Negotiators from the European Council and European Parliament have reached a provisional agreement on new rules aimed at enhancing European capital markets and bolstering investor protection within the EU. The deal, reached during the early hours on Thursday, includes consensus on leverage limits and passporting rules for Loan Originating Funds (LOFs), marking a significant milestone in the regulatory landscape.
Industry groups have welcomed the agreement, with the Alternative Investment Management Association (Aima) stating that it provides the desired regulatory stability sought by its members. The deal had faced delays as industry feedback necessitated additional negotiation time beyond the initially expected end-of-June deadline during the EU›s Swedish presidency.
Jiri Krol, Deputy CEO and global head of government affairs at AIMA, acknowledged the mixed nature of the agreement. «As usual, it’s a mixed bag and we hope the positive elements will outweigh the negatives. This agreement will provide our members with greater certainty on the future regulatory framework and allow them to focus on delivering returns to investors and capital to the economy,» he said.
Capital markets
The provisional agreement, which awaits final adoption during plenary meetings, highlights its significance for the development of European capital markets. It emphasises greater investor protection and the promotion of overall industry growth and stability, according to the European Council.
The agreement primarily focuses on the revision of the Alternative Investment Fund Managers Directive (AIFMD), which governs various alternative investment funds such as hedge funds, private equity funds, private debt funds, and real estate funds in the EU. It also modernises the framework for undertakings for collective investment in transferable securities (Ucits), encompassing retail investment funds like unit trusts and investment companies.
Passporting LOFs
Regarding passporting for loan origination funds, asset managers will maintain the ability to delegate portfolio or risk management to third parties, subject to heightened substance requirements and increased transparency to regulators. EU investors will continue to benefit from access to global expertise and a broader range of alternative investment strategies.
Aima highlighted the inclusion of new rules for loan origination funds (LOFs), which provide credit to companies. Policymakers sought to address potential financial stability concerns, and the framework now offers a comprehensive approach to managing associated risks. The agreement establishes an EU framework for funds originating loans, incorporating additional requirements to mitigate risks to financial stability and ensure an appropriate level of investor protection.
The industry had expressed particular concerns about proposed leverage limit restrictions on loan funds. Krol stated, «We welcome most of the new rules on delegation, liquidity risk management, and passporting for loan origination funds as relatively sensible.» He acknowledged that some restrictions, such as leverage limits on loan funds, were challenging to justify but noted the industry’s close collaboration with policymakers to refine and calibrate them from their initial proposals.
Stricter leverage limits
Regarding liquidity risk management, leverage, and retention of loans, loan funds will now face higher levels of regulation to avoid «originate-to-distribute» models. The legislation is expected to set differentiated leverage limits for open and closed-end funds at around 175% and 300% of Net Asset Value, respectively, according to Aima.
Among the various aspects of the deal is an agreement that clarifies the use of liquidity management tools (LMTs) for investment fund managers, enabling them to handle significant outflows during financial turbulence. These tools, previously used solely by US hedge funds, have been integrated into European UCITS law, taking inspiration from Luxembourg’s experience with such tools following Russia’s invasion of Ukraine. The national solution developed jointly by CSSF and trade association Alfi in Luxembourg served as a model for the EU-wide update in regulation.
Additional significant components of the agreement include enhanced data sharing and cooperation between authorities, measures to identify undue costs impacting funds and investors, and safeguards against misleading fund names that could potentially harm investors.
Related articles on Investment Officer Luxembourg:
- Nobody’s happy about EU deal on MiFID review
- Industry fears ‘suboptimal’ outcome of Mifid-AIFMD review
- EU regulation in 2023: AIFMD, Mifid 2, retail investors, ESG