM/AIF  expressed  as  a 
percentage;’146  

-  data  on  non-EU  master  AIFs  that  are  not  marketed  into  the  EU,  but  which  have  an  EU 
feeder AIF or a non-EU feeder marketed into the EU if managed by the same AIFM.147   

In fact, the Financial Stability Board (FSB) observes that the markets for leveraged loans and 
collateralised  loan  obligations  (CLOs)  have  grown  significantly  in  the  US  and  to  a  lesser 
extent in  the EU in  recent  years.148 According to  its  analysis, in  2014 the issuance of CLO 
exceeded pre-crisis levels and continues to grow.149 According to the supervisory and market 
data  analysed  by  the  FSB,  while  banks  and  insurance  companies  have  the  largest  direct 
exposures  to  leveraged  loans  and  CLOs,  some  open-ended  investment  funds  hold  such 
instruments  and  their  liquidity  could  be  affected  in  times  of  stress.  The  information  on 
indirect  linkages  between  banks  and  non-banks  is  missing  making  it  difficult  to  appraise 

142 KPMG Report, p. 155. 
143 Ibid. 
144 Ibid., p. 83.   
145 Ibid., p. 155. 
146 Ibid. 
147 Ibid., pp. 155-156. 
148 The role of non-bank financial institutions in the leveraged loan and CLO markets has increased. See 
Financial Stability Board, Vulnerabilities associated with leveraged loans and collateralised loan obligations 
(CLOs), PLEN/2019/91-REV, 22 November 2019.    
149 Ibid. 

134 

 
 
 
 
 
 
 
                                                           
systemic  implications  of  the  existing  interconnectedness.150  FSB  suggests  that  data  gaps 
should  be  closed  by  collecting  the  necessary  information  in  relation  to  leveraged  loans  and 
CLO.  

In addition, there were suggestions to make the use of a legal entity identifier (LEI) for AIF 
or AIFMs mandatory.151 This would permit better matching and merging of the AIFMR data 
with the data reported under European Market  Infrastructure Regulation  (EMIR), Securities 
Financing  Transactions  Regulation  (SFTR)  or  other  Union  legislation  and  leading  to  better 
data analysis.  

Furthermore,  results  of  the  General  Survey  point  to  an  inconsistent  understanding  of  what 
must be reported. This concern was voiced both by the NCAs and the industry. Despite the 
fact  that  key  reporting  obligations  are  laid  down  at  EU  level  and  ESMA  has  issued 
Guidelines  driving  further  convergence  among  the  national  reporting  systems,152  it  remains 
within  the  national  discretion  to  stipulate  the  method  of  data  delivery  and  the  provision  of 
additional  information  on  a  periodic  or  an  ad  hoc  basis.  This  leads  to  differences  in  the 
national  interpretation  and  filing  procedures,  which  were  considered  by  the  respondents  as 
increasing costs of reporting even further.   

The  lack  of  a  uniform  approach  at  national  level  was  also  recognised  during  the  Fitness 
Check.  It  is  noted  that  several  Member  States  impose  additional  reporting  obligations  at 
national  level  that  are  more  granular  than  those  foreseen  under  the  AIFMD  (this  includes 
metrics  concerning  the  funds'  portfolio  composition  in  terms  of  financial  instrument, 
geographical focus, investment strategy or risk profile of the fund as a whole).   

The  Fitness  Check  also  revealed  that  a  number  of  supervisors  consider  the  definitions  for 
individual fields are too broad leaving too much discretion to AIFMs in terms of underlying 
methodology and assumptions. This also results in limited consistency across the same fields 
reported  by  AIFMs.  Concrete  examples  include  concepts  such  as  ‘AuM’  and  ‘reported 
gross/commitment leverage calculations’.  

Hence, the AIFMD reporting requirements are assessed as effective only to a certain degree 
as regards the appropriateness of the data.  

The  KPMG  study  also  identified  concerns  regarding  the  “one  size  fits  all”  approach  to 
supervisory  reporting  claiming  that  it  fails  to  fully  reflect  the  different  nature  of  the 
underlying  funds.  It  has  also  questioned  whether  the  proportionality  principle  is  respected 
when  small  firms  engaged  in  less  risky  strategies  are  subject  to  detailed  reporting 
requirements.153 Similarly, in the context of the Fitness Check, some stakeholders complained 
that the current reporting framework is not adequately tailored considering the differences in 
the operations and associated risks of different AIFs. Suggesting that not all reporting fields 
are always relevant (e.g. market risk indicators, stress tests) a proposal was made to refocus 
the requirements to tailor them to each investment strategy.   

150 Ibid. Also see ESRB recommendation. 
151 KPMG Report, p. 84. See supra 9 ESRB recommendation. 
152 ESMA Guidelines on reporting obligations under Articles 3(3)(d) and 24(1), (2) and (4) of 8.08.2014 
ESMA/2014/869E. 
153 Supra 108, pp. 413 - 414. 

135 

 
 
 
 
 
  
 
 
                                                           
The respondents to the General Survey agree that the initial investment in implementing the 
necessary  internal  structures  to  fulfil  reporting  obligations  was  substantial  and  any  changes 
proposed should be assessed being conscious of the significant sunk costs. Given the results 
of  the  KPMG  study  and  the  Fitness  Check,  it  is  apparent  that  further  improvements  to  the 
reporting framework under the AIFMD are possible.  

Finally, bottlenecks exist for ESMA to receive all the reporting data from NCAs even though 
improvements  in  this  respect  are  continuous.154  At  the  same  time,  the  respondents  to  the 
General Survey indicated that they would appreciate information on how the collected data is 
used.155 Whilst the regular reports on the national AIF/AIFM markets remain scarce, 60% of 
the  respondent  NCAs  confirmed  they  produce  regular  analysis  to  monitor  market  trends.156 
Moreover, the accumulated databases allow identifying and interrogating outliers.157 In 2017 
ESMA published the first statistical report on the EU AIF market and aims to issue one every 
year. Increased publicity of conclusion drawn up by supervisors based on the collected data 
would also leave the markets better informed.158  

The  AIFMD  introduced  for  the  first  time  an  EU-wide  approach  to  supervisory  reporting  in 
the  context  of  AIFs.  Despite  the  fact  that  the  reporting  obligation  proved  successful  by 
providing the NCAs with the significant  volumes of data to  monitor systemic risks, certain 
areas were identified as requiring further clarification and cooperation among the supervisory 
authorities.  Member  States  were  also  broadly  in  agreement  that  the  AIFMD  reporting 
obligations should be streamlined.159  

The  relevant  discussion  in  international  fora  will  influence  this  area.  The  following  section 
refers  to  the  IOSCO  work  on  leverage  calculation.  IOSCO  proposes  jurisdictions  to  collect 
national/regional  aggregated  GNE  or  GNE  adjusted  data,  broken  down  by  asset  class  and 
long and short exposures, as well as NAV, on a yearly basis, as a solution to monitor leverage 
trends overtime.160161  The focus on the format of the reported data is likely to influence the 
current reporting template of the AIFMR. 

There are views that the AIFMD supervisory reporting data should be reported centrally, for 
example to ESMA, which would validate it and store it in a fashion similar to its handling of 
the  daily  transactions  reporting  data  under  MiFID  II.  The  authorised  entities  then  could 
access  the  central  database  in  accordance  with  their  mandates.  This  could  reduce 
administrative costs for the NCAs and industry alike and ensure that authorities with financial 
stability mandates access all the relevant data.   

154 KPMG Report, pp. 156 and 157. 
155 Ibid., p 85. 
156 Ibid. 
157 Ibid. 
158 Ibid., p. 156. 
159 EGESC meeting of 27.09.2019. 
160 IOSCO recommends regulators to collect GNE or adjusted GNE broken down by asset classes, and long and 
short exposures. Gross Notional Exposure (GNE), which is the sum of all the absolute value of all positions / 
NAV, is  very similar to the "gross  method" under the  AIFMR.  GNE adjusted,  which implies adjusting GNE 
with regards to some derivative positions (e.g. adjustment of interest rate derivatives positions by 10-year bond 
duration), is very similar to the methodology used for private funds in the US. 
161 The data collection will likely be conducted by IOSCO in a phased-in manner as it will take one to four years 
for some jurisdictions to make legislative changes to collect the relevant data. 

136 

 
 
 
 
 
 
                                                           
Moreover, it may be worthwhile considering whether for macro-prudential reasons it may be 
more useful for the supervisors to receive a full portfolio holdings of the AIFs or at least with 
respect to a particular asset class, such as for example CLO or leveraged loans, in order to get 
a better overview of the market. In the meantime, ESMA is continuing to provide technical 
clarifications on the supervisory reporting requirements in order to achieve greater uniformity 
across the Union.162 

Leverage calculation methodologies under AIFMR    

Leverage is considered one of the key risks and vulnerabilities related to asset management 
activities.163 It is used as a technique, often through the use of derivatives, to increase returns 
through borrowing of assets, including cash or securities. Excessive use of leverage, however, 
amplifies  potential  losses  in  case  of  negative  shocks,  thereby  reducing  the  resilience  of 
market participants.   

The  AIFMD  provisions  on  the  monitoring  of  systemic  risks164  include  the  calculation  of 
leverage  and  the  reporting  of  the  leverage  levels  to  the  NCAs.  Leverage-related  data  are 
monitored  and  shared  among  the  national  regulators  and  ESMA.165  More  specifically,  the 
AIFMR  requires  leverage  to  be  calculated  in  accordance  with  two  methods:  (i)  ‘the  gross 
method’, which is the sum of the absolute values of all positions, so as to give an indication 
of  overall  exposure  and  (ii)  ‘the  commitment  method’,  which  is  the  sum  of  the  absolute 
values of all positions, adjusted for various factors, including the application of netting and 
hedging arrangements.166   

A  representative  majority  of  the  asset  management  industry  and  the  NCAs  regard  the 
leverage provisions under the AIFMD  as  appropriate and effective.167  In particular, 90% of 
NCA interviewees to the KPMG survey recognised that AIFMs could contribute to the build-
up  of  systemic  risks  or  disorderly  markets  if  use  of  leverage  is  high,  but  most  NCAs  that 
responded to the survey did not express any concerns about the leverage levels they observe 
in AIFs in their jurisdictions.168 Moreover, the methodologies under the AIFMR are deemed 
to be comprehensive and advanced in comparison to the other existing measures of leverage 
thereby encouraging harmonization towards these methodologies at global level.169 

The combination of gross and commitment methods to measure leverage under the AIFMR, 
albeit initially criticised as being too burdensome, provides  a clear leverage exposure at the 
level  of  an  individual  AIF.  There  are  different  challenges  in  calculating  leverage  across  a 
wide range of portfolios with different investment strategies and different risks in relation to 
their  underlying  assets.  No  unique  single  measure  can  capture  all  the  risks  and  give  a 
representation  of  the  potential  economic  over-exposure  of  investment  funds  and  every 
measure of leverage has some drawbacks. This is also true for the AIFMR methodologies.                                                                                                                                                                         

162 ESMA Work stream on the data reporting. 
163 FSB Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities,   12 
January 2017; IOSCO Final Report on Recommendations for Liquidity Risk Management for Collective 
Investment Schemes of February 2018, FR01/2018. 
164 Recital 3 of the AIFMD. 
165 Article 25 of the AIFMD. 
166 Section 2 of Chapter II of the AIFMR. 
167 KPMG Report, pp. 171-172. 
168 KPMG Report, p. 171. 
169 Ibid. 

137 

 
 
 
 
 
                                                           
Admittedly,  there  are  limitations  in  the  AIFMR  commitment  approach  linked  to  the 
complexity of its netting rules, which can imply a certain lack of clarity and a certain degree 
of subjectivity on the measuring of hedges or offsetting positions. There are opinions that the 
prescribed methods do not align with industry practice in some sectors (closed-ended funds, 
private equity funds) and lack the necessary metrics to provide accurate reflection of the risks 
associated with the use of leverage. Nevertheless, the leverage calculation methods set forth 
by the AIFMR are considered sufficiently sophisticated. Any changes thereto should improve 
comparability  of  data  reported  and  leverage  calculations.  Necessarily  this  would  require 
taking  into  account  developments  at  international  level,  notably  the  IOSCO  policy  work 
regarding measures of leverage in investment funds.170   

Considering the difficulties in coming up with a “consistent” measure of leverage that could 
be  aggregated  across  funds  and  jurisdictions,171  IOSCO  recommends  adopting  a  leverage 
framework based on a two-step approach. As a step 1, based on a gross measure of leverage, 
one  would  filter  and  identify  those  funds  that  may  pose  risks  for  financial  stability  and 
deserve further risk analysis.172 In step 2, a list of indicators and complementary risk-based 
measures are provided by IOSCO for NCAs consideration to assess potential risks posed by 
funds  identified  under  step  1.  This  would  leave  each  jurisdiction  free  to  fine-tune  the 
reporting requirements and risk-based leverage methodologies further depending on the size 
and complexity of their markets.   

*** 

One of the main objectives of AIFMD was to increase the transparency of AIFMs vis-à-vis 
investors and competent authorities. Because of the experiences from the financial crisis and 
the  range  of  risks  to  which  investors  in  investment  funds  were  exposed,  the  provisions  of 
AIFMD  introduced  safeguards  to  ensure  that  not  only  investors  in  alternative  investment 
funds but, most importantly, the relevant NCAs were provided with sufficient information in 
order to monitor systemic risks within the EU.  

Prior to implementation of AIFMD, NCAs pursued different measures on Member State level 
so  as  to  provide  a  certain  degree  of  transparency  of  collective  investment  management 
activities, as well as the monitoring of macro-prudential risk exposures. The AIFMD Impact 
Assessment notes that the responsibility for implementation and application of such measures 
rested  with  the  NCAs  on  domestic  regulatory  level,  which  led  to  different  types  of 
mechanisms throughout the EU/EEA.   

AIFMD  led  to  a  harmonised  approach  to  the  calculation  of  leverage,  to  the  processes  and 
systems  AIFMs  must  have  in  place  to  ensure  that  the  leverage  limits  for  each  AIF  they 
manage  are  reasonable  and  are  complied  with  at  all  times,  and  to  the  reporting  of  leverage 
levels to the NCAs. Moreover, according to ESMA, all NCAs have implemented the ESMA 
AIFMD Reporting Guidelines concerning leverage. As a consequence, systemic risks can be 

170 Seconded by Member States at the EGESC meeting of 27.09.2019. 
171 Due to the differences in reporting requirements across jurisdictions, market structures, funds’ strategies. 
172 IOSCO proposes to use metrics based on gross exposure under step 1: Gross Notional Exposure without 
adjustments or the Gross Notional Exposure adjusted for interest rate derivatives and options. IOSCO indicates 
that jurisdiction can use an additional/complementary measure to GNE or GNE adjusted by taking into account 
potential netting and hedging arrangements or relationships in the fund’s gross exposure. 

138 

 
 
 
 
 
 
 
                                                           
monitored in a harmonised manner at domestic level by the NCAs and at EU level by ESMA. 
NCAs  are  able  to  monitor  if  an  AIFM  manages  AIFs  that  could  potentially  constitute  an 
important  source  of  counterparty  risk  to  a  credit  institution  or  other  systemically  relevant 
institution in other Member States or to investors.   

Thus,  the  legislative  purpose  is  effectively  fulfilled  as  transparency  of  AIFM  and  AIF 
activities have increased. 

It  is  noted,  though,  that  both  the  reporting  of  leverage  ratios  and  the  demonstration  by  the 
AIFM that its leverage limits are reasonable and that it complies with those limits at all times 
are  submitted  only  to  the  relevant  NCA.  Unlike  the  publicly  available  prospectuses  for 
UCITS, the information documents of AIFs, which describe inter alia the maximum level of 
leverage  and  the  use  of  derivative  trades  incurring  leverage,  may  not  be  accessible  to  non-
investors.   

As a consequence, it is possible that counterparties trading with an AIFM or AIF may not be 
immediately  or  fully  aware  of  the  possible  leverage  risk  and  possible  changes  of  any 
predetermined  and  disclosed  leverage  ratios  of  the  relevant  AIFs.173  Further,  measurements 
taken  by  the  relevant  NCA  against  a  particular  AIFM/AIF,  which  were  necessary  to  avoid 
risks  to  the  stability  and  integrity  of  the  financial  system,  may  not  be  publicly  disclosed. 
Therefore, potential counterparties of an AIFM/AIF may not be aware of any measurements 
imposed  by  the  NCAs.  Consequently,  if  the  counterparty  does  not  perform  proper  due 
diligence  and  require  specific  disclosures,  it  could  subject  itself  to  unidentified  risks.  This 
detracts from effectively achieving the objective of transparency.  

4.1.3.  Specific  objective:  Proper  monitoring  and  limitation  of  microprudential 

risks 

Delegation rules 

A core element of the AIFMD governance, risk and investor protection requirements are the 
provisions  relating  to  delegation.  An  AIFM  is  able  to  delegate  the  carrying  out  of  certain 
(management)  functions174  on  its  behalf  only  when  limitations  and  a  range  of  strict 
requirements  are met, so as to  further increase the efficiency of the conduct  of the AIFM’s 
business.175 At all times, the AIFM remains fully responsible and liable to the AIF’s investors 
for the provision of management functions. 

Delegation is a tool used by fund managers for various reasons including optimising business 
processes,  seeking  specific  expertise  or  to  sometimes  exploiting  regulatory  arbitrage 
opportunities.176  With  particular  regard  to  the  latter,  the  EU  legislature  has  sought  to  avoid 
creating  conditions  for  a  race  to  the  bottom  with  other  jurisdictions  in  terms  of  regulatory 
standards.177  Therefore,  whilst  the  AIFMD  permits  AIFMs  to  delegate  to  third  parties 

173 Raised issue for the German market, cf. Decker, in Frankfurter Kommentar, KAGB (Frankfurt Legal 
Commentary for the German transformation Act of AIFMD), § 274, margin no. 8. 
174 Supporting functions (i.e. administrative and/or technical activities) are not subject to the strict delegation 
requirements of AIFMD, see Recital 31.  
175 231 Recital 30 AIFMD. Those requirements are also valid vis-à-vis sub-delegation. 
176 Eddy Wymeersch, Brexit and the Provision of Financial services into the EU and into the UK, ECFR 4/2018, 
p. 738. 
177 ESMA Statistical Report, p.269. 

139 

 
 
 
 
 
 
                                                           
portfolio management or risk management, it also contains a number of safeguards subject to 
supervisory assessment.  

The AIFMD and the AIFMR lay down detailed requirements for the delegate and obligations 
of  the  delegating  AIFM  as  well  as  its  remaining  liability  towards  the  managed  AIF  and 
investors.178 The core functions of AIFMs can be delegated only to undertakings registered or 
authorised for asset management and supervised by the competent authorities.179 The delegate 
must be of good repute, qualified, have sufficient technical and human resources, and possess 
expertise  necessary  to  discharge  vested  tasks.180  Moreover,  the  AIFM  must  supervise  the 
delegate  and  be  able  to  withdraw  delegation  immediately.181  Importantly,  AIFMs  cannot 
delegate  the  core  functions  to  depositories  or  any  entity,  whose  interest  may  conflict  with 
those of the AIFM or the AIF’s investors. 

NCAs  must  be  notified  before  the  delegation  arrangements  become  effective  so  they  can 
assess  whether  the  delegation  structure  is  objectively  necessary.  These  most  commonly 
include  optimisation  of  business  functions  and  costs,  seeking  expertise  of  the  delegate  in 
specific  markets  or  accessing  global  trading  capabilities.182  Where  a  delegate  is  a  third 
country  undertaking,  a  cooperation  agreement  between  the  relevant  NCAs  must  be  in 
place.183  

AIFMs can no longer be considered as such if they turn into letter-box entities. An entity is 
no longer considered to be an AIFM where it does not ensure a permanent supervision of the 
delegate or does not retain the prescribed standard of decision making. As a consequence, the 
licence of such an AIFM should be rescinded. 

Some stakeholders call for more harmonised rules on delegation.184 The effectiveness of the 
rules on delegation is bound to rest entirely on their diligent enforcement by the supervisory 
authorities.  AIFMs,  which  appear  to  host  ‘empty  shells’  (engaging  in  so-called  white  label 
business)  and  delegate  all  investment  management  functions  abroad,  should  be  properly 
scrutinized.185 

The majority of the respondents to the KPMG Survey did not report any material change with 
respect to their delegation arrangements following the application of the AIFMD.186 55% of 
respondent  AIFMs  delegated  fund  accounting,  valuation  and  pricing  functions  to  other 
entities.  A  slightly  lower  ratio  of  52%  also  delegated  other  fund  administration  activities, 
followed  by  portfolio  management  activities  (35%),  marketing  functions  (29%)  and  risk 
management (10%). Smaller AIFMs were more likely than larger AIFMs to record that they 
delegate portfolio management.  187 In France and Luxembourg more than half of all AIFMs 
delegate portfolio management.188 

178 Article 20(3) of the AIFMD. 
179 Article 20(1)(c) of the AIFMD, Article 78 of the AIFMR. 
180 Article 20(1)(b) and (f) of the AIFMD, Article 77 of the AIFMR. 
181 Article 20(1)(f) of the AIFMD, Article 75(f) of the AIFMR. 
182 This list is not exhaustive. Article 20(1)(a) of the AIFMD and Article 76 of the AIFMR. 
183 Article 20(1)(d) of the AIFMD. 
184 EGESC meeting of 29.09.2019. 
185 ESMA opinion to support supervisory convergence in the area of investment management in the context of 
the United Kingdom withdrawing from the European Union, ESMA34-45-344, 13.07.2017. 
186 KPMG Report, p. 178. 
187 “Investment management functions” are defined in AIFMD to include both portfolio and risk management, 
so it is expected that the AIFM would retain one of these functions to ensure it meets this requirement. See the 

140 

 
                                                           
 
The KPMG survey results indicate that the AIFMD delegation requirements are effective in 
applying  appropriate  governance  and  risk  management  obligations  on  AIFMs  without 
adversely impacting their ability to delegate key functions to specialists (e.g. as regards asset 
classes,  geographies  or  investment  strategies;  or  as  regards  fund  administration  and  fund 
accounting), thereby limiting and managing key operational risks for AIFs and AIF investors.  

Risk and liquidity management rules 

Based on the objectives of adequate risk and liquidity management controls and limitation of 
micro-prudential risks, the AIFMD aims to control the most important risks faced by AIFMs 
and  AIFs  (market,  liquidity,  counterparty  and  operational  risks).  AIFMs  are  therefore 
required to establish appropriate controls and processes.189 

Almost  all  of  AIFM  respondents  to  the  KPMG  Survey  agreed  that  AIFMs  must  have 
appropriate risk management policies and procedures in place.190 There was broad agreement 
that  functional  and  hierarchical  separation  of  the  risk  management  function  sets  a  robust 
framework and corresponds to the heterogeneous universe of AIFs.191 A bit less than a half of 
the  respondent  AIFMs  changed  their  risk  management  policies  and  20%  their  liquidity 
management policies since the AIFMD’s coming into force.192   

The  majority  of  AIFMD  interviewees  in  nearly  all  the  Member  States  noted  that 
implementation  of  AIFMD  had  resulted  in  only  minor  changes  in  substance  to  risk 
management processes, because national rules already existed or because they drew on their 
experience with UCITS requirements (to which a majority of the interviewees were already 
subject).193  Changes  were  said  to  have  been  made  primarily  in  the  area  of  calculating 
leverage and articulating internal governance processes.194   

However,  for  some  AIFMs  the  AIFMD  requirements  had  had  a  greater  impact  in  some 
sectors of the AIF universe. This was in particular the case for AIFMs managing real estate or 
private equity  funds, as  they have  traditionally performed  risk management  as a part of the 
portfolio  management  function.195  Whilst  hedge  fund  managers  found  requiring  separation 
between risk management and portfolio management to be sensible, private equity managers 
took  the  opposite  view  as  regards  their  sector  and  referred  to  the  increased  costs.196 

paper “Delegation of Investment Management under the AIFMD”, Mark Browne, Partner at Mason, Hayes & 
Curran 
188 KPMG Report, p. 178. 
189 Cf. for further details Deloitte, Risk management within AIFMD for private equity and real estate funds 
(2014).; PwC, Risk management, AIFMD Newsbrief: A closer look at the Impact of AIFMD on Risk and 
Liquidity Management (2013), p. 1 et seq.   
190 KPMG Report, p. 89. 
191 Ibid., p. 195. 
192 Ibid., p. 90. 
193 Ibid., p. 194.  
194 Ibid. 
195 Kai Braun and Désirée Springmann, Risk management under the AIFMD, 2013 December, [ 
https://www.ipe.com/investment/briefing-investment/risk-management-under-
theaifmd/www.ipe.com/investment/briefing-investment/risk-management-under-the-
aifmd/10000541.fullarticle]; Risk Management for Private Equity AIFMD and SIF law – A new challenge, 
PWC, [https://www.pwc.lu/en/risk-management/docs/pwc-risk-management-for-pe.pdf]. 
196 KPMG Report, p. 198. 

141 

 
 
 
 
                                                                                                                                                                                     
Moreover, the latter stakeholders did not consider liquidity management requirements to be 
necessary for them.197  

Some  in  the  industry198  opined  that  a  uniform/harmonised  set  of  liquidity  tools  should  be 
available in  all the Member States. There was a  view that  smaller fund managers may lack 
resources,  in  particular  at  the  early  stages  of  business,  to  implement  hierarchical  and 
functional separation of the mentioned responsibilities.   

Analysis  indicates  that  risk  and  liquidity  management  rules  laid  down  in  the  AIFMD  for 
monitoring  micro-prudential  risks  are  perceived  as  necessary  and  they  are  judged  to  be 
effective.199  There  is  testimony  that  implementing  liquidity  risk  management  requirements 
helped  the  industry  to  weather  several  significant  market  dislocations.200  As  regards  the 
smaller AIFMs, in particular those at the early stages of their activities, one must recall that 
the  risk  management  provisions  of  the  AIFMD  do  not  apply  until  the  AuM  reach  the  set 
thresholds, which are judged to be appropriate. 

The AIFMD provisions created a uniform standard in AIFMs risk and liquidity management. 
This enables NCAs to assess whether AIFMs have appropriate risk management controls and 
manage major risks. They also provide assurance for investors that the liquidity profile of an 
AIF is aligned with their redemption rights.  

As regards the availability of liquidity tools in a harmonised way across the internal market, 
this  has  been  also  recommended  by  the  ESRB201  as  well  as  the  FSB202  and  some  in  the 
industry.203  The  ESRB  observes  that  the  availability  of  liquidity  management  tools  varies 
substantially  across  Member  States,  whereas  it  contends  that  ‘the  continued  growth  of  the 
investment  fund  sector,  combined  with  an  increase  in  its  liquidity  transformation  activity, 
could lead to increased financial stability risks that need to be addressed.’204 

The  ESRB  recommends  the  Commission  (i)  to  consider  including  additional  liquidity 
management  tools  in  the  constitutional  documents  or  other  pre-contractual  information  of 
AIFs  (as  a  minimum  the  power  to  suspend  redemptions  should  be  included),  (ii)  provide 
investors with sufficient transparency in relation to such tools, (iii) ensure that the necessary 
operational  capacity and contingency planning is available for the timely activation of such 
additional  liquidity  management  tools,  and  (iv)  report  to  the  NCAs  on  the  implementation 
and use of such additional liquidity management tools in stressed market circumstances. Most 
of the Member States accept the use of various liquidity management tools.   

197 Ibid., p. 90. 
198 AMIC and EFAMA. 
199 KPMG Report, p. 196. 
200 Ibid., p. 197, AMIC/EFAMA, Managing fund liquidity risk in Europe –an AMIC/EFAMA report, April 
2016, p. 5. 
201 Recommendation of the European Systemic Risk Board of 7 December 2017 on liquidity and leverage risks 
in investment funds ESRB/2017/6, 2018/C 151/01. 
202 FSB Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities,  
12 January 2017. The FSB, in its final recommendations, has also encouraged authorities to review their  
frameworks and consider broadening the range of additional liquidity tools available to managers. 

203 Responses to the ESMA public consultation on the draft Guidelines on liquidity stress testing in UCITS and 
AIFs.   
204 Recommendation of the European Systemic Risk Board of 7 December 2017 on liquidity and leverage risks 
in investment funds ESRB/2017/6, 2018/C 151/01, Annex II, C 151/17.  

142 

 
 
 
 
    
 
                                                           
 
While  liquidity  management  tools  remain  primarily  the  responsibility  of  the  fund  manager, 
the ESRB highlights that there could be situations in which fund managers may be reluctant 
to  suspend  redemptions  to  avoid  reputational  costs  and  competitive  disadvantages.  There 
could also be situations where a lack of clearly assigned responsibilities for NCAs might lead 
to  insufficient  reactions  during  stressed  market  conditions.  The  ESRB  specifically 
recommends  that  the  Commission  proposes  changes  to  the  Union  legislation  to  clarify  the 
NCAs'  respective  roles  and  cooperation  between  them  when  using  their  powers  to  suspend 
redemptions in situations where there are cross-border financial stability implications.205 

The  ESRB  also  recommends  that  the  European  Commission  should  oblige  NCAs  to  notify 
other  relevant  NCAs,  ESMA  and  the  ESRB  thereof,  prior  to  the  exercise  of  the  mentioned 
powers.  Furthermore,  the  ESRB  recommends  setting  out  ESMA's  general  facilitation, 
advisory  and  coordination  role  in  relation  to  the  NCAs'  powers  to  suspend  redemptions  in 
such situations, which could facilitate a more harmonised approach. The ESRB explains that 
there could be situations where fund managers face incentives to not suspend redemptions for 
reputational  cost  and  competitive  pressure  and  situations  where  a  lack  of  clearly  assigned 
possibilities for NCAs might lead to insufficient reactions during stressed market conditions. 
Meanwhile, a more active involvement of the NCAs risks creating moral hazard behaviour by 
the fund managers. Therefore, full implications thereof should be carefully considered.   

The ESRB is also concerned that excessive liquidity mismatches in open-ended AIFs, could 
contribute to the build-up of systemic risks, as the forced sale of even a small amount of less 
liquid  assets  may  rapidly  lead  to  substantial  amplifications  of  market  falls.  Therefore,  the 
ESRB  recommends  the  European  Commission  to  mandate  ESMA  to  prepare  and  update, 
based on ESMA’s own analysis, a list of inherently less liquid assets. As far as investment in 
less liquid assets by open-ended AIFs is concerned, the crucial issue is whether the portfolio 
composition  matches  the  AIF’s  redemption  policy.  In  this  respect,  the  AIFMD  already 
requires AIFs to have redemption policies that are consistent with the liquidity profile of their 
investment  strategy  and  to  conduct  regular  stress  tests  under  both  normal  and  exceptional 
liquidity conditions.   

Finally,  empirical  work  is  also  necessary  to  determine  when  liquidity  mismatches  may  be 
excessive.  The  liquidity  of  an  asset  depends  on  several  factors  (asset  specific  as  well  as 
market  and  more  macroeconomic  factors)  and  these  factors  can  change  their  impact  on  the 
liquidity of an asset over time.   

As regards already executed actions, recently ESMA has issued guidelines on liquidity stress 
testing  in  investment  funds  that  brings  further  convergence  and  clarity  in  this  area.206  As a 
result, if there was a harmonised set of liquidity risk management tools available across the 
EU, AIFMs would be able to incorporate any of them in their AIFs’ redemption policies. The 
ESRB  recommends  to  require  that  AIFMs  of  open-ended  AIFs  disclose  internal  limits,  if 
used, to the NCAs and to report any changes to them whenever changes are applied to them 
and also to disclose them to investors according to guidance to be developed by ESMA.  

205 As provided in Article 46 of the AIFMD.  
206 ESMA Guidelines on liquidity stress testing in UCITS and AIFs. 2.09.2019, ESMA34-39-882. These 
guidelines implement one of the ESRB’s recommendations calling for greater convergence across the EU on 
how NCA supervise the use of this liquidity management tool.  

143 

 
 
 
 
  
 
   
                                                           
4.1.4.  Specific  objective:  Common  approach  to  protect  investors  in  AIFM 

managed funds 

Depository regime 

The  global  financial  crisis  in  2007-2009  was  marked  by  a  number  of  events207  leading  to 
irrecoverable  loss  of  investor  assets,  which  laid  bare  the  necessity  to  strengthen  investor 
protection. The idea of introducing a harmonised depository regime for the AIFs akin to the 
one contained in the UCITS framework found support among the EU decision-makers. As a 
result, a harmonised and robust depository regime was introduced in the AIFMD208 requiring 
a  third  party,  i.e.  an  appointed  depository,  to  safe-keep  AIFs’  assets  and  oversee  AIFs’ 
compliance with national legislation and the AIF rules. 

The AIFMD requires appointing, by means of a written contract, a single depositary for each 
AIF managed by the AIFM.209 As a general rule, the depository is required to be established 
in the same Member State as the AIF.210 Only the entities defined in the AIFMD are eligible 
to assume the role of a depositary211 explicitly excluding the AIFMs of the concerned AIFs 
for the avoidance of insurmountable conflicts of interest.212 This exclusion is justified given 
that the depository, besides asset safe-keeping, is also entrusted with a number of oversight 
duties, including monitoring of the AIFs’ cash flows213, in a context where AIFs are regulated 
at national level, as AIFMD is designed to regulate their managers.   

The  delegation  of  depository  functions  is  limited  to  safe-keeping  of  assets  and  is  only 
permitted under certain  conditions,  including holding of financial instruments  in  segregated 
financial instruments accounts along the custody chain.214 The depositary, however, remains 
liable to the AIF or to the investors of the AIF for the loss of assets by the third party, except 
in case of a liability discharge or if it can prove that the loss occurred due to an external event 
beyond the depository’s reasonable control.215   

The  majority  of  respondents  to  the  General  Survey  agreed  that  depositaries  provide  for  an 
appropriate level of protection for professional investors and that oversight responsibilities of 
the depositary cover the  appropriate activities of the AIFM/AIF.216 At the same time, some 
respondents  communicated  their  challenges  in  ensuring  compliance  with  the  AIFMD  or 
called for further development of the regulatory framework.   

Some  respondents  advocated  introducing  a  depositary  passport  enabling  a  cross-border 
supply  of  depository  services.217  In  the  same  vein,  several  respondents  provided  positive 
feedback on the transitional provision, which expired on 22 July 2017 and according to which 

207 Collapse of Lehman Brothers Bank and uncovering of fraudulent asset management business of Bernard 
Madoff. 
208 Leading to an upgrade of the UCITS depository regime accordingly. 
209 Article 21(1) and (2) of the AIFMD. 
210 Article 21(5) of the AIFMD.  
211 Article 21(3) of the AIFMD. 
212 Article 21(4) of the AIFMD. 
213 Article 21(7) and (9) of the AIFMD. 
214 Article 21(11) of the AIFMD. 
215 Article 21(12) and (13) of the AIFMD. 
216 KPMG Report, p. 94. 
217 Ibid., pp. 95 and 207. 

144 

 
 
 
 
 
 
                                                           
the relevant NCA could accept a depository being established in another Member State than 
the AIF.218 This option was claimed to be of great importance for smaller markets where the 
choice  of  depositaries  is  very  limited.  Too  few  sub-custodians,  difficulties  in  finding  fund 
administrators  (independent  from  the  depositary)  and  uncertainties  as  to  how  to  verify 
ownership  of  venture  capital  investments  were  also  mentioned  as  practical  hurdles  in 
ensuring compliance with the AIFMD.219 

Several respondents to the General Survey indicated challenges in relation to prime brokers. 
Certain  views  favoured  imposing  an  obligation  on  the  US  prime  brokers  to  report  to  the 
depositary on the AIF assets.220 In addition, interpretation of the provisions on delegation of 
custody to prime brokers was claimed to vary in different Member States.221 This may impact 
the effectiveness of the harmonised framework. Some respondents criticised the requirement 
to hold multiple omnibus accounts to ensure full compliance with the asset segregation rules. 
They judged the requirement laid down in Delegated Regulation 231/2013 as inefficient and 
burdensome.  Some  pointed  out  the  differing  interpretations  of  a  Central  Securities 
Depository’s (CSD) liability in the custody chain, whereas others noted that they would have 
concerns if the AIFMD rules were applied to CSDs.222  

In  the  framework  of  ongoing  implementation  work  regarding  the  Delegated  Regulation  on 
safe-keeping duties of depositaries223, questions appeared as to the application of delegation 
rules to  tri-party collateral  managers. The tri-party  collateral  manager is  the delegate of the 
depositary and of the AIFM where the latter chooses to use tri-party collateral management 
services. The AIFMD, however, does not contain specific rules to govern such relationships.   

Despite the past difficulties,224 recital 36 of the AIFMD invites the European Commission to 
examine  the  possibility  of  putting  forward  an  appropriate  horizontal  legislative  proposal 
conferring  a  right  to  depositaries  to  provide  services  in  another  Member  State.  Gaps  in 
harmonisation of national laws on securities and major differences in fund accounting rules 
continue  to  persist  and  for  some  are  key  obstacles  for  the  EU  depositary  passport.  On  the 
other  hand,  the  latter  do  not  present  insurmountable  hurdles  to  the  depository  passport  as 
evidenced by the cross-border activities during the transitional period.  In 2018, about 10% of 
the  depositaries  had  a  different  domicile  than  the  fund.  Given  expiration  of  the  transitional 
arrangements,  there  seems  to  be  a  compelling  reason  to  find  a  solution  for  the  smaller 
markets where depository service providers are very few to choose from, if any.   

As regards the feedback relating to prime brokers, it should be recalled that depositaries can 
only delegate safekeeping of assets. The delegation of asset safe-keeping to prime brokers is 
limited to delegation of custody.225 The prime broker is obliged to provide a daily statement 

218 Ibid., pp. 203 and 208, Member State derogation based on Article 61(5) of the AIFMD. 
219 Ibid., p. 96. 
220 This seems linked to a lack of enforcement of Article 91 of AIFMR, which contains a general obligation for 
prime brokers to report to the depositary on the AIF assets. 
221 KPMG Report, p. 96. 
222 Ibid., pp. 96 and 113. 
223 Commission Delegated Regulation 2018/1618 of 12 July 2018 amending Delegated Regulation (EU) No 
231/2013 as regards safe-keeping duties of depositaries, OJ L 271, 30.10.2018, p. 1. 
224 In the past, the Commission had brought forward twice the idea of a depositary passport, first in its proposal 
for a UCITS II Directive, which has never been adopted, and much later in its proposal for AIFMD, which has, 
due to a lack of support by co-legislators, been adopted without the relevant provision. 
225 Article 21(4)(b) of the AIFMD. 

145 

 
 
 
 
 
                                                           
to  the depositary, which includes information  about  the value of the assets  held  in custody. 
The  depositary  must  ensure  that  the  reporting  flow  is  clearly  stipulated  in  its  delegation 
contract with the prime broker.   

The  recent  amendments  to  the  Commission  Delegated  Regulation  231/2013226  allow  the 
comingling  of  the  depositary’s  clients’  assets  at  the  delegate  level,  while  requiring  that  the 
depositary’s own assets, the delegate’s own assets and the delegate’s other clients’ assets are 
segregated.  The  amended  Delegated  Regulation  clarifies  that  the  depositary  itself  must 
maintain a record in the financial instruments account it has opened in the name of the AIF or 
in the name of the AIFM on behalf of the AIF and, therefore, cannot exclusively rely on the 
books and records held by the delegate.227 

As regards the application of the AIFMD rules to CSDs, one of the guiding principles of the 
Union  is  to  preserve  a  level  playing  field.  This  means  that  entities  providing  the  same 
services should be subject to the same rules, except where it is imperative to account for the 
relevant  differences.  Treating  a  CSD  as  a  delegate  of  a  depository  is  also  of  practical 
importance. Given that depositories are subject to strict liability where delegates lose AIFs’ 
assets they should be able to fulfil their duties and to undertake due diligence measures when 
assets are in the CSD’s custody.  

In  2017  ESMA  issued  an  Article  34  Opinion228  requesting  changes  to  the  depositary 
delegation  rules  in  AIFMD  with  regard  to  central  securities  depositories  (CSDs).  ESMA 
recommends that AIFMD be clarified to allow depositaries not to apply the delegation rules 
to  CSDs  in  their  capacity  as  Issuer  CSDs.  Depositaries  should  be  required  to  apply  the 
delegation rules to CSDs in their capacity as Investor CSDs. Furthermore, this change should 
also be made in the UCITS Directive when it is reviewed. 

Overall,  the  AIFMD  regime  for  depositories  is  judged  to  remain  valid  and  effective.  The 
fundamental principle of separating investment decisions from custody of the AIFs’ assets is 
not challenged. Rules governing delegation of custody to third parties have been clarified by 
the mentioned amendments to the Delegated Regulation addressing the alleged shortcomings. 
A  number  of  the  other  discussed  issues  could  be  addressed  by  considering  changes  to  the 
AIFMD.   

4.1.5.  Specific objective: Develop the single market in AIFs 

Single Market for EU AIFs 

a) Marketing of EU AIFs to retail investors 
The  marketing  passport  allows  an  EU  AIFM,  authorised  in  its  home  Member  State,  to 
manage an AIF in other Member States and to market units or shares of EU AIFs it manages 
to  professional  investors  resident  in  other  Member  States  under  the  freedom  to  provide 

226 Commission Delegated Regulation 2018/1618 of 12 July 2018 amending Delegated Regulation (EU) No 
231/2013 as regards safe-keeping duties of depositaries, OJ L 271, 30.10.2018, p. 1. 
227 Ibid., Recital 4. 
228 See the opinion which is available at: https://www.esma.europa.eu/sites/default/files/library/esma34-
45277_opinion_34_on_asset_segregation_and_custody_services.pdf 

146 

 
 
 
 
 
 
 
 
 
                                                           
services or by  establishing  a branch.229  Individual  Member States may permit  marketing of 
AIFs to retail investors within their own jurisdiction and impose additional conditions as they 
deem fit.230 

Pursuant  to  Article  43(2)  AIFMD  Member  States  may  impose  stricter  requirements  on  the 
AIFM  or  the  AIF  than  the  requirements  applicable  to  the  AIFs  marketed  to  professional 
investors in their territory but shall not impose stricter or additional requirements on EU AIFs 
established  in  another  Member  State  and  marketed  on  a  cross-border  basis  than  on  AIFs 
marketed domestically.231  

As regards  access  to  retail investors,  the respondents  to  the KPMG Survey provided  mixed 
views:  44%  reported  an  increased  investment  from  this  investor  group,  22%  observed  no 
change and 22% reported a strong decrease.232 The cost of complying with the AIFMD and 
investment  restrictions  imposed  by  some  Member  States  for  AIFs  targeting  retail  investors 
were cited by some as an impediment to marketing AIFs to retail investors.233 Nevertheless, 
about 40% of the respondent AIFMs market their EU AIFs to EU retail or semi-professional 
investors.234 The majority agreed that following implementation of the AIFMD, the ability to 
market non-EU AIFs to retail investors had become more restricted.235  

The key things most often mentioned as adversely impacting retail investors were:  

- 

-  higher  costs  (fees,  valuation  cost,  AIFM  costs,  indirect  cost,  protection  costs, 
regulatory  costs,  compliance  costs,  reporting  costs),  which  had  resulted  in  products 
available to retail investors being more expensive to run and support;   
small managers finding it no longer viable to be an AIFM and to comply with all the 
requirements;   
local private placement regimes (lack of them, non-availability for retail investors, too 
restrictive or too onerous).  

- 

Topics  less  frequently  mentioned  were  the  new  MiFID  II  professional  investor  definition 
(potential  reclassification  of  some  high  net  worth  individuals  and  municipalities  as  retail 
clients  and  a  more  restrictive  approach  to  opting  up  retail  clients  to  professional),  no 
marketing passport and limitation on distribution. Topics mentioned occasionally were:  

- 

- 

that  non-UCITS  funds  are  automatically  AIFs  (e.g.  French  Fonds  Commun  de 
Placement d'Entreprise);  
the size of retail investments in AIFs is not sufficient in view of the compliance costs 
(i.e. the cost vs return ratio is not viable);  

-  guidance by ESMA that all AIFs are “complex”;  
- 
- 

investment restrictions imposed by some countries on AIFs targeting retail investors;  
a one-size-fits-all approach to regulation.  

229 Articles 31 and 32 of the AIFMD.  
230 Article 43 of the AIFMD. 
231 As follows from the KPMG Report, Member States made extensive use of this possibility to retain an NPPR 
for certain types of AIFs for retail investors as stipulated under Article 43 AIFMD. 
232 KPMG Report, p. 111. 
233 Ibid. 
234 Ibid., p. 100. The category of semi-professional investors is not currently defined in the Union’s acquis and 
the scope of it is not clear.   
235 KPMG Report, p. 102. 

147 

 
 
 
 
 
 
                                                           
It  was  reported  that  the  overall  consequence  of  AIFMD  has  been  less  choice  for  retail 
investors, including for high net worth clients and semi-professional investors.  

The  AIFMD  requirements  on  access  to  retail  investors  have  thus  not  reached  their  full 
potential from an effectiveness point of view.  

b) Auxiliary services provided by AIFMs 
In  addition  to  collective  investment  management,  licenced  AIFMs  can  seek  supplementary 
authorisation  to  provide  a  number  of  auxiliary  services.  These  include  individual  portfolio 
management  of  investments  on  a  discretionary  basis,  investment  advice,  safekeeping  and 
administration in relation to shares and units of CIU and reception and transmission of orders 
in relation to financial instruments.236 Where financial instruments are involved, AIFMs are 
required to comply with the enumerated provisions of the MiFID.237 Since the adoption of the 
AIFMD, the MiFID framework has undergone  some major  changes. Therefore, to  ensure  a 
level  playing  field  between  investment  firms  and  AIFMs  where  they  provide  competing 
services, the AIFMD should be also aligned to cover the relevant obligations as laid down in 
the MiFID II. 

4.2. 

Efficiency 

The  efficiency  analysis  compares  the  actual  situation  with  the  hypothetical  situation  of  not 
having an AIFMD in place, in order to determine what are the costs it entails, and whether 
these  are  proportionate  to  the  benefits  it  brings.  However,  the  efficiency  analysis  also 
compares the current situation with the situation before the intervention (i.e. when there was 
no AIFMD in place), in order to determine whether the current rules have increased costs for 
stakeholders. 

Besides the benefits, the AIFMD has also brought a number of costs to stakeholders.  

4.2.1.  Specific objective: All AIFM are subject to appropriate authorisation and 

registration requirements 

Sub-threshold AIFMs 

As regards proportionality, arguably the implementation of thresholds at EU level in general 
would  seem  appropriate  when  assessed  against  the  purpose  of  exempting  AIFMs  from  full 
authorisation. Such de minimis rules can be seen as a legitimate means to achieve two goals: 
to  prevent  unnecessary  regulatory  and  administrative  burdens  on  AIFMs  and  NCAs  on  the 
one  hand  and,  on  the  other  hand,  providing  for  the  monitoring  of  systemic  risk  stemming 
from (larger and potentially leveraged) AIFs/AIFMs.  

The EC considered the de minimis rule under Article 3(2) AIFMD a necessity in view of the 
principle  of  proportionality.238  It  noted  that  the  management  of  AIF  portfolios  with  total 
assets of less than EUR 100 mn is “unlikely to pose significant risks to financial stability and 

236 Article 6(4) of the AIFMD. 
237 Article 6(6) of the AIFMD refers to the obligations of Directive 2004/39/EC. 
238 EC Explanatory Memorandum to the Proposal for a Directive if the European Parliament and of the Council 
on AIFMs and amending Directives 2004/39/EC and 2009/…/EC 30.4.2009 COM(2009) 207 final, 2009/0064 
(COD).  

148 

 
 
 
 
 
 
 
 
 
                                                           
market efficiency. Hence, extending these regulatory requirements to small managers would 
impose  costs  and  administrative  burden  which  would  not  be  justified  by  the  benefits.” 
Similarly, it is argued that the higher threshold of EUR 500 mn for AIFMs that only manage 
AIFs that are not leveraged and that do not grant investors redemption rights during a period 
of  five  years  following  the  date  of  constitution  of  each  AIF  is  justified  by  the  fact  that 
managers  of  unleveraged  funds  are  not  likely  to  cause  systemic  risks.239  Although  this 
assessment  had  been  met  by  criticism  with  regard  to  the  prevention  or  containment  of 
systemic risk, since actions from smaller market participants – following the "herd instinct" 
with comparable investment strategies – may also lead to systemic risks, the conclusion that 
the de minimis rules are proportionate at least to a certain degree seems reasonable.240  

In principle, the aims of reduced burdens as well as containment of systemic risk can be best 
achieved  at  EU  level  to  achieve  at  least  some  kind  of  level  playing  field  for  market 
participants.  It  would  not  seem  plausible  that  a  similar  outcome  could  be  reached  with 
regulation only at Member State level.  

The fact  that there has not  been growth  in  fully licenced  AIFMs  in  all Member  States, and 
that  the  number  of  registered  AIFMs  is  not  insignificant,  indicates  that  the  levels  of  the 
thresholds are efficient and appropriate and would not seem to go beyond what is necessary 
to  achieve  the  goals  of  minimising  regulatory  and  administrative  burdens  and  containing 
systemic  risk.  Hence,  the  overall  assessment  of  the  measures  taken  can  be  regarded  as 
proportionate.   

4.2.2.  Specific objective: Proper monitoring of macro-prudential risks 

Loan originating AIFs 

Since  there  are  no  common  rules  for  loan  originating  AIFs  at  present,  it  is  not  possible  to 
evaluate efficiency from a backward-looking perspective.  

Supervisory reporting requirements   

The respondents to the KPMG Survey agree that  the initial investment in implementing the 
necessary  internal  structures  to  fulfil  the  AIFMD  reporting  obligations  was  substantial  and 
any changes proposed should be assessed being conscious of the significant sunk costs.  

Most respondents also reported that the  costs and human resources expanded by AIFMs on 
ongoing  compliance  with  the  reporting  requirements  are  significant  components  of  the 
overall transaction and operational costs, for example because more personnel are employed 
to maintain the processes and sense check the reports. Also, different NCAs employ different 
IT arrangements and formats for receipt of the reports. Therefore, firms needing to report to 
more than one NCA cannot fully centralise and standardise their reporting systems.  

239 EC Explanatory Memorandum, ibid.  
240 See Tollmann in: Dornseifer/Jesch/Klebeck/Kunschke/Machhausen, Directive 2011/61/EU, Art. 3 margin no. 
19. 

149 

 
 
 
 
 
 
 
 
                                                           
For  a  large  number  of  AIFMs  the  frequency  of  reporting  and  the  content  of  reporting  has 
increased  as  a  result  of  AIFMD.241  Hence,  it  can  be  concluded  that  the  costs  of  complying 
with the reporting obligations have increased.  

For  example,  regarding  reporting  under  the  AIFMD,  KPMG242  presented  a  survey  in  2013 
with evidence of the comparative compliance costs for hedge funds in different jurisdictions. 
It  concludes  that  hedge  funds  headquartered  in  the  Asia-Pacific  region  allocated  a  larger 
share  of  their  total  operating  costs  to  compliance  than  their  European  and  North  American 
counterparts. While more than a third (37%) of Asia-Pacific respondents declared they were 
allocating 10% or more of operating costs to compliance, the percentage was lower for North 
American  (26%)  and  European  (21%)  funds.  As  regards  smaller  hedge  funds,  which 
generally  spend  more  on  compliance  in  relative  terms,  North  American  funds  on  average 
spend  0.4%  of  their  assets  under  management  on  compliance,  more  than  funds  in  Europe 
(0.2%) and the Asia-Pacific region. Cost data for supervisory reporting only is not available. 
However,  according  to  the  survey,  46%  of  respondents  said  that  the  impact  of  ‘AIFMD 
registration and reporting’ on compliance costs was ‘high’, which is only slightly more than 
the  42%  of  respondents  which  said  that  the  corresponding  cost  impact  of  registration  and 
reporting to the U.S. Securities and Exchange Commission was ‘high’. No updates with more 
recent survey data are available. 

Source:  Commission  staff  working  document  Fitness  Check  of  EU  Supervisory  Reporting 
Requirements SWD (2019) 403 final. 

The 2019 study on the costs of compliance for the financial sector243 shows that supervisory 
reporting  costs  represent  a  high  share  (70%)  of  the  total  costs  of  complying  with  AIFMD. 
The factors reported to have significantly influenced supervisory reporting costs were:  
- the number of requirements;  
- the timing of legislative changes;  
- the limited extent to which compliance processes can be automated; and  
- a short transition period for compliance. 

241 KPMG report, p. 157 
242 https://home.kpmg/content/dam/kpmg/pdf/2013/10/the-cost-of-compliance-v2.pdf 
243 Study on the costs of compliance for the financial sector - Publications Office of the EU (europa.eu) 

150 

 
 
 
 
 
 
                                                           
There  was  however  no  indication  from  respondents  that  the  costs  of  implementing  the 
AIFMD  requirements  were  unacceptable  or  significantly  disproportionate  relative  to  the 
potential impacts if systemic risks were to go undetected due to the lack of a proper reporting 
and monitoring system. 

There  are,  however,  certain  aspects  of  the  reporting  regime  that  could  be  addressed,  which 
would further enhance its efficiency. 

The  content-related  data  requirements  at  the  level  of  the  AIFM  and  its  AIFs  are 
administratively  extensive  and  standardisation  is  necessary  for  comparative  analysis.  The 
templates  provided  by  the  various  NCAs  differ  in  terms  of  content,  so  EU-wide 
standardisation  of  reported  data  is  not  guaranteed  in  every  aspect.  It  was  noted  by  survey 
respondents  and  interviewees  that  there  are  idiosyncrasies  in  the  AIFMD  reporting 
requirements of each Member State, with many using different template layouts and different 
software versions of the ESMA reporting requirements (See Section X). 

This has led to the industry having to take into account each country specific, which creates 
additional  inefficiencies  for  cross-border  participants.244  The  NCA  reporting  is  extensively 
time- and resource-depleting as each AIF report requires  – on a quarterly basis – numerous 
data  to  be  aggregated.  Some  of  the  data  fields  are  varied  and  prone  to  interpretation  and 
calculation  whereas  others  are  required  to  be  converted  to  a  specific  file  format  for 
transmission to the NCA, which validates the data and passes it on to ESMA, in some but not 
all cases.   

244 Cf. in addition the BaFin Annual Report 2015, p. 255 et seq which refers to the relevant reporting 
requirements; cf. for the Disclosure requirements in Ireland for Retail Investor AIF, Central Bank AIF 
Rulebook, p.62 et seq. 

151 

 
 
 
 
 
   
                                                           
AIFM  interviewees  were  of  the  opinion  that  reporting  systems  should  be  streamlined  to 
reduce unnecessary administrative efforts and costs (see Section x). This is a strong indicator 
that  at  present  the  reporting  regime  is  not  fully  efficient.  The  points  summarised  in  the 
effectiveness sub-section about unnecessary, duplicative or insufficient data also bear on the 
assessment  of  efficiency.  This  issue  is  compounded  when  other  EU  reporting  requirements 
are also taken into account.  

In general, the interviewees shared the opinion that the differences in terms of interpretation 
and  filing  procedures  further  exacerbate  the  imposed  regulatory  costs  which  are  not 
compensated for by the availability or provision of analysed market data.  

Translation  costs  also  matter,  especially  if  AIFMs  have  a  reporting  obligation  to  NCAs 
located in jurisdictions other than the home Member State of the AIFM. This may be the case 
for  groups  with  AIFMs  or  AIFs  in  different  Member  States,  as  they  cannot  centralise  the 
reporting, even where the investment strategies are identical. Also, if the AIFM is invested in 
a target company located in that specific jurisdiction, for example. In such cases there can be 
further duplication of data reporting, over and above that already described. 

As  regards  proportionality,  the  AIFMD  reporting  framework  appears  to  comply  with  the 
purpose-means  ratio, because the measures required do not  go beyond what  is  necessary to 
achieve the aforementioned objective. The provisions of AIFMD in this regard are limited to 
those aspects that could not have been regulated by the individual Member States themselves 
and  had  to  be  regulated  by  the  EU  against  the  objectives  of  a  level  playing  field  and 
comparable  data.  However,  it  should  be  ensured  that  the  relevant  data  are  collected  only 
where the NCAs and ESMA have identified a clear use for it in mitigating a particular risk 
(see  ESMA  AIFMR  Advice).  The  discussion  above  and  under  effectiveness  would  indicate 
that additional costs could arise for ESMA, NCAs and AIFMs that are not in line to the core 
aim of the reporting requirements. 

In  conclusion,  it  can  be  said  that  because  the  activities  of  AIFMs  can  have  effects  across 
borders  and  on  financial  actors  around  them,  it  seems  appropriate  that  NCAs  are  in  the 
position  to  monitor  these  entities  in  a  similar  manner  to  their  monitoring  of  other  financial 
institutions.  The  increased  transparency  achieved  and  the  information  received  through  the 
provisions on reporting to NCAs under AIFMD should make it easier for regulators to detect 
and respond to risks in the relevant markets. AIFMD has led, to a significant degree, to the 
standardisation  of  such  mechanisms,  processes  and  systems  so  that  systemic  risks  can  be 
monitored on a harmonised level in the EU, via the reporting obligations of AIFMs.  

However,  achievement  of  the  principle  of  efficiency  could  be  improved  by  addressing:  the 
issues discussed above  around  appropriateness  of certain  of the data specified in  Annex  IV 
AIFMR; that ESMA has not received from NCAs all reported data, so has not been able to 
analyse  post-AIFMD  market  trends;  and  that  the  market  does  not  generally  have  access  to 
NCA  analyses.  It  should  also  be  considered  that  the  increased  costs  of  running  an  AIFM 
business are ultimately borne to some extent by AIF investors and that generally they are not 
benefitting from public information flow from the NCAs.   

152 

 
 
 
 
 
 
 
 
Leverage calculation methodologies under AIFMR    

The implementation of the AIFMD will have resulted in one-off and additional costs due to 
additional staffing and processes. KPMG found no qualitative and/or quantitative data from 
which  estimates  can  be  made  of  the  cost-benefit  relationship  of  the  AIFMD  leverage 
provisions.  However,  it  is  noted  that  many  AIFMs  were  already  subject  to  similar  national 
requirements.245  Besides,  the  increased  transparency  of  the  leverage  employed  by  AIFMs 
facilitates a better monitoring of systemic risks. Therefore, the described costs appear to be 
proportionate and efficient in relation to the overall achieved benefits.  

As regards the principle of proportionality, arguably the variety of AIFs and their underlying 
assets may deem an efficient regulatory approach at EU level, by way of prescribing detailed 
conditions,  rather  difficult.  Hence,  the  European  co-legislators  chose  to  provide  principles, 
including reporting measures, and refrained from imposing too detailed rules, but left it to the 
NCAs more closely to consider leverage use and potential risks. This fulfils the condition of 
proportionality since the AIFMD measures do not go beyond what is necessary to create an 
EU framework.   

4.2.3.  Specific  objective:  Proper  monitoring  and  limitation  of  microprudential 

risks 

Delegation rules 

43% of AIFMs reported that the AIFMD resulted in a fee increase for delegated activities.246 
Other than this finding there is no further evidence that quantifies the benefits of the AIFMD 
delegation  rules  versus  the  cost  of  complying  with  them.  However,  given  that  the  AIFMD 
rules on delegation require AIFMs to frequently monitor the delegate and review delegation 
arrangements  and  no  substantial  changes  in  delegation  activities  emerged  after  the  AIFMD 
came into force, the increase in costs is deemed justified.247 The fact that there is no reported 
reduction in the delegation of activities implies that the cost-benefit relation is at least neutral, 
if  not  positive,  which  supports  the  conclusion  that  the  criterion  of  efficiency  is  met  by 
AIFMD.  

Risk and liquidity management rules 

Over  60%  of  respondents  to  the  KPMG  survey  said  that  costs  had  increased  due  to  the 
AIFMD risk management requirements, with about 70% reporting that the provisions require 
AIFMs to do things they would not otherwise do or would do more efficiently, or duplicate 
other requirements, or do not match the requirements of their AIF investors. 248 

In the private equity and real estate sectors, the necessity of full functional and hierarchical 
separation  of  risk  and  portfolio  management  is  not  regarded  as  efficient  from  a  cost 

245 Note that the costs associated with the reporting of leverage to NCAs is covered under the assessment of the 
reporting rules and is therefore not repeated here – see sub-section above.)   
246 KPMG Report, p. 179. 
247 KPMG Report, p. 179. 
248 KPMG Report, p. 198. 

153 

 
 
 
 
 
 
 
                                                           
perspective.  In  some  cases  attempts  are  therefore  being  made  to  issue  letters  of  comfort 
beyond the usual contractual agreements, which in turn can lead to additional costs.   

The operational objective of the rules on risk and liquidity management pursuant to Articles 
15  and  16  AIFMD  is  to  impose  risk  management  controls  on  major  risks  to  which 
AIFMs/AIFs are exposed, in particular market, liquidity, counterparty and operational risks.  

As  regards  proportionality,  Article  15(1)  AIFMD  explicitly  requires  that  the  functional 
separation  arrangements  shall  be  reviewed  by  the  NCA  of  the  home  Member  State  of  the 
AIFM  in  accordance  with  the  principle  of  proportionality.  It  is  assumed  that  the  NCAs 
comply  with  this  requirement.  Survey  feedback,  however,  was  that  small  AIFMs  do  not 
usually have enough staff to meet the functional separation requirements, which is a barrier to 
entry for e.g. small venture capital fund managers for whom risk management usually is an 
integral  part  of  the  portfolio  management  function  and  consequently  is  carried  out  by  the 
same team.   

The operational objective of the rules on risk and liquidity management pursuant to Articles 
15  and  16  AIFMD  is  to  impose  risk  management  controls  on  major  risks  to  which 
AIFMs/AIFs are exposed, in particular market, liquidity, counterparty and operational risks.  

Articles 15 and 16 AIFMD comply with the purpose-means ratio, because the requirements 
do  not  go  beyond  what  is  necessary  to  achieve  the  specific  and  operational  objective.  The 
provisions of AIFMD are limited to those aspects that could not have been regulated by the 
individual  Member  States  and  had  to  be  regulated  by  EU  requirements  to  ensure  a  level 
playing field.  Since the  primary  role of the liquidity management  framework is  to  limit the 
risk  that  the  liquidity  profile  of  the  AIF’s  investments  does  not  align  with  its  underlying 
obligations,  the ESMA  AIFMR Advice states that “such  an  approach is  consistent with  the 
request  from  the  Commission  to  specify  rules  that  are  proportionate  and  necessary”  for 
specifying the general obligations placed on AIFMs by Article 16(1)-(2) AIFMD.  

It  can  therefore  be  concluded  that  the  principle  of  efficiency  is  achieved.  The  onus  is  on 
NCAs to ensure appropriate application of the proportionality principle. 

4.2.4.  Specific objective: Common approach to protect professional investors in 

AIFM managed funds 

Depository regime 

The  majority  of  respondents  to  the  KPMG  Survey  indicated  that  on  average  it  costs  EUR 
500,000  to  obtain  a  depository  licence.  This  has  not  appeared  to  defer  depositories  from 
entering the market.249   

4.2.5.  Specific objective: Develop the single market in AIF 

Single Market for EU AIFs 

249 Ibid., p. 147. 

154 

 
 
 
 
 
  
 
 
 
 
 
                                                           
4.3.  Relevance 

To assess the relevance of the AIFMD, we need to analyse whether the objectives and tools it 
sets out were and are appropriate to tackle the problems that existed, the issues that are being 
faced now, and challenges in the near future.  

At  the  time  of  the  intervention,  the  problems  were  related  to  macro-prudential  (systemic) 
risks, micro-prudential  risks,  market  efficiency  and integrity, investor protection, impact  on 
market for corporate control and acquisition of control of companies by AIFMs.250  

Looking  at  the  objectives  of  the  AIFMD,  they  can  be  seen  as  adequate  responses  to  the 
problems identified at the time. 

4.3.1.  Specific objective: All AIFM are subject to appropriate authorisation and 

registration requirements 

Sub-threshold AIFMs 

The  registration-only  or  sub-threshold  AIFM  provisions  appear  to  remain  relevant  several 
years after implementation of AIFMD in order to ensure financial stability and to facilitate a 
proportional  access  to  the  financial  market  for  smaller  market  participants,  which  remains 
relevant for a competitive and functional European financial market. As shown in the KPMG 
report,  the  policy  rationale  of  introducing  a  de  minimis  regime  for  AIFMs  within  the  EU 
remains  valid.  Although  many  NCAs  apply  additional  provisions  to  sub-threshold  AIFMs, 
these often relate to AIFMs of AIFs marketed to non-professional investors. Such AIFMs and 
AIFs cannot avail of the AIFMD passports, so it seems appropriate and proportionate that it is 
a  matter  left  to  national  discretion.  They  can,  however,  chose  to  opt  up  to  a  full  licence  in 
order to gain the passports.  

4.3.2.  Specific objective: Proper monitoring of macro-prudential risks 

Loan originating AIFs 

Since  there  are  no  common  rules  for  loan  originating  AIFs  at  present,  it  is  not  possible  to 
evaluate relevance from a backward-looking perspective.  

Supervisory reporting requirements   

The FSB states that the lack of consistent and accessible data acts as a significant barrier to 
assessing  the  extent  to  which  funds’  use  of  leverage  could  contribute  to  global  financial 
instability  and  whether  existing  mitigants  are  appropriate  in  addressing  such  financial 
stability  risks.251  It  notes  the  need  for  improved  systems  for  aggregating  and  analysing 
information provided to supervisory authorities.  

The AIFMD reporting obligations are intended primarily to make the activities of the AIFMs 
more transparent in order to advance financial stability on domestic and European level. This 

250 For a more elaborate explanation of these risks, see Section 2. 
251 Retrieved from http://www.fsb.org/wp-content/uploads/FSB-Policy-Recommendations-on-
AssetManagement-Structural-Vulnerabilities.pdf, p. 26. 

155 

 
 
 
 
 
 
 
 
 
 
                                                           
has been materially (though not fully) achieved, including – and importantly – with regard to 
the use of leverage in AIFs.  

The overarching goal of exposing and/or making available important data sets in connection 
with  systemic  risk  at  the  European  level  continues  to  be  the  focus  of  attention.  In  order  to 
ensure  financial  stability  in  the  EU  and  minimise  systemic  risk,  it  remains  relevant  and 
essential that the intended sharing and aggregation of data be fully implemented. Also, it is 
important that the wider market, including investors, can readily access EU-wide analyses, as 
recently provided by ESMA.  

Leverage calculation methodologies under AIFMR    

The use and level of leverage in each AIF are reported by AIFMs to the NCAs. The AIFMD 
reporting requirements therefore make it possible for regulators to observe trends and capture 
outliers. This enables the NCAs and ESMA to monitor potential financial stability risks and 
to  ensure  that  the  leverage  limits  for  each  AIF  managed  by  an  AIFM  are  reasonable  and 
complied with at all times. As such, the AIFMD provisions remain of great relevance for the 
stability of the European financial market. 

4.3.3.  Specific  objective:  Proper  monitoring  and  limitation  of  microprudential 

risks 

Delegation rules 

Delegation  of  management  functions  and  operational  tasks,  especially  those  which  AIFMs 
are not  highly specialised in,  while focusing on key core  competencies, remains a common 
business models for AIFMs around the EU.252 Therefore, the AIFMD delegation provisions 
remain relevant. ESMA supports this view. Moreover, survey respondents and interviewees 
to  the  KPMG  study,  having  questioned  some  selected  areas  of  the  AIFMD  regime,  did  not 
raise any critical issue of the AIFMD severely impacting delegation activities of the AIFMs, 
i.e.  both  parties  do  not  doubt  the  relevance  and  need  for  the  general  delegation  provisions. 
This  supports  a  conclusion  that  the  AIFMD  delegation  rules  are  aligned  with  the  general 
objective  of  EU  market  integration,  along  with  the  other  objectives  of  consumer  protection 
and financial stability, and are still relevant. 

Risk and liquidity management rules 

The  ongoing  relevance  of  risk  and  liquidity  management  regulation  is  confirmed  by  global 
regulatory  bodies,  as  illustrated  by  recent  recommendations  of  the  FSB253  and  IOSCO.254 
Also,  the  AIFMD  risk  management  provisions  continue  to  be  considered  by  market 
participants  as  relevant,  including  the  hierarchical  separation  of  risk  management  and 
portfolio management.   

252 See Figure 35 on page 93 of the KMPG Report. 
253 See http://www.fsb.org/2017/01/policy-recommendations-to-address-structural-vulnerabilities-fromasset-
management-activities/.  
254 See http://www.iosco.org/news/pdf/IOSCONEWS486.pdf. 

156 

 
 
 
 
 
 
 
 
                                                           
However,  some  respondents  to  the  KPMG  survey  questioned  the  rationale  for  the  full 
application of Articles 15 and 16 AIFMD across all sectors of the AIF industry. In particular, 
application  by  NCAs  of  the  proportionality  principle  to  the  requirement  for  hierarchical 
separation of risk and portfolio management was seen as essential for smaller AIFMs. Also, 
while  some  questioned  the  application  of  the  liquidity  management  rules  to  AIFs  available 
only to professional investors, others expressed a contrary view.   

It  can  therefore  be  concluded  that  the  AIFMD  risk  and  liquidity  management  provisions 
remain generally relevant. They exert a harmonised discipline in striking a balance between 
honouring  investor  redemptions  in  a  timely  and  fair  manner  with  the  objective  of  offering 
investors  access  to  higher  risk  premia  from  investing  in  less-liquid  assets.255  Especially  in 
times of distortive effects of expansive monetary policies and low interest rates, resulting into 
a  yield  compression  on  various  assets,  illiquid  assets  will  remain  a  target  investment  of 
investors with mid- to long-term asset allocations.   

4.3.4.  Specific objective: Common approach to protect professional investors in 

AIFM managed funds 

Depository regime 

The  AIFMD  depositary  rules  form  a  substantial  part  of  the  Directive’s  investor  protection 
objective.  The  fact  that  the  majority  of  respondents  to  the  General  Survey  agreed  on  the 
depositaries’  essential  role  across  all  types  of  AIFs  as  providers  of  an  appropriate  level  of 
investor protection indicates continued relevance of the provisions.   

In particular, the rules provide significant guidance and clarity in relation to a range of issues 
relating  to  the  duties,  role  and  liability  of  the  depositary.  This  is  of  relevance  not  only  to 
entities intending to provide depositary services, but also to AIF investors, AIFs, AIFMs and 
other service providers or counterparties to AIFs.  

In  November  2015,  IOSCO  issued  recommended  standards  on  custody  of  CIU  assets,256 
which  remain  current  and  underline  the  global  policy-makers’  view  of  the  importance  and 
ongoing relevance of such regulation. 

4.3.5.  Specific objective: Develop the single market in AIF 

Single Market for EU AIFs 

4.4.  Coherence 

In evaluating how the AIFMD fits within a broader over-arching architecture, the degree of 
consistency between the provisions of the Directive was analysed (internal coherence). How 

255 Cf. EFAMA Response to the IOSCO Consultation on CIS Liquidity Risk Management Recommendations 
(CR04/2017), EFAMA, 2017. 
256 See https://www.iosco.org/news/pdf/IOSCONEWS405.pdf 

157 

 
 
 
 
 
 
 
   
 
 
 
 
                                                           
it  relates  to  other  EU  (legislative  and  non-legislative)  and  national  actions  (external 
coherence) was also assessed.   

4.4.1.  Specific objective: All AIFM are subject to appropriate authorisation and 

registration requirements 

Sub-threshold AIFMs 

With regard to internal coherence of the AIFMD provisions on authorisation and thresholds, 
it  seems  reasonable  to  assert  that  the  requirements  are  coherent  with  other  parts  of  the 
Directive. There is no evidence or commentary that suggests otherwise.  

The  coherence  of  Article  3(2)  AIFMD  is  more  appropriately  assessed  against  other  EU 
legislation (i.e. external coherence), because AIFMD promulgates an equivalent market entry 
barrier  to  other  substantial  EU  legislative  acts  on  regulated  industries.  Such  de  minimis 
regimes257  are  common  within  EU  regulatory  policies.  The  rationale  of  these  policies  may 
differ  from  case  to  case  but  most  often  relate  to  the  principle  of  proportionality  and 
subsidiarity, and the factual  economic circumstance that most often the  regulated industries 
are heterogeneous.   

The most direct comparators of AIFMD are the requirements under UCITSD and MiFID II. 
UCITSD does not include exemptions or exclusions for small UCITS ManCos. Likewise, in 
MiFID  II  there  is  no  authorisation  exemption  for  small  investment  firms,  but  there  is  an 
exemption  –  at  national  discretion  –  for  firms  that  provide  only  the  service  of  receipt  and 
transmission of orders. In the Member States that apply this exemption, firms are generally 
still subject to national authorisation requirements that mirror MiFID II.  

Both  UCITSD  and  MiFID  II  cover  retail  (as  well  as  professional)  clients  or  investors.  It  is 
therefore  more  relevant  to  consider  legislation  such  as  IORPD  II.258  Article  5  IORPD  II 
provides that “…Member States may choose not to apply this Directive, in whole or in part, 
to  any  IORP  registered  or  authorised  in  their  territories  which  operates  pension  schemes 
which together have less than 100 members in total. Subject to Article 2(2), such IORPs shall 
nevertheless  be  given  the  right  to  apply  this  Directive  on  a  voluntary  basis.”  The  chosen 
indicator (number of members) and value (100) that differentiate between EU authorised and 
nationally  regulated  IORPs  are  different  to  those  in  AIFMD,  but  the  principle  is  the  same, 
and AIFMD and IORPD II can be regarded as coherent. 

4.4.2.  Specific objective: Proper monitoring of macro-prudential risks 

Loan originating AIFs 

Since  there  are  no  common  rules  for  loan  originating  AIFs  at  present,  it  is  not  possible  to 
evaluate coherence from a backward-looking perspective.  

257 Recital 17 AIFMD. 
258 Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the 
activities and supervision of institutions for occupational retirement provision (IORPs). 

158 

 
 
 
 
 
 
 
 
 
                                                           
Supervisory reporting requirements  

With regard to internal coherence, the reporting obligations for AIFMs partly do not give a 
consistent picture of the data. The data requested may vary in quantity and content depending 
on  the  Member  State,  because  of  the  differing  national  legislation  or  rules  that  further 
articulate the reporting requirements under AIFMD. Also, the KPMG study results highlight 
that even within the AIFMD reporting template there is duplication.259  

Reporting  obligations  to  NCAs  under  AIFMD  have  also  been  assessed  with  regard  to 
external coherence, i.e. their interplay with other relevant EU legislation. The respondents to 
the KPMG Survey mentioned the overlapping reporting obligations under other pieces of EU 
legislation as  an issue that  is  deviating from  a coherent  approach.  Indeed, the results of the 
Fitness  Check  of  EU  Supervisory  Reporting  Requirements260  confirmed  overlaps  of  the 
AIFMD with reporting under the Money Market  Fund Regulation (MMFR) as well as with 
the  ECB's  collecting  of  the  investment  funds  data  for  the  statistical  purposes.  Some 
respondents called for harmonising the AIFMD reporting requirements with those under the 
EMIR, SII, CRR and other pieces of Union legislation, and at international level.261 

Leverage calculation methodologies under AIFMR    

Within  AIFMD, 
investor  disclosure 
leverage,  reporting,  risk  management  and 
requirements  appear  to  operate  inherently  coherent  between  the  various  components  of  the 
AIFMD.  

the 

The  provisions  are  also  externally  coherent  vis-à-vis  other  EU  measures  with  similar 
objectives. The use of leverage in investment funds in the EU is comprehensively regulated 
for  AIFs  in  AIFMD,  and  for  UCITS  in  UCITSD  and  the  CESR  Guidelines  on  Risk 
Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS, as 
well as in the ESMA Guidelines on ETFs and other UCITS issues.262 These regulations and 
guidelines are generally coherent with each other, but the methodologies differ.   

ESRB  acknowledged  in  its  report  on  shadow  banking  in  Europe263  the  important  progress 
made  in  improving  the  monitoring  and  risk  assessment  of  “synthetic  leverage”  through  the 
collection of data reported under AIFMD. These data can be aggregated with data collected 
under  the  coherent  obligations  in  EMIR  and  SFTR,  in  order  to  provide  NCAs,  ESMA  and 
ESRB  a  sufficient  and  thorough  overview  of  the  overall  leverage  and  leverage  risks  in  the 
European financial markets.   

However,  an  AMIC/EFAMA  report  on  leverage264  remarks  that  in  respect  to  the 
determination  of  leverage,  the  treatment  of  cash  assets  in  UCITS  and  AIFs  could  be 
harmonised.  Moreover,  AMIC/EFAMA  noted  that  in  order  to  ensure  consistency  between 

259 (see 4.1.2 and 4.2.1 in Section 1).  KPMG Report. 
260 Commission Staff Working Document Fitness Check of EU Supervisory Reporting Requirements, 
SWD(2019) 402 final, 6.11.2019.    
261 KPMG Report, p. 86. 
262 CESR Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for 
UCITS CESR/10-788 28 July 2010 (hereafter referred to as the CESR Guidelines); ESMA Final Report, Peer 
review on the Guidelines on ETFs and other UCITS issues 30 July 2018. 
263 ESRB, EU Shadow Banking Monitor No 2 / May 2017, pages 33-35. 
264 AMIC/EFAMA, Managing fund liquidity risk in Europe –an AMIC/EFAMA report, April 2016. 

159 

 
 
  
 
 
 
                                                           
UCITSD and AIFMD it would be helpful to harmonise the calculation method of the gross 
leverage for UCITS using VaR approaches based on the gross method that  applies for AIFs 
under AIFMD. In the light of IOSCO’s work on common leverage measures, KPMG survey 
respondents  and  interviewees  urged  that  the  outcome  of  this  work  be  considered  and  any 
changes to EU requirements be introduced simultaneously for UCITS and AIFs (see Section 
X).   

4.4.3.  Specific  objective:  Proper  monitoring  and  limitation  of  microprudential 

risks 

Delegation rules 

With  regard  to  the  internal  coherence  of  AIFMD,  in  addition  to  the  main  articles  on 
delegation, there are specific rules on delegation of the valuation function. The KPMG survey 
and interview results relating to the main delegation rules and the further desk research did 
not raise any issues or questions as to their internal coherence with the delegation provisions 
for  the  valuation  function.  Neither  did  they  raise  any  questions  as  regards  to  internal 
coherence of these rules with the broader set of rules on governance and risk management, or 
with the delegation rules for depositaries.  

With  regard  to  external  coherence  of  the  Directive,  AIFMD  sits  alongside  a  multitude  of 
other relevant EU/EEA legislative acts. On the basis of available quantitative and qualitative 
data, the coherence of AIFMD and similar provisions in other EU legislative acts is a mixed 
picture. It has been possible to detect both similarities and differences.  

As far as the delegation of portfolio management and risk management is concerned, Article 
20(1)(c) AIFMD requires the delegate to be an authorised or registered undertaking, able to 
provide the business of asset management, and subject to supervision or, where that condition 
cannot be met, prior approval by the relevant NCA of the home Member State of the AIFM. 
According to the ESMA AIFMR Advice, UCITS ManCos and MiFID investment firms are 
eligible  counterparties  in  AIFMD  delegation  structures  as  these  are  considered  to  be 
authorised  to  provide  asset  management  services  and  subject  to  supervision.  The  same 
standards apply under Article 13(1)(c) UCITSD.  

There  are  however  some  differences  between  the  comparable  AIFMD  and  UCITSD 
provisions,  but  there  is  a  reasonable  degree  of  coherence  of  AIFMD  with  MiFID  II  and 
UCITSD. This is evidenced by ESMA often referring to MiFID  II and UCITSD provisions 
when publishing clarifications on the application of the AIFMD delegation rules.265  

Indeed, the KPMG survey and interview results did not indicate that any incoherencies with 
other legislation materially impact compliance with or the benefits of the AIFMD delegation 
rules.  Often  times,  groups  with  both  an  AIFM  and  a  UCITS  ManCo  (or  one  entity  that  is 
both) apply the same delegation controls across both their AIFs and their UCITS. 

265 Auslagerung von Anlageverwaltungsfunktionen, Dr. Ulf Klebeck, 2012, p. 230. 

160 

 
 
 
 
 
 
 
 
 
                                                           
Risk and liquidity management rules 

The  AIFMD  risk  and  liquidity  management  requirements  are  internally  coherent  with  a 
number of other AIFMD provisions, including valuation, delegation and leverage. So far, no 
evidence  came  to  light  that  suggests  a  lack  of  coherence  between  the  risk  and  liquidity 
management requirements and other AIFMD provisions. In fact, as noted under effectiveness 
above, the large majority  of  respondents  agreed  that AIFMs  must establish appropriate  risk 
and liquidity management processes.  

As regards external coherence, the picture is more mixed. While in the most corresponding 
legislative  acts  (UCITSD  and  MiFID  II),  risk  management  is  an  operating  condition,  i.e.  a 
requirement  that  must  be  met  in  order  to  secure  authorisation,  AIFMD  renders  risk 
management to be an authorisation criterion, i.e. a regulated activity. An AIFM is defined as 
providing  at  least  portfolio  management  and  risk  management.  However,  in  practice,  the 
industry  does  not  seem  to  regard  this  legislative  difference  as  a  determinant  of  business 
models.  

The AIFMD risk and liquidity management provisions are largely based on UCITSD, thereby 
ensuring coherence with e.g. Article 51(1) UCITSD.266 Articles 15 and 16 AIFMD enhanced 
the  governance  structures  envisioned  under  UCITSD  require  robust  controls  that  ensure 
delivery of the risk profile disclosed to investors. Consequently, the regulatory requirements 
for AIFs and UCITS were aligned. Furthermore, the provisions of Articles 15 and 16 AIFMD 
align with the risk mitigation requirements for OTC derivative contracts under EMIR.267   

Thus,  the  AIFMD  risk  and  liquidity  management  rules  can  be  deemed  generally  externally 
coherent with corresponding provisions in related EU legislation. 

4.4.4.  Specific objective: Common approach to protect professional investors in 

AIFM managed funds 

Depository regime 

With  regard  to  internal  coherence  of  the  AIFMD  provisions  on  depositaries,  it  seems 
reasonable  to  assert  that  the  requirements  are  coherent  with  other  parts  of  the  AIFMD.  We 
have identified no evidence or commentary that suggests otherwise. 

As  regards  external  coherence,  the  AIFMD  depositary  provisions  were  introduced  for  the 
first time and in a tightened form compared to the previous provisions under UCITS.268 The 
UCITS  depositary  requirements  have  since  been  brought  into  line  with  those  in  AIFMD. 
Therefore, there is now a high level of coherence between AIFMD and UCITSD.   

4.4.5.  Specific objective: Develop the single market in AIF 

266 Cf. Geurts/Schubert, in Frankfurter Kommentar, KAGB (Frankfurt Legal Commentary for the German 
transformation Act of AIFMD), § 29, margin no. 6. 
267 EU Regulation 648/2012 of 4 July 2012 on OTC derivatives, central counterparties and trade repositories. 
268 Cf Article 22 et sec. UCITSD as well as De Blasi in Frankfurter Kommentar, KAGB (Frankfurt Legal 
Commentary for the German transformation Act of AIFMD), § 80 margin no. 1. 

161 

 
 
 
 
 
 
 
 
 
                                                           
Single Market for EU AIFs 

4.5. 

EU added value  

EU  added  value  refers  to  the  changes  and  results  observed  in  the  area  of  alternative 
investment fund managers across the EU which could not have been achieved through action 
at regional or national levels.  

The  assessment  of  EU  added  value  has  relied  mainly  on  desk  research,  specifically  on 
comparisons with the situation in the EU before the Regulations took effect. 

The AIFMD was the first legislative act concerning alternative investment fund managers in 
the EU. It represented the start of the development of a coordinated EU strategy to establish a 
harmonized and stringent regulatory and supervisory framework for the activities within the 
Union of all AIFMs. 

The  question  of  whether  the  AIFMD  has  generated  EU  added  value  is  linked  with  the 
question  of  whether  the  results  achieved  surpass  those  which  could  realistically  have  been 
expected at Member States’ level (i.e. through national interventions alone).   

4.5.1.  Specific objective: All AIFM are subject to appropriate authorisation and 

registration requirements 

Sub-threshold AIFMs 

The sub-threshold AIFM regime provides for NCAs to allow a lowered market entry barrier 
into domestic markets for smaller AIFMs. Besides the proportional application of operating 
conditions,  the  initial  lighter  registration  regime  makes  AIFMD  a  more  proportionate  EU 
legislative act for market participants in the EU. This can be regarded favourably against the 
respective objectives of AIFMD.  

However,  given that  a number of NCAs do not  provide for the  registration option or apply 
additional requirements (in some cases, the full AIFMD requirements) to registered AIFs, the 
causality  relationship  between  the  AIFMD  sub-threshold  regime  and  what  has  happened  in 
practice cannot easily be assessed. Indeed, in some Member States it is likely that the impact 
of the national provisions is the over-riding driver of the current position in those markets. 

4.5.2.  Specific objective: Proper monitoring of macro-prudential risks 

Loan originating AIFs 

Since  there  are  no  common  rules  for  loan  originating  AIFs  at  present,  it  is  not  possible  to 
evaluate the EU added value from a backward-looking perspective.  

Supervisory reporting requirements   

Prior to the introduction of AIFMD, there was no consistent picture of reporting requirements 
for  AIFMs.  The  reporting  obligations  were  implemented  by  the  NCAs  with  respect  to 
national law, so there were differences between the NCAs in the data requested. Furthermore, 

162 

 
 
 
 
 
 
 
 
 
 
 
 
the  pre-AIFMD  status  lacked  standardisation,  and  therefore  comparability,  between  the 
different Member States’ data sets.   

Post-AIFMD, the same reporting requirements apply to  all AIFMs and AIFs. The reporting 
regime  has  directly  caused  a  significant  improvement  in  increased  transparency  at  the  EU 
level. The collection of information  through the  AIFM  reports to  NCAs makes it easier for 
regulators to detect and respond to risks in the relevant markets on a harmonised level in the 
EU.  This  strengthens  the  monitoring  of  cross-border  activities  of  AIFMs  and  enables  the 
NCAs  to  identify  systemic  risks  to  the  financial  system,  thereby  contributing  to  financial 
market stability. 

However, ESMA needs  to  have received data from  all Member States and for a number of 
years, before market trends can sensibly be examined. Meanwhile, the industry and investors 
would welcome more publically available national analyses. 

Leverage calculation methodologies under AIFMR    

The AIFMD leverage provisions provide a consistent and standardised regulation in respect 
to the calculation, reporting and risk-mitigation of leverage within the EU. As a consequence, 
AIFMs are able to determine on the basis of standardised methods the relevant leverage ratio 
of  an  AIF,  the  relevant  NCAs  can  receive  data  on  a  standardised  basis  in  order  to  gain  a 
sufficient  overview  about  the  overall  leverage  risk  in  their  domestic  financial  markets,  and 
ESMA  can  aggregate  submissions  from  NCAs  to  form  an  overall  view  of  the  level  of 
leverage in the European financial market as a whole.   

Therefore,  AIFMD  has  directly  caused  an  improvement  in  the  use  and  management  of 
leverage in a consistent manner across the EU. Also, NCAs and ESMA are able to determine 
the reasonableness of the leverage limits set for each AIF by the relevant AIFM. Furthermore, 
they have the powers to introduce limits on leverage for a particular AIF or set of AIFs if they 
believe  they  potentially  give  rise  to  heightened  systemic  risks  or  pose  a  threat  to  financial 
stability.   

4.5.3.  Specific  objective:  Proper  monitoring  and  limitation  of  microprudential 

risks 

Delegation rules 

Given that delegation by AIFMs of certain functions is a common activity in the EU, there is 
a significant amount of cross-border provision of delegated services. Therefore, a harmonised 
set of delegation provisions is a reasonable response from a regulatory point of view and is 
important for the benefits of EU market integration, which national measures alone could not 
achieve.  

Also, it is clear from the KPMG survey evidence that the AIFMD delegation provisions have 
directly caused an increase in the number of delegation arrangements subject to scrutiny by 
the  NCAs  and  in  the  duration  and  frequency  of  delegation  reviews  by  AIFMs  and  their 
delegates.  The  fact  that  full  liability  remains  with  the  AIFM,  irrespective  of  the  degree  of 
delegation activities, together with the required functional and hierarchical separation of risk 

163 

 
 
 
 
 
 
 
 
 
management  from  portfolio  management,  are  positive  examples  of  investor  protection 
benefits and provide EU added value. 

Risk and liquidity management rules 

The AIFMD risk and liquidity management requirements were a robust response to the 2008 
financial  crisis.269  They  aimed  to  strengthen  the  European  investment  fund  market  by 
addressing  liquidity  management  issues  in  an  appropriate  manner.270  Furthermore,  the 
provisions  provide  necessary  safeguards  for  investors.  They  thereby  promote  investor 
confidence  in  investments  in  the  broad  universe  of  assets,  including  less  liquid  or  illiquid 
investment,  and  facilitate  increased  access  to  capital  markets  and  greater  financing  options 
for enterprises seeking to raise capital.  

These two outcomes are also  in accordance with the EU’s aims under the CMU and would 
seem to imply that the AIFMD has resulted in positive outcomes for the EU (i.e. causality is 
indicated).  However,  the  degree  of  influence  is  not  clear  given  the  results  of  the  statistical 
research carried out by KPMG, which do not indicate that AIFMD has had a significant effect 
on growth in the EU AIF market (see Annex 4 to the KPMG report).    

4.5.4.  Specific objective: Common approach to protect professional investors in 

AIFM managed funds 

Depository regime 

Prior to the introduction of AIFMD, at EU level there were only regulations with regards to 
depositaries for UCITS, under UCITSD. Given this, and given the assessments above against 
the four other principles, it can be argued that the AIFMD depositary requirements have led 
to an improvement in the Single Market for AIFs.  

Further, based on the evidence available, it can reasonably  be asserted that  the objective of 
the  AIFMD  depositary  rules  –  to  provide  independent  oversight  of  certain  of  the  AIFMs’ 
activities and to  ensure safe-keeping of AIFs’ assets  – has been met and has directly led to 
improvement  in  the  stability  of  AIF  market  and  the  safety  of  the  investors’  assets  (i.e. 
causality is indicated).  

The transitional provision that allows a depositary to be in a different domicile to the AIF has 
been  of  particular  added  value  to  smaller  Member  States,  which  might  otherwise  not  have 
been able to develop domestic AIF markets. 

5.  CONCLUSIONS 

Overall,  it  is  concluded  that  the  AIFMD  is  delivering  on  its  objectives  to  bring  the  AIF 
market  into  a  more  coordinated  supervisory  framework  based  on  a  harmonised  set  of 
standards,  promoting  a  high-level  investor  protection  and  facilitating  greater  integration  of 
the AIF market. Market data shows that assets under the management of AIFs are growing, as 
are the cross-border activities of AIFMs.   

269 See the collapse and bankruptcy of the US investment bank Lehman Brothers on 15 September 2018. 
270 Cf. AMIC/EFAMA, Managing fund liquidity risk in Europe - an AMIC/EFAMA report, April 2016, p. 3. 

164 

 
 
 
 
 
 
 
 
 
 
                                                           
Inadequate protection of fund investors 
The  AIFMD  provides  a  high-level  of  investor  protection.  Rules  on  conflicts  of  interest, 
disclosure  and  transparency  requirements  all  serve  to  protect  investor  interests,  which  is 
beneficial  for  building  confidence  in  financial  markets.  This  evaluation  confirms  that  a 
dedicated  regime  regulating  the  functions  and  liability  of  depositaries  proved  to  be  an 
effective measure for enhancing investor protection.   

Investor protection could be, however, improved by  further  clarifying  AIFMD and  AIFMR 
rules on delegation and clearly bringing in CSDs into the custody chain so that depositaries 
could exercise an effective oversight over the AIFs’ activities. A common level of protection 
of  investors  into  loan  originating  AIFs  could  be  ensured  by  having  Union  rules  on 
transparency for AIFMs managing such funds.   

The  possibility  for  EU  AIFMs  to  market  AIFs  to  retail  investors  is  dependent  on  the 
permission  of  the  individual  Member  States  that  may  impose  additional  conditions  as  they 
deem  fit.271  The  overall  consequence  of  AIFMD  has  been  less  choice  for  retail  investors, 
including  for  high  net  worth  clients  and  semi-professional  investors.  The  introduction  of 
safeguards for investor protection is necessary at the Union level, but should be provided for 
in the context of the ELTIF review and in the PRIIPS Regulation instead of in the AIFMD. 

Difficulties in monitoring and managing financial stability risks 
The AIFMD requirements on supervisory reporting and on risk and liquidity management are 
valuable from a macro-prudential point of view and can help identify and mitigate financial 
stability risks. In 2019, ESMA published its first Annual Statistical Report on EU Alternative 
Investment  Funds,  which  aggregates  AIFs  supervisory  reporting  data  providing  market 
participants  and  investors,  as  well  as  supervisors  and  policy  makers,  with  information  on 
market developments.272  

However,  a  case  is  made  for  more  streamlined  reporting  requirements,  given  identified 
overlaps  with  requirements  under  other  Union  laws,  such  as  statistical  reporting  under  the 
ECB regulations. IOSCO work, particularly on leverage, which focuses on the type of data to 
be  provided  to  supervisors  and  provides  further  detailed  input  that  concerns  the  AIFMR 
reporting template.   

As  regards  leverage  calculations,  the  evaluation  concludes  that  the  leverage  calculation 
methods  –  the  gross  and  commitment  methods  –  currently  provided  in  the  AIFMR  are 
satisfactory.  The  work  of  the  FSB  and  IOSCO  as  well  as  recommendations  of  the  ESRB 
concerning  improved  measures  for  assessing  macro-prudential  risks  are  also  taken  into 
account.273  

Increasing non-bank lending raises concerns regarding financial stability as well as the level 
playing  field  among  the  financial  intermediaries  active  in  the  credit  market.  On  this  basis, 

271 Article 43 of the AIFMD. 
272 ESMA Annual Statistical Report EU Alternative Investment Funds 2019, 21.01.2019, ESMA 50-165-748. 
(ESMA Statistical Report 2019) and ESMA Annual Statistical Report EU Alternative Investment Funds 2020, 
10.01.2020, ESMA50-165-1032, (ESMA Statistical Report 2020). 
273 Recommendation of the European Systemic Risk Board of 7 December 2017 on liquidity and leverage risks 
in investment funds ESRB/2017/6, 2018/C 151/01. 

165 

 
 
 
 
 
 
 
 
                                                           
some  stakeholders  call  for  consideration  of  Union  standards  for  loan  originating  AIFs  and 
supplementing  the  AIFMR  reporting  template  with  additional  data  fields  relating  to  loan 
origination by AIFs. AIFMs managing loan-originating AIFs are not subject to any micro or 
macro prudential requirements that would be conducive to preserving stability of the financial 
system regardless of the noticeable growth of this market segment in Europe.  

According to the ESRB recommendations liquidity management could be improved if open-
ended AIFs located anywhere in the Union had a range of liquidity management tools to have 
recourse to during the stressed market conditions.  

Inefficiencies in managing investment funds 
The  evaluation  identifies  a  number  of  deficiencies  that  undermine  the  effectiveness  of  the 
AIFM  passport.  Gold-plating  and  the  lack  of  a  common  understanding  among  NCAs  of 
certain AIFMD rules or concepts as well as limited coverage of the AIFM passport produce 
inefficiencies. Sub-threshold AIFMs may have difficulties in satisfying all the requirements 
of the AIFMD and as a result refrain from cross-border activities while the authorised AIFMs 
are permitted to market their AIFs cross-border only to professional investors.  

Similarly,  the  absence  of  an  EU  passport  for  depositaries  leaves  the  market  for  depositary 
services  fragmented  and  particularly  impacts  the  supply  side  of  these  services  in  smaller 
markets.  The  affected  Member  States  would  welcome  an  introduction  of  the  depository 
passport,  whereas  others  prefer  securities  laws  to  be  harmonised  before  introducing  such  a 
passport.  Furthermore,  there  is  a  lack  of  clarity  and  regulatory  gaps  in  relation  to  tri-party 
collateral management and custody services provided by central securities depositories.    

Moreover,  there  are  some  calls  to  refine  the  allegedly  binary  nature  of  the  valuation  rules, 
whereby it is understood that a combined use of internal and external valuers is excluded, as 
well  as  uncertainty  around  the  liability  of  external  valuers  due  to  a  lack  of  the  EU 
harmonisation of these issues.  

The remuneration rules provided in the AIFMD are judged as having achieved the objective 
of bringing about a more risk-conscious approach to the management of AIFs. Nevertheless, 
following the changes to the CRD,274 which include amendments to the rules on remuneration 
for  staff  of  credit  institutions,  there  is  room  for  improvement  regarding  the  measure  of 
proportionality provided in the AIFMD.  

Where  financial  instruments  are  involved,  AIFMs  are  required  to  comply  with  the 
enumerated provisions of the MiFID.275 To ensure a level playing field between investment 
firms and AIFMs where they provide competing services, the AIFMD should be aligned to 
cover the relevant obligations as laid down in the MiFID II. 

Another level playing field issue relates to the national private placement regimes (NPPRs), 
which  permit  access  of  third  country  AIFMs  and/or  AIFs  to  the  markets  of  individual 
Member States. NPPRs differ across Member States and, more importantly, implement only a 
very  limited  number  of  the  AIFMD  requirements  thus  creating  an  uneven  playing  field  for 

274 Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 
2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, 
remuneration, supervisory measures and powers and capital conservation measures, OJ L 150, 7.6.2019, p. 253. 
275 Article 6(6) of the AIFMD refers to the obligations of Directive 2004/39/EC. 

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EU AIFMs. On the other hand, the NPPRs proved to play an important bridging role while 
the AIFMD passport for the third country entities has not been activated yet by means of a 
delegated act. As a result, investors in the permitting Member States have been able to access 
global  markets  for  financial  services  allowing  them  to  better  diversify  their  investment 
allocation. 

The evaluation confirms the key role that ESMA has been playing in promoting supervisory 
convergence among the NCAs as regards application of the AIFMD.             

It  transpires  from  the  responses  to  the  KPMG  Survey  and  to  the  public  consultation  that 
stakeholders,  initially  resistant,  seem  to  have  recognised  the  added  value  of  the  AIFMD. 
Moreover, a number of issues that had been raised since the implementation of the AIFMD 
have been already solved by the recently adopted Union laws.   

The Cross-Border Fund Distribution of Investment Funds package was adopted inter alia to 
increase  transparency  in  relation  to  regulatory  fees  charged  by  NCAs  for  processing  AIF 
notifications  and  in  relation  to  national  marketing  rules.276  The  AIFMR  has  been  recently 
amended to clarify asset segregation requirements where custody of assets is delegated to a 
third party.277 The recent amendments to the CRD provide that AIFMs belonging to the same 
corporate group or conglomerate will have to apply the AIFMD rules on remuneration thus 
avoiding  their  being  subject  to  concurrent  set  of  rules  regulating  distinct  financial 
intermediaries.278  The  EU  regulation  on  sustainability  related  disclosures  in  the  financial 
services sector is set to ensure coherence across different EU regulatory frameworks.279 The 
recently  changed  European  Venture  Capital  Fund  Regulation  opened  up  the  use  of  the 
designations ‘EuVECA’ to managers of collective investment undertakings authorised under 
the AIFMD and expanded investment parameters.280  

Other  issues  raised  in  this  evaluation,  however,  may  possibly  warrant  further  action  at  the 
Union level to support the further development of the EU AIFs market and to respond to new 
technological developments ensuring that the AIFMD framework is fit for purpose.   

276 Directive (EU) 2019/1160 of the European Parliament and of the Council of 20 June 2019 amending 
Directives 2009/65/EC and 2011/61/EU with regard to cross-border distribution of collective investment 
undertakings, OJ L 188, 12.7.2019, pp. 106–115 and Regulation (EU) 2019/1156 of the European Parliament 
and of the Council of 20 June 2019 on facilitating cross-border distribution of collective investment 
undertakings and amending Regulations (EU) No 345/2013, (EU) No 346/2013 and (EU) No 1286/2014, OJ L 
188, 12.7.2019, pp. 55-66. 
277 Commission Delegated Regulation 2018/1618 of 12 July 2018 amending Delegated Regulation (EU) No 
231/2013 as regards safe-keeping duties of depositaries, OJ L 271, 30.10.2018, p. 1. 
278 Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 
2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, 
remuneration, supervisory measures and powers and capital conservation measures, OJ L 150, 7.6.2019, p. 253. 
279 Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on 
sustainability‐ related disclosures in the financial services sector, OJ L 317, 9.12.2019, pp. 1–16. 
280 Regulation (EU) 2017/1991 of the European Parliament and of the Council of 25 October 2017 amending 
Regulation (EU) No 345/2013 on European venture capital funds and Regulation (EU) No 346/2013 on 
European social entrepreneurship funds. 

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