ESMA opinion on key principles for an European framework on debt funds

In the context of the recent discussions within the European Securities and Markets Authority (ESMA) and the subsequent changes of supervisory practice, the European Commission has asked ESMA to issue an opinion on loan-originating funds (Debt Funds).

Indeed, Steven Maijoor, chair of ESMA, pointed out that this practice is not consistently regulated within Member States. ESMA has therefore issued its opinion on Debt Funds on 11 April 2016[1].

ESMA's position is that a common framework on Debt Funds is required at an European level. This opinion does however not apply to loan participation (i.e., via the secondary market), nor to loan restructurings. Furthermore, the opinion focuses on alternative investment funds (AIF), as UCITS funds are prohibited to grant loans under their regulation.

ESMA's considerations are of two types:
... with respect to risk management
  • Potential limitation on leverage;
  • Accrued liquidity monitoring;
  • Potential diversification requirements (e.g., in case the fund targets retail investors); and
  • Limitation of and assessment on types of borrowers (only small or medium enterprises).  
... with respect to the players involved
  • Specific organisational requirements for alternative investment funds manager;
  • Authorisation requirements for Debtfunds;
  • Eligibility requirements for investors.  
The European Commission, the Parliament and the Council will now have to determine which of the above mentioned items should be part of the potential upcoming regulation and in what form. In this respect, ESMA considers that this could be made by way of a dedicated legislative act or by way of an ESMA instrument such as guidelines.
In Luxembourg
The Commission de Surveillance du Secteur Financier (CSSF) updated its frequently asked questions document in this respect on 9 June 2016. The CSSF position is that loan origination by AIFs is a permitted activity, but it also emphasises that the supervision will be tightened in this respect. Indeed, the CSSF requests that AIF managers (AIFM) willing to engage in such activities need to establish specific administrative and organisational measures. Furthermore, it is the AIFM's duties to assess whether appropriate measures have been taken.
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[1] ESMA opinion on the key principles for a European framework on loan origination by funds (ESMA/2016/596).

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