The European Securities and Markets Authority (ESMA) has published an Opinion on the “Key principles for a European framework on loan origination by funds“. The Opinion is addressed to the European Parliament, the Council and the Commission, and sets out ESMA’s “view on the necessary elements for a common European framework for loan origination by investment funds“, which could replace the 31 different frameworks in use today.
ESMA’s Opinion is only concerned with loan origination by alternative investment funds (AIFs); and it’s offered on the assumption that the Commission will consult on a European framework for loan origination, as it seeks to build a Capital Markets Union.
ESMA recommends that the Commission’s consultation should explore:
- “whether there is a need for mandatory authorisation of managers of loan-originating funds” – or whether a sub-threshold Alternative Investment Fund Managers Directive (AIFMD) registration could suffice (where it’s available);
- whether loan-originating “fund authorisation [is] necessary and [if so, whether] general authorisation or [an] opt-in framework could achieve [the Commission’s] aims“;
- “whether … a distinction should be made between smaller and larger funds [and] whether authorisation of loan-originating funds should be dependent on the extent to which they actually originate loans“;
- whether loan-originating AIFs should be made available to retail investors and, if so, in what circumstances, and with what kinds of investor protection; and
- whether, and to what extent, the leverage of loan-originating AIFs should be restricted.
In ESMA’s Opinion, loan-originating AIFs should:
- be closed-ended, without the right to redeem on a regular basis;
- not be permitted to have shorter liabilities than the loans they’ve originated;
- not be permitted to originate loans for a period that will exceed the life of the AIF;
- be required to have specific policies, processes and procedures to govern (for example) risk appetite; risk management; the assessment, pricing, granting and management of credit; and the management of collateral;
- be required to, “at any moment … ensure they have a level of liquidity which is appropriate to their activities“;
- be required to conduct regular stress tests, and to report the results “preferably on a quarterly basis“; and
- not be permitted to lend to individuals, financial institutions, collective investment schemes, their own fund manager, or any party connected to their own fund manager.
ESMA’s Opinion includes an Annex, which briefly summarises most of the 31 existing frameworks.
ESMA doesn’t say anything about next steps … that’s primarily one for the Commission, which has not publicly acknowledged or responded to the Opinion, so far.
It’s not immediately clear that fund managers or fund investors will welcome these proposals. Small fund managers, in particular, are likely to see them as a cause for concern, if they lead to an unnecessary increase in the regulatory burden, or contribute to the practical demise or further restriction of the sub-threshold AIFMD regime.