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Credit funds of the same sponsor may engage in cross trades, meaning that credit assets are transferred between funds. AIFMD 2.0 will introduce risk retention rules (RR-rules) as from 16 April 2026. The RR-rules provide that, when originated loans are transferred to third parties, the transferring alternative investment fund (AIF) must retain at least 5% of the notional value of the transferred loan.
Key insights
- Risk‑retention rules apply only in narrow cases, including EU‑managed AIFs transferring originated loans to genuine third parties.
- Many cross trades fall outside scope, especially trades involving bonds, secondary‑market loans, or funds under the same manager.
- Impact on credit‑fund cross trades is limited, as numerous conditions and exemptions prevent the RR‑rules from being triggered.
A prerequisite for the RR-rules to apply is that the transferring AIF is managed by an EU Alternative Investment Fund Manager (EU AIFM), rather than, for instance, a US AIFM. If that is the case, the following cumulative conditions must be met for the RR-rules to apply: (i) a loan is being transferred; (ii) the loan has been originated; (iii) origination was undertaken by the transferring EU AIF; (iv) the loan is transferred to a third party; (v) the transfer is not covered by a derogation; and (vi) the loan was originated before 15 April 2024. Below we comment on these conditions.
- A security-type of debt product (e.g. a bond) should not be captured by the loan concept. Cross trades in relation to bonds may thus escape the risk retention rule by their mere nature.
- If one were to take the position that a security qualifies under the loan concept, it remains relevant to identify an origination process. Bonds, as a classic example of a debt security, are typically not subject to such process, as the issuer is responsible for structuring the bond and determining its terms and conditions; subscribers may choose to accept or decline them, but they do not have the ability to define them.
- The origination must have been carried out by the transferring AIF. This excludes the application of the RR-rules if the loan was acquired in the secondary market.
- Third party remains a non-defined term. Funds of which the governance and/or management are overseen by the same sponsor may not qualify as third parties. Furthermore, the activation of conflict-of-interest policies in relation to cross trades may be an indication that there is no true third-party relationship between such entities.
- A cross trade is not within the scope of the RR-Rules if it is carried out during the wind-down period, to comply with regulations, or required to implement the AIF's investment strategy in the best interest of investors. An investment policy can identify a cross trade as a tool to implement an investment strategy. A cross trade may also help to avoid transaction costs that would be charged by using third-party brokers.
- Even if the cross trade meets all the above conditions loans originated before April 15, 2024 are not subject to these rules.
US fund managers should keep the RR-rules in mind, but the impact on cross trades may be less significant than some anticipate, given the numerous conditions required for the rules to be triggered.
This snippet was co-authored by Noémie Hémery and Selma Ulusoy of Carne Group.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
