AIMA looks to build on successes in Europe with AIFMD review, ELTIF launch and more

ELTIF

AIMA’s private credit affiliate, the ACC responded to the EU Commission’s ELTIF review by providing a detailed analysis of how the framework was currently perceived by credit fund managers. Our response also highlighted ways to unlock the significant potential of the ELTIF vehicle, through broadening the range of eligible assets, providing ELTIF managers with greater flexibility on how they operate and structure ELTIF funds, and finally making ELTIFs more accessible for retail investors. Many of the ACC’s suggested reforms were reflected in the European Commission’s proposal for a revised ELTIF published in November.

AIFMD Review

The multi-year process of reviewing the Alternative Investment Fund Managers Directive (AIFMD) has continued throughout 2022, with European Council reaching its general approach in June 2022 and the European Parliament is still working to finalise its position at the time of writing with respect to the European Commission’s legislative proposal to amend the AIFMD and the Undertaking for Collective Investment in Transferable Securities (UCITS) Directive.

AIMA has been engaging with policymakers at all levels on the proposal, including the European Commission, the European Parliament, EU Member States and various National Competent Authorities, to express its views and will continue to do so as the negotiations move into the trialogue stage in 2023. AIMA has also been speaking to various local trade associations and has convened a group of buy side associations to help coordinate the industry’s approach to the review of this directive.

It is expected that a political agreement should be adopted in the first half of 2023, with a potential publication of the text in the EU Official Journal in mid-2023 and a potential entry into application end of 2024/beginning of 2025, after the transposition phase.

Prudential regime for MiFID investment firms

Following the EU’s IFR/IFD prudential regime which entered into application on 26 June 2021, the UK’s similar Investment Firm Prudential Regime (IFPR) took effect on 1 January 2022. AIMA has continued to monitor and respond to developments in the UK and EU, including guidelines and other level 2 measures from the European Banking Authority and the European Securities and Markets Authority.

MiFID

Discussions continue within the European Parliament and Council regarding the Commission’s proposals to overhaul MiFIR to introduce a consolidated tape and reform the MIFIR transparency framework. AIMA has been active in the debate to ensure that the design of the consolidated tape reflects the needs of data users and to ensure that more consideration is given to questions of how to minimise the reporting burden for buy-side firms in the context of transparency obligations.

UK Senior Managers and Certification Regime

While implementing the Investment Firms Prudential Regime (“IFPR”), the FCA replaced the existing “significant IFPRU firm” definition with a new definition of “significant SYSC firm”. While the FCA presented this as a minor technical amendment, it had in fact widened the scope of application of the definition, such that many UK members would have faced the prospect of becoming enhanced firms under the Senior Managers and Certification Regime (“SMCR”).

We raised the issue with the FCA, explaining the background to the historical definition and demonstrating that becoming enhanced firms would be disproportionate for the impacted firms. Following this engagement, the FCA acknowledged the problem and committed “to ensure continuity of the scope of the Enhanced regime as it has previously been understood and applied” by consulting on changes to the FCA Handbook. We have provided further input into the consultation and await final rules.

UK Wholesale Markets Review

AIMA has continued its engagement on the UK’s Wholesale Markets Review (WMR), a review launched by HM Treasury in 2021 to determine how the UK should adapt its approach to regulating secondary markets post-Brexit and improve certain rules under the onshored EU Markets in Financial Instruments Directive II that have not delivered their intended benefits.

This year, we responded to the FCA’s consultation on improving secondary equity markets. Building on our response to the WMR, we expressed our support for FCA proposals to simplify the reporting of over-the-counter transactions by adopting a new regime based on ‘designated reporting’ firms, improve the tick size regime and enhance market resilience during trading venue outages.

LIBOR transition

Early in 2022 we became aware that the FCA’s approach to Libor transition had led to a situation in which UK firms were unable to trade options referencing Libor, even though liquidity in the parallel SOFR options market was minimal. We approached the FCA to highlight the situation, making the case that the FCA’s stance was effectively limiting the ability of certain UK firms to deliver their investment strategies in a way that would achieve the best possible result for investors. We continued to engage with market participants over the coming weeks, sharing insight and data to help members remain informed about the situation in the market, while keeping industry informed of the FCA’s views and expectations].

Securitisation

The UK and EU undertook separate reviews of the EU Securitisation Framework in 2021. The ACC responded to both Calls for Input highlighting the asset management sectors' perspective on the general functioning of the regulation and areas for improvements.

This included targeted recommendations on the applicability of the STS criteria for CLOs, reducing the operational burden on private securitisations, clarifying investor due diligence requirements as well as supporting a more efficient NPL market. UK and EU policymakers are expected to reform the Securitisation framework in 2022 and the ACC will continue to engage with them on this ongoing workstream.

UK Productive Finance Working Group

AIMA and its private credit affiliate the ACC played a leading role in the UK Productive Finance working group, an industry initiative jointly convened by the FCA, Bank of England and HM Treasury to support greater investment into longer-term, less liquid assets. In September 2021, this Working Group published a series of recommendations to address the barriers faced by UK investors, particularly UK DC pension schemes. This group also supported the introduction of a new authorised UK fund regime for investing in long-term assets – the long-term asset fund (LTAF). The ACC also submitted its response to the FCA’s consultation on the LTAF vehicle in June.

In addition to this work, the ACC has also engaged extensively with the UK Government on the impact of the Charge Cap on the ability of UK DC pension schemes to access alternative assets. These efforts were recognised in the consultation published in November by the Department for Work and Pensions which seeks views on removing performance-based remuneration from the Charge Cap.

Digital finance

AIMA advocated for greater proportionality in the EU’s proposed regulation on digital operational resilience (DORA), with the final agreed text including a carve-out for sub-threshold AIFMs. DORA is expected to start having full effect in early 2024 and AIMA will be preparing an implementation guide for members to comply with the new rules. We also participated in the UK FCA’s cyber insights group to ensure the latest intelligence around cyber threats could be highlighted to members of AIMA’s Cyber & Technology Group. Separately, AIMA have met with EU policymakers to discuss the proposed regulation on markets in crypto-assets (MiCA) and better understand the wider implications for digital assets technology and investment in Europe. MiCA is expected to take effect in 2024 and AIMA’s Digital Assets Regulatory Group continues to track relevant legal developments in the digital assets space.

Looking ahead

Looking into next year the revisions to AIFMD are still being finalised and our persistent engagement is likely to be rewarded with a workable outcome for our members. We are confident in our ability to have a voice in regulatory outcomes, as we experienced with the final version of the ELTIF reform carrying many of our recommendations. Meanwhile, the ongoing consequences of Brexit on the cross-border regulatory landscape with the UK will continue to provide new complexities, all of which provide ample opportunities for AIMA to add value for our members.

The AIMA GRA team produces a monthly letter offering the latest analysis of the key industry global regulatory developments as well as a review of some of the global legislative and regulatory actions that impact the alternative asset industry. To find out more click here.