ESMA publishes Final Report on the Draft Regulatory Technical Standards for open-ended loan-originating AIFs

RegCORE Client Alert | Financial Services

QuickTake 

On 21st October 2025, the European Securities and Markets Authority (ESMA) published its Final Report ESMA, Final Report, Draft Regulatory Technical Standards on open-ended loan-originating AIFs under the AIFM Directive; available here.Show Footnote on the Draft Regulatory Technical Standards (RTS) for open-ended loan-originating alternative investment funds (AIFs) and their managers (AIFMs) regulated under the Alternative Investment Fund Managers Directive (AIFMD), as revised and supplemented (AIFMD II).

ESMA’s final RTS establish a principles based but prescriptive framework enabling loan originating AIFs to operate as open ended, anchored on four pillars: an appropriate redemption policy, the maintenance of sufficient liquidity to meet redemptions, robust liquidity stress testing and ongoing monitoring. Several consultation stage proposals have been softened, notably the removal of any fixed liquid asset “target bucket” and a reduction in the minimum frequency of liquidity stress testing to at least annually. Crucially, the RTS confirm that expected cash flows generated by loans qualify as liquid assets for these purposes. The consistent supervisory expectation is that AIFMs demonstrate to their home competent authority that liquidity risk management is compatible with strategy and redemption terms and that liquidity management tools selected are appropriate and calibrated. 

The RTS define the requirements under which a loan-originating AIF may maintain an open-ended structure. According to the mandate in the AIFMD, those requirements shall include a sound liquidity management system, the availability of liquid assets and stress testing, as well as an appropriate redemption policy having regard to the liquidity profile of a loan-originating AIF. Those requirements shall also take into account the underlying loan exposures, the average repayment time of the loans and the overall granularity and composition of the portfolios of loan-originating AIFs.

Guided by consultation responses from market participants, ESMA, in particular, adopted three material adjustments to its consultation draft dated 12 December 2024:

1. Removal of the fixed asset requirement - AIFMs shall no longer be required to constantly hold a fixed amount of liquid assets. Instead, AIFMs shall ensure sufficient liquidity based on the AIF’s expected loan cash-flows to meet redemptions of investors without imposing a fixed liquidity buffer; ESMA, Final Report, section 2.2, numbers 6-7.Show Footnote

2. Reduced frequency of liquidity stress testing - AIFMs managing loan-originating AIFs shall perform liquidity stress tests at least annually rather than quarterly as previously proposed, unless specific fund features justify a higher frequency; ESMA, Final Report, section 2.2, number 8.Show Footnote and

3. Clarification of the scope and authorisation wording - The RTS now apply to “AIFMs that manage” loan-originating AIFs, not those that “intend to manage” loan-originating AIFs in order to avoid a misinterpretation as requiring AIFMs to seek pre-authorisation from their competent authorities before managing a loan-origination AIF. ESMA, Final Report, section 2.2, number 9.Show Footnote

The RTS have been submitted to the European Commission for adoption and are expected to apply as of 16th April 2026 ESMA has transmitted the final RTS to the European Commission, which has three months, extendable by one month, to adopt them. The instrument specifies an application date of 16 April 2026, calibrated to align with the Level 1 amendments by way of AIFMD II.Show Footnote, alongside the wider (revised) AIFMD II package ESMA, Final Report, section 3.4, paragraph (8).Show Footnote, giving AIFMs a defined window to design and implement governance, documentation, modelling and borrower level cash flow processes aligned to the new regime. Analysis on the opportunities and impacts of the revised AIFMD II package are discussed in a standalone Client Alert.

Key takeaways 

AIFMs must be able to demonstrate to their home authority that the fund’s liquidity risk management is compatible with its investment strategy and redemption policy and that the selected liquidity management tools are appropriate. In framing an appropriate redemption policy, AIFMs are required to consider a defined set of factors, including redemption frequency, notice and settlement periods, investor base and concentration, portfolio diversification and liquidity profile, expected portfolio cash inflows, prevailing market conditions, liquidity stress testing results, valuation availability and the calibration and trigger conditions for liquidity management tools. ESMA acknowledges that open ended loan originating funds typically operate with lower dealing frequencies and longer notice periods and the RTS are consistent with that market reality.

The sufficiency of liquidity standard replaces any prescriptive liquid asset buffer. AIFMs must ensure that the fund can honour redemption requests, having regard to the availability of liquid assets, the stated redemption policy and operational timelines, the liquidity profile and composition of assets, leverage and other liabilities and investor characteristics and behaviour where available. For loan assets specifically, AIFMs must consider repayment schedules, maturities, credit quality, underlying exposures and estimated defaults and reschedulings. The RTS explicitly recognise that expected cash flows generated by loans are to be treated as liquid assets. ESMA has removed the earlier concept that managers might self classify “other assets” as liquid based on saleability within the notice period, favouring instead an evidence based assessment grounded in the enumerated factors.

Liquidity stress testing must be performed at least annually, with frequency increased where fund characteristics justify it. Managers must stress assets and liabilities separately and combine results to assess overall liquidity impact. Severe but plausible scenarios should include interest rate and spread shocks, defaults within loan portfolios and redemption pressure, with due consideration of the fund’s liquidity management tools and, where available, investor behaviour. ESMA’s approach is aligned with its existing LST Guidelines while tailored to the private credit profile of open ended loan originating AIFs.

On an ongoing basis, AIFMs must monitor portfolio composition and concentration, loan maturities and early warning impairment signals, cash and cash flows including unencumbered cash, leverage and liabilities and the volume and timing of subscriptions and redemptions alongside observed unitholder behaviour. The monitoring obligation is expressly designed to ensure that the liquidity management system remains compatible with strategy and redemption policy throughout the fund’s life.

When defining the appropriate redemption policy of the open-ended loan-originating AIF, AIFMs shall consider several factors, including, inter alia, the redemption frequency offered to investors, the targeted investors, the notice period and the amount of liquid assets held by the AIF. More specifically, an AIFM shall, at least, consider the following factors:

a) Frequency of redemptions offered to shareholders or unitholders;

b) availability of liquid assets held by the AIF;

c) portfolio diversification and the liquidity profile of the assets held;

d) investment policy and strategy;

e) credit quality of the loans;

f) investor base and investor concentration;

g) level of subscriptions and redemptions of investors;

h) duration of the minimum holding period;

i) length of the notice period and of the settlement period; 

j) other redemption conditions;

k) expected incoming cash flows of the portfolio;

l) market conditions and material events that may affect the possibility for the AIFM to implement the redemption policy of the open-ended AIF it manages;

m) liquidity management tools selected in accordance with Article 16(2b) of the AIFM Directive, their calibration and the conditions for their activation; According to the ESMA, the most used liquidity management tools employed in open-ended funds are: (i) Lock-up periods; (ii) ex-ante investor gates; (iii) ex-ante fund level gates; (iv) prescribed redemption windows; (v) notice period; and (vi) slow pay provisions.Show Footnote

n) results of the liquidity stress tests; and

o) availability of a reliable, sound and up-to-date valuation of the loans and other assets in the portfolio.

Further to that, in order to ensure that the open-ended loan-originating AIF provides for sufficient liquidity to comply with and fulfil, redemption requests of investors, AIFMs shall consider several factors, including, inter alia, the amount of liquid assets, the redemption policy of the AIF, the maturity and the number of loans granted, estimated defaults and rescheduling, the length of the notice period and the anticipated behaviour of the targeted investors, as well as the investor concentration. More specifically, an AIFM shall, at least, consider the following factors:

a) Availability of liquid assets held by the AIF;

b) redemption policy of the AIF;

c) portfolio diversification and liquidity profile of all the assets in which the AIF is invested;

d) length of the notice period;

e) length of the settlement period for subscriptions and redemptions;

f) length of the minimum holding period;

g) available liquidity management tools, their calibration and the conditions for their activation;

h) for the loans granted by the AIF:

(i) Repayment terms and schedules;

(ii) maturities;

(iii) credit quality;

(iv) underlying exposures;

(v) estimated default rates and rescheduling;

i) incoming cash flow of the portfolio;

j) investor base including the investor type, potential investor concentration and, where available, investors’ subscription and redemption behaviours;

k) if any, the targeted level of leverage, including leverage arising from hedging strategies and the related financial obligations; and

l) any other liabilities.

However, ESMA removed the previous requirement for AIFMs to constantly hold a fixed amount of liquid assets. Instead, AIFMs shall ensure sufficient liquidity based on the AIF’s expected loan cash-flows to meet redemptions of investors without imposing a fixed liquidity buffer.ESMA, Final Report, section 2.2, numbers 6-7.Show Footnote This reflects feedback from market participants indicating that loan-originating funds derive liquidity primarily from cash inflows such as interest and principal repayments and that a fixed threshold could rather impact the overall fund performance. ESMA, Final Report, section 2.2, number 6.Show Footnote

Further, ESMA also lowered the stress-testing frequency to “at least annually”, acknowledging that quarterly testing may be disproportionate for most managers. ESMA, Final Report, section 2.2, number 8.Show Footnote ESMA aligned the RTS with its existing guidelines on liquidity stress testing ESMA, Guidelines on liquidity stress testing in UCITS and AIFs.Show Footnote, recognising that higher testing frequency may only be required for funds with frequent dealing or concentrated investor bases. Consequently, the final RTS mandates at least annual testing, generally allowing supervisors to require more where it may be warranted. AIFMs remain expected to test more frequently where portfolio risk or redemption patterns require it. ESMA, Final Report, section 3.1, Q11.Show Footnote

Finally, by replacing “intend to manage” with “manage”, ESMA confirmed that the RTS do not create a new pre-authorisation requirement, though national authorisation regimes may still apply. These adjustments promote legal clarity and proportionality while ensuring robust investor protection and consistent supervision throughout the EU. ESMA, Final Report, section 3.1, Q1.Show Footnote

Key considerations

The RTS avoid a one size fits all model but codify the factors AIFMs and national authorities must address, promoting supervisory convergence and reducing the scope for arbitrage. ESMA recognises that secondary markets for private loans are often illiquid at or near book value; disposal of loans is not assumed to be a primary source of liquidity for redemptions. The policy thrust is towards ex ante structuring of liquidity through redemption terms, notice and settlement cycles and calibrated tools, underpinned by demonstrable cash flow generation from loans and robust monitoring.

EU AIFMs managing open ended loan originating AIFs should establish a documented governance and policy framework that maps the RTS factors, sets out the compatibility analysis between strategy and redemption terms and demonstrates the selection, calibration and activation conditions for liquidity management tools. Offering documentation and investor materials should be reviewed to ensure that redemption frequency, notice and settlement periods, valuation processes at dealing points and liquidity tools are clearly disclosed and internally consistent. AIFMs should re validate redemption design against portfolio cash flow profiles and investor base characteristics, with particular attention to quarterly or less frequent dealing cycles and longer notice periods that commonly prevail in private credit. Objective activation and de activation criteria for liquidity tools should be specified and evidenced through liquidity stress testing outputs.

At an asset level, AIFMs should build borrower level cash flow schedules reflecting amortisation, interest, covenants, cash sweeps, triggers, expected prepayments and possible extensions and then integrate those schedules with fund level redemption calendars. Borrower monitoring frameworks should be enhanced to capture payment delays, covenant breaches and other early warning signals. Liquidity stress testing should separate asset and liability shocks and combine them at the fund level, covering defaults, spread moves, valuation uncertainty and redemption scenarios, with explicit modelling of liquidity tools as mitigants. The baseline frequency may be annual, but AIFMs should be prepared to defend that choice relative to dealing frequency, investor concentration, portfolio complexity and leverage profile.

Valuation arrangements must ensure reliable, sound and up to date values at dealing points, aligning valuation cycles with redemption windows. Methodologies, independence and the role of external valuation support should be documented. Data and systems should be enhanced to capture investor concentration and, where available, subscription and redemption behaviour, as well as to support treasury forecasting of liquidity across notice and settlement cycles and borrower events. Internal management information and board reporting should be aligned to the RTS factors and liquidity stress testing outcomes, with clear escalation protocols. Leverage, including that arising from hedging and other liabilities should be embedded within the liquidity sufficiency analysis, including stress treatment of collateral calls and roll risks. Finally, firms should map national requirements that may impose pre authorisation, notifications, or approvals for open ended loan originating funds or for changes to liquidity tools.

AIFMs should begin reviewing their internal liquidity-risk framework to reflect the principle of sufficient liquidity and the requirements relating to an appropriate redemption policy. Documentation must demonstrate how loan cash-flows support the fund´s ability to meet redemptions and which liquidity-management tools are used.

Overall, stress-testing procedures may need to be re-designed to ensure at least one comprehensive test per year covering adverse scenarios such as borrower defaults or market-wide redemption shocks. Results should be retained and used to adjust liquidity and redemption policies.

In addition to the above, redemption terms in the underlying fund documentation may also need to be further aligned with the fund´s liquidity profile. Investors should be in a position to receive, and request, clear disclosure on redemption frequency, notice periods and any gating or suspension mechanisms.

A practical roadmap to meeting the RTS’ compliance obligations would commence with a focused gap analysis against the RTS articles governing redemption policy, liquidity sufficiency, liquidity stress testing and monitoring, to identify documentation, modelling and data gaps. Design and calibration work should then finalise dealing terms and liquidity tool architecture, validate borrower level cash flow and fund level stress testing models and align valuation timetables to dealing cycles. Governance and supervisory engagement should follow, including policy updates, board approvals and preparation of a coherent demonstration pack for the home authority. Operational readiness by 16 April 2026 should include systems changes, controls testing, service provider alignment and staff training consistent with service level agreements and oversight responsibilities.

Lastly, and perhaps unsurprisingly, supervisors will expect substance: a coherent link between loan cash flow generation, redemption design, liquidity tool calibration and liquidity stress testing evidence. Valuation at dealing points is likely to be a focal area, given the fairness and run risk implications for illiquid loans. Accordingly, methodologies, independence and frequency should be demonstrably robust. Investor concentration and behavioural assumptions require careful documentation, particularly where full look through is unavailable. Reliance on secondary loan sales near net asset value as a primary source of liquidity will be viewed sceptically. Consequently, ex ante liquidity structuring remains essential. Leverage and hedging related exposures must be integrated into liquidity analysis, with attention to counterparty concentration and margining dynamics under stress. 

Outlook

The implementation of the RTS and the new requirements under AIFMD (II) as to, in particular, liquidity-management tools provide an opportunity to review and further enhance existing fund structures and fund documentations. AIFMs should now conduct gap analyses against the principles and requirements under the RTS and adjust their liquidity, redemption and disclosure policies in preparation for the April 2026 application date. Early planning will help in ensuring a smooth transition.

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