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ESMA suggests additional legislative requirements for loan-originating funds

ESMA suggests additional legislative requirements

The European Securities and Markets Authority (ESMA) has issued an Opinion on loan-originating funds, as part of the wider Capital Markets Union action plan. The Commission has not taken a decision on whether new legislation is required and may ultimately favour guidelines. However, ESMA prefers a more coordinated approach to such fund regulation and suggests authorisation of the funds and additional requirements for the managers.


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In contrast to the Commission’s approach, which is to introduce new legislation only where clearly necessary, ESMA proposes that various new requirements be introduced for loan-originating funds. Its Opinion does not cover types of AIF for which loan origination is already possible (ELTIFs1, EuSEFs2 and EuVECAs3) or UCITS (for which loan provision is prohibited). Also, it focuses on loan origination and no other types of provision of credit, such as loan participation or loan restructuring.

The Opinion includes a mapping of national practices and laws. This shows that the majority of Member States allow funds to originate loans, but they subject them to different requirements, which creates difficulties for cross-border business. Also, some countries have developed or are developing bespoke legislative frameworks, such as Ireland, Italy, Germany, France and Spain.

ESMA’s main recommendations are:

  • authorization of the fund and requirements for manager (in addition to the AIFMD)
  • such funds should be closed-ended ones with no redemption rights prior to the end of their lifetime (with some possible exceptions)
  • tailored requirements according to the potential investors types – ESMA stresses the risks in making loan-originating funds accessible to retail investors
  • additional and specific requirements such as risk management procedure, collateral management policy, valuation methods, etc.
  • requirements related to diversification, limits as to leverage, short-selling, use of derivatives and eligible debtors.

ESMA also recommends further assessment by the Commission as to possible mitigants to address systemic risk, for example via additional macro prudential rules.

The Commission is expected to launch a consultation on loan-originating funds in the second quarter of 2016 and we can expect it to include the issues identified by ESMA.


1ELTIFs – European long term investment funds

2EuSEFs – European Social Entrepreneurship Funds

3EuVECAs – European Venture Capital Funds

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