Regulatory development
On 21 October 2025, the ESMA published its final report on draft Regulatory Technical Standards (“RTS”) concerning open-ended loan-originating alternative investment funds (“OE LO AIFs”) under the revised Alternative Investment Fund Managers Directive (“AIFMD II”). This final report follows a public consultation that ESMA launched on 12 December 2024 and closed on 12 March 2025.
Under AIFMD II, ESMA is required to develop draft RTS determining the requirements with which loan-originating AIFs must comply to maintain an open-ended structure, including a sound liquidity management system, the availability of liquid assets and stress testing, as well as an appropriate redemption policy.
Legal framework
Under Article 16(2)(a) of AIFMD II, an AIFM must ensure that the loan-originating AIF it manages is closed-ended. However, by way of derogation to this requirement, a loan-originating AIF may be open-ended provided that the AIFM managing it is able to demonstrate to its home competent authority that the AIF's liquidity risk management system is compatible with its investment strategy and redemption policy.
The RTS establish a harmonised framework across the European Union, providing clarity for both AIFMs and national competent authorities (“NCAs”) on the conditions under which loan-originating AIFs may operate with an open-ended structure.
Key changes following consultation
ESMA introduced three significant amendments following industry feedback:
Removal of fixed liquid asset requirements
The main point raised by respondents to the consultation concerned the requirement for AIFMs to determine an appropriate amount of liquid assets that OE LO AIFs shall hold to meet redemption requests. Respondents emphasised that effective liquidity management in OE LO AIFs depends more on the liquidity arising from the loans granted by the funds, rather than constantly holding a fixed amount of liquid assets.
Taking this into account, ESMA revised the draft RTS by removing the fixed asset requirement and instead stipulated that AIFMs must structure their OE LO AIFs in a manner that ensures that they maintain sufficient liquidity to meet redemption requests.
Reduced stress testing frequency
Taking into consideration the feedback received, ESMA updated the draft RTS to require that AIFMs managing OE LO AIFs must carry out liquidity stress tests at least once a year, rather than every quarter as previously proposed in the consultation paper.
Clarification on Scope
Several respondents highlighted that the wording setting requirements for AIFMs that 'intend to manage' OE LO AIFs in the draft RTS could be misinterpreted as requiring AIFMs to seek pre-authorisation from their competent authorities before managing an OE LO AIF. In response, ESMA amended the draft RTS, replacing 'intend to manage' with 'AIFMs that manage'.
Core requirements
The final RTS establish four fundamental pillars:
An AIFM that manages an open-ended loan-originating AIF must be able to demonstrate to the competent authorities of its home Member State that the liquidity risk management system of the AIF is compatible with its investment strategy and its redemption policy.
Appropriate redemption policy
In order to ensure that the redemption policy of the open-ended loan-originating AIF it manages is appropriate, an AIFM shall, at least, consider the following factors:
- frequency of redemptions offered to shareholders or unitholders,
- availability of liquid assets held by the AIF,
- portfolio diversification and the liquidity profile of the assets held,
- investor base and the investor concentration,
- length of the notice period and of the settlement period,
- liquidity management tools selected, their calibration, and the conditions for their activation
- results of the liquidity stress tests,
- availability of reliable, sound and up-to-date valuation of the loans and other assets in the portfolio.
Sufficient liquidity
In order to ensure that the open-ended loan-originating AIF it manages has sufficient liquidity to comply with redemption requests, an AIFM shall, at least, take into account:
- the availability of liquid assets held by the AIF, the redemption policy of the AIF, and the portfolio diversification
- for the loans granted by the AIF: the repayment terms and schedules, the maturities, the credit quality, the underlying exposures, and the estimated default rates
- the investor base including the investor type, potential investor concentration and, where available, investors' subscription and redemption behaviours
- the targeted level of leverage, including leverage arising from hedging strategies, and the related financial obligations, as well as any other liabilities
Critically, the expected cash flow generated by the loans granted by the open-ended loan-originating AIF shall be considered as liquid assets.
Liquidity stress testing
An AIFM that manages an open-ended loan-originating AIF shall conduct liquidity stress tests at least on an annual basis, unless a higher frequency is justified by the characteristics of the open-ended loan-originating AIF. An AIFM shall stress test separately the assets and the liabilities of the open-ended loan-originating AIF and shall combine the results of these stress tests to determine the overall effect on the liquidity of the AIF.
An AIFM shall apply severe but plausible scenarios in terms of change in interest rates, credit spread and potential defaults in loans granted, as well as in redemption requests considering the investor base.
An AIFM shall employ liquidity stress tests that consider adequately the characteristics of the open-ended loan-originating AIFs they manage and shall consider scenarios with low probability but with high impact on the ability of AIFMs to value the loans.
Ongoing monitoring
In order to ensure that the liquidity management system of the open-ended loan-originating AIF it manages remains compatible with its investment strategy and redemption policy, an AIFM shall, at least, monitor on an ongoing basis the following elements: portfolio concentration; the level of unencumbered cash; cash flows; the amount and timing of subscriptions and redemptions; the repayment of the loans pursuant to the schedules agreed; the behaviour of shareholders or unitholders; the maturity of the loans; early-warning signals of loans impairment (e.g. payment delays); the level of leverage, where applicable; the liquidity of the AIF, including the availability of liquid assets in the portfolio of the AIF; and any liabilities of the AIF.
Market Insights from Consultation
Fund Characteristics
Responses showed that the majority of OE LO AIFs have low redemption frequency with long notice periods. According to industry data, 48% of open-ended funds investing in private credit assets offer redemptions at quarterly intervals, whilst 47% have notice periods of 30-60 days.
Respondents provided data showing that the smallest funds ranged from approximately €45 million to €700 million, with average sizes ranging from €372 million to €1.196 billion.
Secondary market reality
ESMA observed that, in most cases, loans issued were generally illiquid and could not be readily sold on the secondary market, which reinforced ESMA's view that, for OE LO AIFs, sales of loans typically do not serve as the primary source of liquidity to meet redemption requests.
Practical implications for AIFMs
The final RTS establish a principles-based framework that requires AIFMs to take proactive steps to ensure compliance. Given the flexibility afforded by the RTS, AIFMs should focus on developing robust internal processes and documentation to demonstrate the compatibility of their liquidity risk management systems with the investment strategy and redemption policy of each OE LO AIF they manage.
In addition, AIFMs must be able to demonstrate to the competent authorities of their home Member State that they have selected the appropriate liquidity management tools in accordance with Article 16(2b) of AIFMD.
AIFMs should take the following steps to prepare:
- review governance frameworks to map RTS factors and demonstrate compatibility between investment strategy and redemption policy
- build cash flow models reflecting loan amortisation, interest payments, and redemption calendars
- design stress testing frameworks that separate asset and liability shocks and combine results at fund level
- enhance monitoring systems to capture investor behaviour, payment delays, and early warning signals
- prepare supervisory documentation demonstrating the compatibility of liquidity risk management with investment strategy
Timeline and next steps
The draft RTS set out in the final report have been submitted to the European Commission for adoption, and from the date of submission, the European Commission shall take a decision on whether to adopt the RTS within three months, with the possibility to extend that period by one month.
Upon adoption, the RTS shall apply from 16 April 2026, aligning with the transposition deadline for AIFMD II into national laws across EU Member States.
However, the European Commission has recently indicated that these RTS have been included in the list of delayed non-essential Level 2 acts, meaning that adoption as a delegated regulation is not expected before 1 October 2027 at the earliest.
Conclusion
The final RTS represent a balanced and proportionate regulatory framework that recognises the unique characteristics of open-ended loan-originating AIFs whilst ensuring robust investor protection. By removing the fixed liquid asset requirement and reducing stress testing frequency, ESMA has demonstrated responsiveness to industry concerns whilst maintaining rigorous standards.
The principles-based approach provides AIFMs with flexibility to tailor liquidity management frameworks to specific fund characteristics, whilst establishing clear parameters for supervisory convergence. AIFMs should conduct comprehensive gap analyses and engage proactively with home NCAs to ensure smooth transition to the new regime.
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