Hedge Funds View – Q1 2025

Welcome to the inaugural edition of Simmons & Simmons Hedge Funds View. We are excited to share the first of our newsletters which will provide an overview of key regulatory developments affecting hedge fund managers. We hope that this will be a valuable resource to help you stay informed on the ever-changing regulatory environment.

These updates are intended to provide high-level summaries, and we encourage you to follow the embedded links or contact our team for more detailed information on a particular topic. Please let us know if you have colleagues who may be interested in receiving the newsletter and we will add them to the distribution list.

Topics in this edition:

United Kingdom

1 The FCA’s proposals for the future regulation of AIFMs
2 The FCA’s focus on AIFs and private asset valuations
3 The UK’s drive for simplification and growth
4 FCA Consultations on changes to public offers
5 "Minor” amendments to the FCA’s Anti-greenwashing Rule and SDR

Europe

6 The European Commission’s SUI becomes the in vogue TLA
7 The long awaited RIS trilogue discussions kicks off
8 Simplification and clarification of EU Sustainability Regulation
9 ESMA launches common supervisory action with NCAs on compliance and internal audit functions of AIFMs and UCITS managers
10 DORA status update: one month and counting after implementation day
11 ESRB raises issues on ESMA’s proposals for active account requirement under EMIR 3
12 Central Bank of Ireland provides clarification on provision of guarantees by Irish QIAIFs

Global

13 AIMA and MFA oppose FSB’s proposed leverage restrictions

Best of the rest:

• A guide to navigating Hedge Fund Side Letters
• The European Commission extends the UK’s temporary equivalence under EMIR
• UK Chancellor to engage with financial services sector for input on boosting growth
• UK EMIR Refit re-reporting deadline passed
• UK Government responds to House of Commons report on the governance of AI
• European Commission guidelines on AI systems and prohibited AI practices
• French regulator fast-tracks authorisation for defence-focused funds

---

1. The FCA gives first indications of new regime for AIFMs

7 April was an exciting day for UK AIFMs with the publication of not one, but two, consultations aimed at streamlining regulatory requirements for AIFMs. Both consultations remain open for comment until 9 June 2025.

A) HM Treasury Consultation

HMT published proposals for a streamlined framework for the regulation of AIFMs and their depositories. The Government believes there are opportunities to streamline its AIFM regulations to make them simpler and cheaper for most asset managers to do business in the UK. The key proposals covered are:

• Sub-threshold AIFMs – HMT is proposing to remove the legislative thresholds for sub-threshold AIFMs (currently EUR 100m or EUR 500m where the AIFs managed are unleveraged and have no redemption rights for 5 years). The FCA in its Call for Input (see below) sets out proposals for a new regime based on the size and activities of the firm. Under these proposals, AIFMs that are currently unregulated and relying on the regime for small registered AIFMs, would need to seek FCA authorisation.
• Listed closed-ended investment companies – despite challenges with the application of the UK AIFM Regulations to listed closed-ended investment companies, the government is proposing to keep them in scope to ensure continued financial stability and that appropriate consumer protections continue to apply.

B) FCA Call for Input

The Call for Input sets out the FCA’s approach to changing the regulatory framework for UK AIFMs with the intention of making it easier for firms to grow, compete, innovate and enter the market. The FCA is proposing a more proportionate regime that reflects a firm’s size and activities, whilst at the same time removing unnecessary regulation and reducing the administrative burden for firms. Of particular interest, the FCA is consulting on:

• Creating a new three-tiered regime for small firms (NAV below £100m), medium firms and large firms (NAV above £5bn), with those in the largest category being subject to the highest standards
• Changing the metric for classifying firms to a NAV based threshold, instead of the current leveraged AuM model
• Introducing changes to depositary requirements to bring them in line with global standards
• Revised standards for managers of listed closed-ended investment companies

The FCA is also intending to review the effectiveness of the AIFM and UCITS remuneration codes and prudential requirements for AIFMs, and removing the AIFM business restriction that prevents AFIMs from carrying out certain regulated services.

The FCA plans to consult on draft rules in H1 2026.

2. The FCA’s focus on AIFs and private asset valuations

A) FCA Dear CEO letter on Supervisory strategy for Asset Management and Alternatives

In a "Dear CEO" letter dated 26 February 2025, the FCA outlined its supervisory strategy and priorities for the asset management and alternatives sector over the coming year which will be focussed on supporting confident investing in private markets, building firm and financial system resilience against market disruption, and securing positive outcomes for consumers.

The letter has a strong focus on private markets and, in particular, private funds but also highlights the following points which may apply to AIFMs more broadly:

• Building firm and financial system resilience against market disruption. As part of its supervisory priorities, the FCA will focus on prudent risk management, liquidity management and operational resilience. It will continue to monitor liquidity risk and will consider findings on margin preparedness from both the Bank of England (BoE) report on its system-wide exploratory scenario and the FSB's report on liquidity preparedness for margin and collateral calls. The FCA will also focus on identifying outlier firms and funds with high leverage, illiquidity or concentrated investment.

• Operational Resilience: Firms are encouraged to evaluate their operational processes and collateral management practices, especially when services are outsourced.

• Financial Crime and Market Abuse: The FCA highlights the potential risks of financial crime associated with complex ownership structures. Firms are reminded to conduct proportionate AML controls and risk-based due diligence and KYC checks to identify ultimate beneficial owners.

• Sustainable Finance: The FCA will engage with firms with sustainability-related products, to understand how they are implementing the labelling, naming, and marketing rules under SDR with the aim of identifying any outliers and engage with them directly.

Firms are encouraged to discuss the letter with their senior management and boards and to consider whether the risks of harm discussed in the letter are prevalent and implement strategies to manage them.

B) FCA Multi-Firm Review on Private Market Valuation Practices

Hot on the heels of the Dear CEO letter, the FCA published the findings from its multi-firm assessment of valuation practices and governance for valuing private markets assets.

The valuation of private assets has been a focus area for the FCA given the growth in private market asset management in the UK as well combined with the lack of frequent trading and regular pricing of private market assets. The review includes examples of good and bad practice identified as part of the review and sets out the FCA’s expectations for firms investing in these assets.

These findings will inform the FCA's review of the Alternative Investment Fund Managers Directive (AIFMD) as it updates its rules in the Handbook.
Please read our client update, available here, for more information on this topic.

3. The UK’s drive for simplification and growth

A) The FCA publishes its 5-year strategy

The FCA published its Strategy for 2025 to 2030, which sets out the FCA's vision and priorities that will guide the FCA's future and shape its decisions for the next five years.

The FCA's vision underpinning the high-level Strategy is to deepen trust, rebalance risk, support growth and improve lives and the strategy is focussed on the following four priorities:

• Be a smarter regulator: The FCA aims to be a predictable, purposeful and proportionate regulator. They intend to improve their processes and embracing technology to become more efficient and effective.
• Support growth: This will be done by enabling investment, innovation and ensuring the continued competitiveness of the UK’s financial services.
• Help consumers navigate their financial lives: The FCA intends to work with industry to boost trust and product innovation and to ensure the right information and support is available to consumers.
• Fight crime: With a focus on those who seek to use the fact they’re regulated to do harm.

In our view, the direction of the FCA's strategy is not a surprise and is consistent with HMT's growth agenda. There are also some similarities with the strategy in the EU around the Savings and Investments Union (see updates below). In essence, both the FCA and the EU Commission want to move more capital from retail savings into capital markets investments (the FCA specifies that it wants to see a higher proportion of consumers with over £10,000 in investment assets holding 'mainstream' investments).

Notably, as part of the strategy the FCA announced that it will be establishing a permanent presence in the US and Asia-Pacific. This will support the relationships with other global regulators and provide a local touchpoint for financial looking to get authorised in the UK.

B) Revamping and restating the MiFID Org Reg

As part of the Mansion House speech at the end of last year, the Chancellor announced her intention to make further technical changes to the wholesale markets framework. To this extent, the Treasury published a draft statutory instrument and policy note titled "Markets in Financial Instruments Organisational Regulation". These publications outline the UK government's plan to reform the regulatory framework for financial services which mainly consists of a) revoking firm-facing regulations within the Org Reg and replacing them with rules in the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) rulebooks; and b) to restate key definitions in domestic legislation (including in the Financial Services and Markets Act 2000 (FSMA 2000) and the Regulated Activities Order (RAO)) without materially changing their policy effect.

The responsibility for setting direct regulatory requirements will be delegated to UK regulators, allowing them to leverage their day-to-day experience in supervising financial services firms. This provides flexibility to update regulations in response to market trends and risks.

The government has invited market participants to submit technical comments on the draft statutory instrument by 14 April 2025, focusing on achieving the policy intent and avoiding unintended consequences, with the aim of implementing the instrument in H2 2025.

C) Removal of the Consumer Duty champion requirement

Whilst not relevant for many hedge fund managers, it is interesting to note that in a speech, FCA chief executive, Nikhil Rathi, confirmed that from 27 February 2025, firms are no longer required to have a Consumer Duty Board Champion.

This reflects the FCA’s expectation that the Duty should now be well-embedded firms’ management discussions, processes, and policies. This does not remove the FCA’s expectations that Boards and senior management ensure the firm’s strategy, culture and objectives focus on delivering good customer outcomes, but it makes the governance requirements much less prescriptive.

The announcement follows the letter sent by Mr Rathi to the Prime Minister dated 16 January 2025 in which he noted that, in order to achieve the reforms necessary for supporting growth, the Government will need accept greater risks being taken and will need to prioritise resources effectively. The letter highlights several key areas including reducing regulatory burdens, including the removal of the need for a Consumer Duty Board Champion.

D) FCA feedback statement on consumer duty rule review

Continuing its focus on the Consumer Duty and reducing the regulatory burden, the FCA released an Action Plan detailing proposals to review and streamline regulatory expectations in the context of the Consumer Duty. In its Feedback Statement, the FCA outlines an ambitious Action Plan aimed at simplifying regulatory requirements for firms following the introduction of the Consumer Duty.

This is a follow-up to the Call for Input (CFI) published last July (see our update on the CFI here), where the FCA asked for feedback on how to streamline and simplify its rules in light of the Consumer Duty.

The FCA have stated that there was clear feedback to the CFI that now is not the time for wholesale changes to the FCA rules. However, they have set out some proposals for immediate action in discrete areas and plans for longer-term work

4. FCA Consultations on changes to public offers

The FCA has released two consultation papers, CP25/2 and CP25/3, as part of ongoing efforts to refine the Public Offers and Admissions to Trading Regulations (POATR) and the UK Listing Rules. The POATR framework will replace the existing UK Prospectus Regulation and is expected to come into force fully in January 2026.

• Encouraging the offering of low denomination bonds (CP25/2): The proposals aim to encourage listed companies to offer low denomination bonds (i.e. less than £100,000) by aligning disclosure requirements for low denomination bonds with those for higher denominations to make raising capital easier for issuers.

• Simplifying listing requirements (CP25/2): In order to simplify the requirements under the UK Listing Rules, the FCA proposes:
  i) changing the listings applications process for further issuances to reduce frictions; and
  ii) removing Listing Particulars as a listing admission document to simplify the FCA’s listing framework and better align with the POATRs reform.

• Introducing a framework to regulate Public Offer Platforms (POPs) (CP25/3): In CP25/3, the FCA outlines its approach and proposals for the framework governing POPs to allow more targeted regulation of offers of securities by companies where they are not being admitted to a public market. Companies seeking to make public offers of securities outside a public market, where the value of the offer is more than £5m and made to a broad investor base, will need to do so via a POP.

Next steps

Both consultations close on 14 March 2025. The FCA plans to publish the final rules for the POATR framework as a whole, including rules for firms operating a POP, in the summer of 2025. It is expected that the POATR regime will fully come into force in January 2026.

5. “Minor” amendments to the FCA’s Anti-greenwashing Rule and SDR

The FCA has published Handbook Notice 127, which sets out what it describes as “minor” amendments to the Anti-greenwashing rule and Sustainability Disclosure Requirements. The amendments, which the FCA consulted on in its Quarterly Consultation CP24/26, aim to clarify and/or affect aspects of the implementation of the rules and include following:

• The FCA has aligned the scope of the anti-greenwashing rule with the general financial promotion rules by proposing to disapply the rule to financial promotions qualifying as “excluded communications” and “third party prospectuses”. “Excluded communications” include those communications that would be excluded from the scope of the general prohibition on communicating financial promotions under the Financial Promotion Order or would be excluded from the scope of the restriction on authorized firms communicating financial promotions in relation to unregulated investment schemes under the Promotion of Collective Investment Schemes Order. As such communications are excluded from the general “fair, clear and not misleading” rules under COBS 4 which aligns the anti-greenwashing rule with the general approach for financial promotions. It is important to note that this would not impact the scope of the application of the anti-greenwashing rule to client communications – all communications with clients in relation to the sustainability characteristics of products or services would continue to be subject to the anti-greenwashing rule.

• Managers who use sustainability labels must include as part of their pre-contractual disclosures both the KPIs prescribed in the Sustainability Disclosure Regime as well as any metrics that retail investors may find useful; and

• The period within which managers that use a sustainability label or sustainability terms need to produce product-level sustainability report will be extended from 12 to 16 months after the manager start using the label or term.

6. The European Commission’s SUI becomes the in vogue TLA

A) Call for evidence on the SUI published (closed on 3 March 2025)

On 3 February, the European Commission has recently issued a call for evidence on the Savings and Investments Union (SIU), a strategic initiative aimed at enhancing the investment landscape across the European Union. The SIU is intended to build on the Capital Markets Union (CMU) which focussed on creating a more integrated and efficient EU capital market. So, in case you were wondering which, SIU rather than CMU is the correct three letter acronym (TLA) to use going forward.

The purpose of the call for evidence is to gather views, facts and evidence from consumers and stakeholders on progress made on the CMU, as well as to identify significant challenges that the SIU should address in order to construct a comprehensive strategy on the SIU.

B) ECON draft report on CMU/SIU reforms (17 March 2025)

Building on the theme of implementing reforms to bolster growth and improve European competitiveness, the European Parliament's Committee on Economic and Monetary Affairs (ECON) published a draft report on how to facilitate the SIU.

The report sets out the ECON’s position on various topics and calls on the Commission/Member States to take action including in the following areas:

• Attract private investment: ECON calls on the Commission and Member States to develop solutions (legislative or otherwise) to create an EU capital market that has sufficient size, liquidity, depth and transparency to attract EU and international investors;
• ESMA direct powers: The report supports integration of institutional and market structures – including granting ESMA direct supervisory powers over pan-EU market infrastructures
• Member State legislative alignment: To ease cross border activities, ECON states that the simplification agenda should include alignment of Member States’ legislative frameworks.
• Regulations (not Directives): It calls on the Commission to rely more on regulations (not directives) in order to limit national discretion/fragmentation.
• New EU products for retail: To channel household savings into investment, it calls on the Commission to explore the idea of creating an EU investment savings account or EU-label for simple investment products for retail.
• Venture capital/equity investment: Calls on Commission to prioritise a CMU/SIU agenda that favours access to venture capital/equity investment over bank lending.
• Public investment: Highlights need for substantial public sector support to mobilise private investment in high-risk areas like defence and decarbonisation.

C) European Commission sets out its strategy for the SIU (19 March 2025)

Hot on the heels of the ECON report, the European Commission published a Communication detailing its strategy for the SIU.

The SUI will require a range of policy measures, affecting various dimensions of the EU’s financial system. The communication groups these policy measures into the following categories, noting that these are interlinked (a) Citizens and Savings; (b) Investments and Financing; (c) Integration and Scale; and (d) Efficient Supervision in the Single Market. Some of the policy aims set out in the communication include the following:

• Further developing the asset management sector, including addressing fragmentation and unnecessary and duplicative regulatory burdens.
• Harmonising supervision, emphasising convergence of national practices and not necessarily seeking a single supervisor.
• Encouraging retail participation in capital markets, highlighting the need to improve financial literacy and access to savings and investments accounts as well as the need for a new tax efficient savings wrapper for retail investors.
• Simplification of the securitisation framework focusing on simplifying due diligence and transparency and adjusting prudential requirements for banks and insurers.
• Promoting investments in ‘certain’ alternative asset classes, focusing only on venture capital, private equity and infrastructure.
• Facilitating investment exits and secondary private capital markets possibly through multilateral intermittent trading of private company shares.

For more information on the SUI and the policies set out in the Communication, please read our client note on the topic here.

7. The long awaited RIS trilogue discussions kicks off

The trilogue discussions on the Retail Investment Strategy (RIS) started on 18 March and follows shortly after the publication of two notes (both dated 11 March 2025) by the Council of the EU in which it compares the negotiating positions of the European Parliament, the European Commission and the Council on the proposed legislative package that makes up the RIS.

While the discussions are happening behind closed doors, we've been keeping our ears to the ground. As we predicted in our February EU RIS View the focus of the discussions was on the simplification of the RIS and reducing regulatory burdens. The Parliament (supported by the Council) has asked the Commission to prepare non-papers (basically, non-public discussion papers) with simplification proposals for several aspects of the RIS including the value-for-money benchmarks, disclosure requirements and best interests/suitability (referred to as the ‘customer journey’).

Our understanding is that the next trilogue meeting will take place after the Commission’s non-papers are ready. This is likely to be in early May (at the earliest), assuming that the Commission takes the full six weeks provided to them to prepare the papers.

As the Council and Parliament positions remain divergent on key points a swift conclusion to the discussions seems unlikely. In addition, the Polish Council Presidency has previously expressed that it would aim to progress the RIS file but not necessarily conclude during its 6-month tenure. Either way, the earliest prediction of trilogues to finish is during H2 2025.

If you want to refresh your knowledge on the RIS and the recent developments, you can find detailed information on our RIS Hub.

8. Simplification and clarification of EU Sustainability Regulation

A) Publication of draft releases proposals to simplify rules on sustainability and EU investments

On 26 February, the European Commission published its highly anticipated raft of proposals to amend and simplify various EU regulations relating to sustainability and investment (the “Omnibus Simplification Package”), with the aim of reducing the compliance burden, boosting competitiveness and investment capacity in the EU.

The amendments set out in the Omnibus Simplification Package are just proposals at this stage and will be subject to trilogue negotiations. However, we encourage fund managers to ensure they are aware of the proposed changes and how they may be impacted.

The Omnibus Simplification Package sets out several important changes to sustainability reporting and due diligence requirements under CSRD, the EU Taxonomy and CS3D, including the following:

• CSRD: Removing an estimated 80% of companies from the scope of CSRD by changing the scoping parameters and criteria.
• EU Taxonomy: Limiting EU Taxonomy reporting obligations to the largest companies;
• EU Taxonomy: Introducing a financial materiality threshold for Taxonomy reporting and reducing the information in the reporting templates by around 70%.
• EU Taxonomy: Reviewing the “Do No Significant harm” criteria for pollution prevention and control related to the use and presence of chemical. This is a first step in revising and simplifying the criteria for all Taxonomy activities.
• CS3D: Simplifying sustainability due diligence requirements so that in-scope companies avoid unnecessary complexities and costs;
• CS3D: Limiting the information requested during value chain mapping by large companies and
  In addition, the Omnibus Directive sets out the following “Postponement Proposals”:
• CSRD: A two-year postponement to sustainability reporting requirements under the CSRD for all "second wave" and "third wave" companies that would otherwise be required to start reporting in 2026 or 2027 (in respect of financial year 2025 or 2026).
• CS3D: A one-year postponement to the transposition deadline for the (until 26 July 2027) and the deadline for its application to the first tranche of companies (until 26 July 2028).

In a recent development, on 1 April, the Parliament voted to fast-track its work related to the Postponement Proposals and will vote on Thursday, 3 April on whether to delay application of the new sustainability reporting and due diligence requirements.

For more information on the proposals set out in the Omnibus Directive, please read our client briefing note here.

B) European Commission publishes FAQs on the Taxonomy Regulation

On 5 March 2025, the European Commission published a Commission Notice setting out FAQs which provide technical clarifications on the application of the EU Taxonomy.

In particular the FAQs provides additional clarification on the following areas:

• the technical screening criteria for new activities included in the Taxonomy Climate and Environmental Delegated Acts,
• the generic ‘do no significant harm’ (DNSH) criteria; and
• the related reporting obligations.

The Notice follows publication of the FAQs in draft form in November 2024.

Please see our client note here for more information.

C) Platform on Sustainable Finance publishes Draft Report on Taxonomy and Climate Delegated Act

In January, the EU Platform on Sustainable Finance (PSF), released a draft report which setting out proposed changes to the Climate Delegated Act and proposals on expanding the EU Taxonomy. The proposed amendments to both the Climate Delegated Act and the EU Taxonomy seek to reduce the complexity of the regulations to increase usability and effectiveness.

As part of its mandate, the Platform carried out a study to better understand how the Taxonomy and the broader framework are being implemented. Two key messages from the industry stood out:

• the need to simplify the application of Do No Significant Harm (DNSH) criteria; and
• a strong push to expand the scope of the Taxonomy.

The Platform is seeking feedback and evidence-based input on challenges faced by firms relating to the DNSH criteria and has proposed updates to the criteria to improve usability. The Platform also aims to improve the Taxonomy's effectiveness and is consulting on a proposal for new activities in mining and smelting and their criteria. Proposed revisions to the Climate Delegated Act include revising energy-related thresholds and the criteria for certain activities (including bioenergy, manufacturing and construction)

Please see our client note here for more details.

9. ESMA launches common supervisory action with NCAs on compliance and internal audit functions of AIFMs and UCITS managers

Of interest to firms with EU based AIFMs/ManCos, on 14 February 2025, ESMA launched a new Common Supervisory Action (CSA) focused on the Compliance and Internal Audit Functions within fund management companies. The CSA will be conducted in collaboration with the national competent authorities (NCAs) across the EU throughout 2025, and will aim to assess the extent to which UCITS and AIFMs have established effective compliance and internal audit functions focusing on factors including staffing, authority, knowledge, and expertise as required by the AIFM and UCITS frameworks.

ESMA has emphasised that robust internal controls are vital to prevent investor harm and uphold financial stability. Therefore, they are scrutinising these functions to ensure that firms are maintaining internal control mechanisms that monitor, identify, measure, and mitigate potential risks of non-compliance with applicable regulations.

The CSA will use a common assessment framework developed by ESMA. During the year, NCAs are to conduct regional reviews of AIFMs and UCITS management companies and share their supervisory insights gained from their oversight with ESMA.

ESMA expects to publish its final report, which will set out the findings of this exercise, in 2026.

10. DORA status update: one month and counting after implementation day

The EU Digital Operational Resilience Act (DORA) became fully applicable on 17 January 2025 meaning in-scope financial entities must now be DORA-compliant. We summarise here a few developments that may be of interest to our readers:

• Implementation: The status of implementation varies across EU member states as different approaches are being taken to implementation, such as in respect of deadlines, competent authorities and incident reporting procedures. See our full insights on five key jurisdictions here.
• Registers of information: In Ireland, guidelines have been released by the Central Bank of Ireland (CBI) on the register of information and incident reporting, with financial entities to submit their registers of information by 4 April 2025. The registers must contain information as of 31 March 2025. In Luxembourg, financial entities must submit their register of information to the Luxembourg regulator, the CSSF, from 1 April 2025 to 15 April 2025.
• Treatment of ICT services provided by one financial entity to another: There has been some clarification on this topic. A formal Q&A with the European Commission’s comments was published in January, in which it is confirmed that financial entities have the onus to assess whether the services that they rely on are ICT services. See our full update here.
• Subcontracting ICT services: The European Commission has adopted Regulatory Technical Standards (RTS) on sub-contracting information and communication technology (ICT) services supporting functions. The RTS specify the elements to be taken into account by financial entities in sub-contracting ICT services that support critical or important functions under Article 30(5) of DORA. This follows an initial rejection of the draft RTS which the Commission viewed as going beyond the mandate given under Article 30(5) of DORA.
• Guidelines on aggregated annual costs and losses: ESMA published a webpage with official translations of the guidelines on the estimation of aggregated annual costs and losses caused by major ICT-related incidents under DORA. The guidelines, which will apply from 19 May 2025, specify a common template for the submission of the aggregated annual costs and losses.
• Formal notice to member states for failure to transpose DORA: The European Commission published a press release announcing it has decided to open infringement procedures against certain member states for failing to fully transpose DORA requirements into national law by 17 January 2025. The member states (which includes Belgium, Denmark, Greece, Spain, France, and Portugal) will have two months to respond and to complete their transposition and notify their measures to the Commission.

11. ESRB raises issues on ESMA’s proposals for active account requirement under EMIR 3

On 27 January 2025, the European Systemic Risk Board (ESRB) published its response to ESMA’s consultation on the conditions for the Active Account Requirement (AAR) under EMIR 3. The Consultation Paper was published in November 2024.

Under the AAR, certain financial and non-financial counterparties are required to maintain active accounts at EU central counterparties (CCPs) for derivative contracts that are considered to be of substantial systemic importance by ESMA with the aim of improving financial stability in the EU. Hedge Fund managers with fund and/or client accounts that are above the clearing threshold may have obligations under the AAR, and would need to consider whether they are trading in derivatives in the relevant AAR categories.

In its response, the ESRB express its view that, under the current proposal, the AAR would not adequately address risks arising from reliance on systemically important clearing services in third countries. While the AAR marks an important step towards reducing dependence on non-EU CCPs, its effectiveness, as well as the possible occurrence of unintended effects, must be closely monitored and evaluated over time.

Separately, the ESRB highlights issues including:

• Operational conditions: robust operational conditions are essential for ensuring that active accounts function effectively.
• The representativeness obligation: the ESRB supports this obligation noting that requiring systemic counterparties to use EU CCPs can help make the market stronger and reduce systemic risks.
• Reporting requirements: accurate and granular reporting would be vital for monitoring compliance and systemic risks. The ESRB welcomes the inclusion of the aggregate value of initial and variation margins as a risk-based measure in the reporting requirement.

12. Central Bank of Ireland provides clarification on provision of guarantees by Irish QIAIFs

On 7th March 2025, the Central Bank of Ireland released the 50th edition of its AIFMD Q&A, offering key clarifications on the ability of QIAIFs, including ICAVs and ILPs, to act as guarantors and providing security for third parties. Previously, the lack of a clear definition of "guarantor" led to complex security arrangements in fund finance transactions.

The Q&A confirmed that QIAIFs can provide guarantees for investments and intermediate vehicles where they have an economic interest, even if not wholly owned subsidiaries, provided certain criteria are met. The criteria include ensuring arrangements are in the best interest of the QIAIF and its investors, confirming transactions are at arm’s length, disclosing risks in the prospectus, and limiting investor liability.

The practical effect of the change is that it will allow QIAIFs to grant direct security for the obligations of third parties, which should reduce both the complexity and cost of fund finance transactions. This marks a welcome development for the industry and will operate to simplify structuring arrangements on various type of transactions, including those.

13. AIMA and MFA oppose FSB’s proposed leverage restrictions

The Managed Fund Association (MFA) and Alternative Investment Management Association (AIMA), two of the largest hedge fund trade bodies, have published letters to the Financial Stability Board (FSB) criticising the FSB’s recent proposals to clamp down on the use of leverage.

In December 2024, the FSB published a consultation report on leverage in non-bank financial intermediation (NBFI) which includes hedge funds, other leveraged investment funds, pension funds and insurance companies. The consultation and policy recommendations are addressed to FSB member authorities and standard setting bodies and aim to enhance the ability of authorities and market participants to monitor vulnerabilities from NBFI leverage. This follows a 2023 FSB report which identified leverage as a contributor to recent period of market stress.

The MFA and AIMA are lobbying against these proposals. The main concerns raised by the bodies relate to the proposals to restrict the use of leverage and to require hedge funds to disclose more detail on their leverage to banks and other counterparties. They also warn that the regulatory clampdown was misplaced and could make markets more vulnerable to stress and could reduce market efficiency and liquidity.

The consultation closed on 28 February 2025 and the final report is expected to be published in mid-2025.

Best of the Rest:

This edition’s ‘best of the rest’ covers…

A Guide to navigating Hedge Fund Side Letters

Investors proposing to make substantial allocations to hedge funds frequently seek to negotiate special terms for their investment by way of a side letter. Side letters contain legally binding representations and commitments from one or more parties connected with the fund in question. To assist managers in navigating these side letters, we have recently published our Guide to Hedge Fund Side Letters in which we cover common side letter terms, discuss practical considerations for managers to take into account when reviewing a side letter and provide guidance on how managers can avoid signing problematic side letters.

We hope that this will be a useful tool to review and negotiate side letters.

The European Commission extends the UK’s temporary equivalence under EMIR

On 31 January 2025, the European Commission published an implementing decision determining that, until 30 June 2028, the regulatory framework applicable to central counterparties (CCPs) in the UK is equivalent to EMIR. In accordance with Article 25 of EMIR, a CCP established in a third country (including the UK) may only provide clearing services to clearing members or trading venues established in the EU, where that CCP is recognised by ESMA as ‘equivalent’. The extension may help avoid potentially significant disruptions to both financial and energy markets.

UK Chancellor to engage with financial services sector for input on boosting growth

In a statement published 20 January 2025, the UK Chancellor, Rachel Reeves, makes clear her plans to will host Industry Forums with leaders in the asset management industry and other financial sectors to obtain inputs on how to bolster growth in the sector and in the UK more broadly. The feedback from these sessions is intended to play a key role in designing the first ever Financial Services Growth and Competitiveness Strategy which is set to be published later this year.

UK EMIR Refit re-reporting deadline passed

The “re-reporting” obligation deadline by the “UK EMIR Refit” passed on 31 March 2025. Entities that are responsible for reporting therefore need to ensure that any outstanding derivative reports have been updated in line with the new rules. You can read more about the specific changes introduced by the Refit in our previous article here.

Where voluntary delegation arrangements, e.g., to broker counterparties, are in place, remember that the regulatory responsibility and liability nonetheless remains with the entity responsible for reporting for UK EMIR purposes. As a reminder, even third country (e.g. Cayman) AIFs are in scope of UK EMIR, including the re-reporting obligation, where they have a UK AIFM.

UK Government responds to House of Commons report on the governance of AI

The UK Government has published its response to a report from the House of Commons Science, Innovation and Technology Committee's on AI governance in which it agrees that AI-specific legislation is required. It further confirms that it will shortly publish a consultation paper setting out a proposed legislative framework for regulating developers of AI models.

The government will further take steps to:

• assist regulators in crafting sector-specific guidance via the Regulatory Innovation Office and other advisory services; and
• establish the AI Safety Institute (AISI) as a statutory body to enhance collaboration with AI developers and support international AI safety efforts.

European Commission guidelines on AI systems and prohibited AI practices

In February, the European Commission published two sets of non-binding guidelines under the new EU AI Act.

Guidelines on the definition of an AI system: The AI Act regulates the development and use of “AI systems”. The first set of guidelines provides guidance on how to determine whether a system will fall in scope of the definition of “AI system” and therefore the AI Act itself.

Guidelines on prohibited AI practices: Article 5 of the AI Act sets out prohibited practices related to AI, which includes using AI systems for manipulative, exploitative, social control or surveillance practices. The guidelines consider the main concepts of the prohibited activities and provide specific examples of behaviours and systems that would be ‘prohibited activities’.

French regulator fast-tracks authorisation for defence-focused funds

The French financial regulator, Autorité des Marchés Financiers (AMF), has announced expedited authorisation processes for investment funds targeting “significant investment” in France’s defence industry.

This initiative aims to facilitate significant investments in France's defence technological and industrial base (BITD) and aligns with the French government's efforts to strengthen its armed forces and maintain strategic autonomy. The AMF will also contribute to European standard-setting to ensure sustainable finance regulations do not hinder defence funding. This development comes amid a broader debate on the role of defence industries in sustainable finance noting the intensifying pressure on responsible investors to align strategies with geopolitical realities.