If an EU AIF or a non-EU AIF that is marketed in any EU member state (In-Scope AIFs) intends to hold a securitisation position, certain due diligence obligations apply to its alternative investment fund manager (AIFM) prior to holding the position. Non-EU AIFs with EU investors that committed under a reverse solicitation approach are not in scope. The due diligence obligations focus on the credit granting procedures and criteria, compliance with risk retention rules (at least 5%) and the verification of so-called article 7 disclosures. AIFMs are also required to have certain processes in place in this respect. AIFMs are prohibited from investing on behalf of In-Scope AIFs in non‑compliant securitisations. 

A securitisation is generally defined as a transaction in which credit risk is tranched into junior and senior investment positions and the payments are dependent on the underlying exposures. The residence of the parties involved or of the underlying debtors and the type of tranched instruments issued are all irrelevant for this definition. The definition is broad, a position in a leveraged entity holding credit assets can potentially constitute a securitisation position.

Many U.S.-based securitisations do not meet the above-discussed EU requirements, as U.S. parties usually do not comply with article 7 as it is burdensome. Moreover, the positions often do not meet the EU risk retention rules. As a result, such positions are ineligible for investment by In-Scope AIFs.

It’s unclear whether the due diligence obligations apply only to direct holdings of securitisation positions or also to indirect holdings. Indirect holdings held via a controlled vehicle are expected to be in-scope. On the other hand, there is more uncertainty regarding securitisation positions held via a non-controlled vehicle (e.g., another fund) which may not necessarily be in scope of the prohibition.

Given the ambiguity of the rules, In-Scope AIFs that may become indirectly exposed to non-compliant securitisation positions should seek advice and foresee proper risk disclosures in their offering documents.

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