European regulators are proposing guidance that would set liquidity standards for alternative investment funds that engage in loan origination and operate as open-ended funds.
On Tuesday, the European Securities and Markets Authority (ESMA) published draft standards that set requirements for open-ended, loan-originating alt funds when it comes to managing liquidity — including standards for ensuring the availability of liquid assets, stress testing those arrangements, and adopting appropriate redemption policies.
The regulators noted these requirements — which aim to ensure that funds that have assets tied up in lending can also meet redemption demands — should also “take due account of the underlying loan exposures, the average repayment time of the loans and the overall granularity and composition of the portfolios” of these funds.
The draft guidance follows a public consultation, which saw the fund industry push back on certain proposals, such as a requirement that these funds set a target for the amount of liquid assets they must hold.
According to ESMA, the industry argued that effective liquidity management for these kinds of funds “depends more on the liquidity arising from the loans granted by the funds, rather than constantly holding a fixed amount of liquid assets.”
They also argued that setting fixed targets for liquid assets could negatively impact fund performance.
In response, ESMA revised its proposals to remove the fixed asset requirement. It also scaled back the requirement for fund managers to stress test these arrangements from quarterly to annually, among other revisions.
The European Commission now has three months to make a decision on whether to adopt the proposed guidance.