By Xenia Neofytou, B.Sc. (Hons), FCCA, CySEC Advanced Certificate Holder, Founder and Managing Director of CX Financia (Ref: A37)
AIFMD II Cyprus fund managers must transition from passive policy updates to demonstrating an audit-ready, operational compliance framework before the April 2026 transposition deadline. Key regulatory shifts include mandatory Liquidity Management Tools (LMTs) calibration under CySEC Circulars C743 and C776, strict 20% single-borrower lending limits for loan-originating AIFs, and verifiable local substance for delegated functions. To ensure full alignment across your fund prospectus, operating model, and regulatory filings, explore our dedicated CySEC AIFM Licensing & Fund Advisory Services.
AIFMD II Cyprus Fund Managers Compliance Summary
For AIFM boards and compliance officers, the difficult part of AIFMD II is no longer identifying the headline changes. It is determining what those changes mean for each fund, each operating model and each regulatory file.
Does an open-ended property AIF need different redemption terms? Are its liquidity-management tools capable of operating during stress? Does a closed-ended fund fall outside the LMT framework? When do shareholder loans to portfolio companies bring the loan-origination requirements into scope? Can the AIFM demonstrate that decisions prepared by delegates remain subject to meaningful internal review and challenge?
These questions cannot be resolved through a single amendment to the compliance manual.
Directive (EU) 2024/927, commonly referred to as AIFMD II, amends the AIFMD and the UCITS Directive in relation to delegation arrangements, liquidity-risk management, supervisory reporting, depositary and custody services, and loan origination by alternative investment funds. It entered into force on 15 April 2024, with Member States required to transpose its principal provisions by 16 April 2026. (Eur-Lex)
The practical shift is from having a regulatory framework to demonstrating that the framework works.
For Cyprus AIFMs, self-managed AIFs and new fund-management applicants, the authorisation file, programme of operations, governance arrangements, fund documents, service-provider relationships, systems and regulatory data should describe the same operating model.
AIFMD II applicability: which changes affect each fund structure?
AIFMD II does not apply identically to every AIF. The analysis should begin with the fund’s structure, its investment activities and the manner in which investors can exit.
| Fund or activity | Principal AIFMD II impact |
Open-ended AIF | LMT selection, calibration, activation and operational readiness |
Closed-ended AIF | No mandatory two-LMT selection, but financing, cash-flow and exit risks remain |
AIF originating loans | Credit assessment, approval, administration and monitoring controls |
Loan-originating AIF | Additional structural, leverage, concentration and risk-retention requirements |
AIFM using material delegation | Substance, retained authority, oversight and enhanced reporting |
New AIFM applicant | Alignment of governance, resources, delegation and systems from authorisation stage |
A fund may therefore be outside one requirement while remaining subject to another.
For example, a genuinely closed-ended real-estate AIF does not have to select the two LMTs required for an open-ended AIF. It must nevertheless manage rental income, financing commitments, debt service, valuation, delayed property sales and the fund’s exit timetable.
Similarly, the fact that originated loans represent less than 50% of a fund’s NAV does not automatically remove all loan-related requirements. The 50% test helps determine whether the fund falls within the additional category of a loan-originating AIF. An AIF originating loans below that level may still require appropriate credit-assessment, approval and monitoring controls.
For asset managers evaluating initial setup parameters, read our complete guide on Cyprus AIF Setup Requirements to align your investment strategy with the right legal structure.
The relevant question is therefore not simply whether AIFMD II applies. It is:
Which requirements apply to each fund, activity and operating arrangement?
Delegation and AIFM substance: retained control must be visible
Delegation remains a legitimate part of the AIFM model. AIFMD II does not require every function to be performed internally.
It does, however, increase the information available to supervisors about delegates, sub-delegates, the functions transferred and the human and technical resources retained by the AIFM to perform and oversee portfolio-management and risk-management activities. The amended authorisation framework also requires clearer information on senior roles, reporting lines, time commitments and supporting resources. (Eur-Lex)
The concern is not simply how many functions have been delegated. It is whether the AIFM continues to possess the information, expertise, authority and resources necessary to control them.
A firm may have detailed delegation agreements and receive regular reports while still appearing weak if material decisions are effectively taken elsewhere and the AIFM’s involvement is limited to formal approval.
Consider a Cyprus AIFM that delegates portfolio management to an overseas group entity. The delegate prepares the investment recommendation, performs the risk analysis and proposes the execution instructions. The Cyprus board receives quarterly reports and approves the recommendations, but its minutes show no challenge, alternative views, rejected proposals or escalation.
The delegation itself is not necessarily the problem. The concern is whether the AIFM is genuinely controlling the process or merely approving decisions that have already been made.
A regulator may ask who has authority to reject the delegate’s proposal, whether the AIFM has sufficient expertise to test the underlying assumptions and what happens when an investment limit, risk appetite or agreed mandate is breached. A credible evidence trail should therefore connect the delegated function to an internal owner, the information reviewed, the challenge raised, the decision taken and any resulting remediation.
AIFMD II also requires the business of the AIFM to be decided by at least two qualifying natural persons who work full-time for the AIFM, or are executive or governing-body members committed full-time to conducting its business, and who are domiciled in the EU. This is a statutory minimum rather than a universal statement of adequate substance; more resources may be needed depending on the size and complexity of the manager and its funds.
For global entities structuring cross-border operations, review our insights on Cross-Border Business Structuring & Operational Substance to ensure your local physical presence meets international tax and regulatory standards.
For a new AIFM applicant, these questions should be addressed when designing the programme of operations, staffing model, governance framework and delegation arrangements. For an existing manager, the issue is whether the model approved at authorisation still reflects what happens in practice.
This is also where compliance monitoring and internal audit add value. Reviewing the wording of contracts is not enough. The review should test whether the AIFM actually receives timely information, challenges material assumptions, escalates exceptions and follows remediation through to closure.
Liquidity-management tools under AIFMD II: selection is only the beginning
The harmonised liquidity-management framework is one of the most immediate operational changes introduced by AIFMD II.
An AIFM managing an open-ended AIF must select at least two appropriate LMTs from points 2 to 8 of Annex V, after assessing their suitability against the fund’s investment strategy, liquidity profile and redemption policy. The tools must be reflected in the fund rules or instruments of incorporation, and the selection cannot consist only of swing pricing and dual pricing.
The nine tools are:
| Liquidity-management tool | Practical purpose |
| Suspension of subscriptions, repurchases and redemptions | Temporarily stops dealing where normal processing would be unsafe, unfair or impossible. |
| Redemption gate | Temporarily restricts the proportion of units or shares that investors can redeem. |
| Extension of notice periods | Gives the AIFM additional time to raise liquidity before meeting redemptions. |
| Redemption fee | Charges redeeming investors an amount reflecting the liquidity cost of their exit. |
| Swing pricing | Adjusts the NAV through a swing factor reflecting the cost of liquidity caused by investor flows. |
| Dual pricing | Uses different subscription and redemption prices to allocate dealing or liquidity costs. |
| Anti-dilution levy | Charges investors responsible for material flows so that remaining investors do not bear the resulting costs. |
| Redemption in kind | Meets a redemption by transferring assets rather than cash, where legally and operationally suitable. |
| Side pockets | Segregates assets whose liquidity or reliable valuation has materially deteriorated. |
The tools are not interchangeable.
An extension of the notice period addresses time. A redemption gate addresses volume. Redemption fees, swing pricing, dual pricing and anti-dilution levies address liquidity costs and dilution. Redemption in kind reduces the need to sell assets for cash where a fair transfer is possible.
A gate should also be distinguished from a suspension. A gate does not stop all redemptions: it restricts the portion processed at a dealing date and applies the fund’s allocation and carry-forward rules to the balance. Suspension is more severe because dealing is temporarily stopped.
Suspension and side pockets are exceptional mechanisms. They should not be treated as ordinary substitutes for a properly designed liquidity model. AIFMD II permits their use where circumstances require it and where the action is justified in the interests of investors. (Eur-Lex)
ESMA’s Guidelines reinforce that selection is a fund-specific exercise. Relevant factors include the fund’s legal structure, investment strategy, dealing terms, liquidity profile, stress-test results, investor base and any operational barriers to implementing particular tools. Where appropriate, managers should consider combining a quantitative tool—such as a gate or notice-period extension—with an anti-dilution tool. (ESMA)
CySEC Circulars C743 and C776: what changed for Cyprus funds?
CySEC has provided specific direction on the Cyprus implementation of the LMT framework.
Circular C743, issued on 19 December 2025, addressed the selection of LMTs and the amendment of fund rules, constitutional documents and partnership agreements. It required relevant managers of open-ended AIFs and UCITS to select at least two suitable tools from redemption gates through redemptions in kind, assess their suitability against the strategy, liquidity profile and redemption policy, and incorporate them into the applicable fund documents. C743 also set out the associated application or notification process and encouraged relevant submissions by 27 February 2026.
The document amendment was only the first stage. Inclusion of a gate or levy in the prospectus does not establish that it has been properly calibrated or can be operated by the administrator.
Circular C776, issued on 6 May 2026, adopted the ESMA LMT Guidelines into CySEC’s supervisory practices. Its focus extends to the effective integration of LMTs into fund structures, alignment of selection and activation with the fund’s liquidity profile, clear governance and escalation, fair application, investor disclosure, staff expertise and supporting systems and controls. The Guidelines apply from 16 April 2026, while existing collective investment undertakings covered by the transition are given until 16 April 2027.
The practical distinction is clear:
C743 addressed selection, suitability and fund-document amendments. C776 moves the focus to calibration, governance, activation, systems and ongoing review.
Where a Cyprus fund completed the document amendment but has not tested the tool with its administrator, agreed decision rights or developed investor and regulatory communications, the implementation exercise is not complete.
Practical example: which LMTs fit an open-ended property AIF?
Consider an open-ended property AIF offering quarterly redemptions with 60 days’ notice.
Seventy-five per cent of its NAV is invested in direct commercial property, 15% in property-related loans and only 10% in cash and listed assets. Five investors hold 65% of the fund’s NAV.
The central issue is the mismatch between the period promised to investors and the time realistically required to convert the underlying assets into cash.
An extended notice period may be appropriate because commercial property cannot normally be sold within 60 days without execution uncertainty or price pressure. A longer period gives the AIFM more time to use rental receipts, loan repayments and orderly disposals.
A redemption gate addresses a different problem. Because the investor base is concentrated, one or two investors could create requests that materially exceed the fund’s available cash. The gate limits the volume leaving at a dealing date and spreads larger requests across subsequent dates under the fund’s rules.
A redemption fee or anti-dilution levy may also be appropriate where the costs of meeting redemptions can be reasonably estimated. It can protect remaining investors from legal, valuation, financing and transaction costs, but it does not make property liquid or solve the timing mismatch.
Swing pricing may be more difficult to defend where direct-property values and transaction costs cannot be measured frequently and consistently. ESMA specifically recognises that redemption fees may be useful for funds with predictable property transaction costs and where swing pricing is difficult because pricing sources are infrequent or limited. (ESMA)
The board should therefore go beyond naming two tools. It should determine the notice period, gate threshold, allocation method and treatment of carried-forward requests. It should confirm who may activate or deactivate the tool, what information must be presented to the decision-maker, whether the administrator can perform the calculation and how the depositary, investors and CySEC will be informed.
A tool that appears in the prospectus but cannot be calculated and implemented accurately during stress is not an effective liquidity control.
Closed-ended real-estate AIFs: no two-LMT requirement, but liquidity risk remains
A genuinely closed-ended real-estate AIF does not have to select the two LMTs required for an open-ended AIF.
Its investors do not ordinarily have periodic redemption rights. They generally recover capital through distributions, asset disposals, the expiry of the fund term or a permitted secondary transfer.
This does not remove liquidity risk. It changes its nature.
The AIFM must assess whether the fund can service bank debt, meet property expenses and taxes, finance maintenance and capital expenditure, withstand tenant default, refinance borrowing and complete planned disposals before the end of the fund’s term.
A delayed sale may lead to a covenant breach, additional capital requirements, refinancing on unfavourable terms, delayed distributions, an extension of the fund term or a forced disposal below expected value.
There is also an important distinction between leveraged and unleveraged closed-ended funds. Article 16(1) excludes only unleveraged closed-ended AIFs from the specific requirement to maintain an appropriate liquidity-management system and conduct regular liquidity stress testing. A leveraged closed-ended AIF remains within that broader framework, even though it is outside the mandatory two-LMT regime. (Eur-Lex)
The distinction can be expressed simply:
An open-ended property AIF must defend its redemption promise. A closed-ended property AIF must defend its financing, cash-flow and exit plan.
Loan-originating AIFs: classification, thresholds and structural consequences
AIFMD II introduces a common EU framework for loan origination by AIFs.
The first question is whether the AIF originates loans. The second is whether lending is sufficiently central to the strategy for the fund to be classified as a loan-originating AIF. The third is which additional structural and quantitative requirements apply.
A loan-originating AIF is one whose investment strategy is mainly to originate loans or whose originated loans have a notional value representing at least 50% of its NAV. The 50% test is a classification threshold; it is not a safe harbour below which loan origination becomes unregulated. (Eur-Lex)
An AIFM managing an AIF that originates loans must maintain effective policies, procedures and processes for credit-risk assessment and for the administration and monitoring of the credit portfolio. Those arrangements must remain current and effective and be reviewed regularly and at least annually. Limited relief may apply to qualifying shareholder loans within the statutory conditions. (Eur-Lex)
Three distinctions commonly cause uncertainty.
Where a property AIF borrows from a bank to acquire an asset, the fund is the borrower. That transaction creates leverage and cash-flow risk but is not loan origination.
Where the AIF lends to a portfolio company or property SPV, the arrangement may be loan origination. A shareholder loan is defined by reference to an equity or voting interest of at least 5% and the inability to sell the loan independently from the related capital instruments. Any relief should be assessed against the actual conditions rather than assumed because the borrower is part of the investment structure. (Eur-Lex)
A genuine secondary-market acquisition may also differ from origination. However, the rules can capture indirect arrangements where the AIF or AIFM participated in structuring the loan or agreeing its characteristics before obtaining exposure.
The principal quantitative safeguards include a 20% of capital limit on loans originated to a single borrower where that borrower is a financial undertaking, another AIF or a UCITS. This is not a general 20% concentration limit for every commercial borrower. (Eur-Lex)
Loan-originating AIFs are also subject to leverage limits of 175% of NAV for open-ended funds and 300% for closed-ended funds, calculated using the commitment method. (Eur-Lex)
Where an originated loan is transferred to a third party, the AIF must generally retain 5% of its notional value for the applicable period. AIFMD II also prohibits strategies whose sole purpose is originating loans for onward transfer and restricts loans to specified connected parties, including the AIFM, its staff, the depositary and certain delegates and group entities. (Eur-Lex)
Loan-originating AIFs are closed-ended by default. An open-ended structure is possible only where the AIFM can demonstrate that the liquidity-risk-management system is compatible with the fund’s strategy and redemption policy. (Eur-Lex)
Consider a private-credit fund offering quarterly redemptions while granting seven-year loans. It is not enough to state that a secondary market exists. The AIFM should understand whether loans can actually be sold during stress, how long a sale would take, the likely discount and whether reliance on repeated sales would disadvantage investors who remain.
ESMA submitted draft technical standards addressing the conditions for maintaining an open-ended loan-originating AIF, including liquid assets, stress testing and an appropriate redemption policy. ESMA has stated that Commission adoption of those standards is not expected before 1 October 2027 at the earliest. (ESMA)
The central question is not whether an open-ended credit fund is automatically unacceptable. It is whether its liquidity promise can be defended against the maturity and liquidity of the loan portfolio.
Administrators, depositaries and reporting: accountability remains with the AIFM
Administrators, depositaries and other regulated service providers add expertise and independent controls. Their appointment does not replace the AIFM’s accountability.
Suppose an external administrator uses an incorrect property-valuation input. Subscriptions and redemptions are processed using the resulting incorrect NAV, and the depositary identifies the inconsistency two weeks later.
The administrator should recalculate the NAV, identify the cause, quantify the effect on each transaction and investor, correct the records and explain the control failure. The depositary should escalate and monitor the matter within its statutory role.
The AIFM must assess investor impact, determine whether correction, compensation or notification is required and ensure that the underlying weakness is addressed. The relevant question is not only who made the calculation error. It is why the AIFM’s oversight framework did not identify it before investors dealt.
The same principle applies to regulatory reporting.
Assume a draft Annex IV return shows leverage of 145%, the risk report states 171%, the administrator calculates 158% and the board pack repeats 145%.
The AIFM should not choose the lowest or most convenient figure. It should establish whether the difference arises from reporting dates, data sources, definitions, treatment of borrowing or derivatives, or calculation methodology.
Different figures are not automatically evidence of a breach. The governance failure occurs where the AIFM cannot explain the difference, determine which figure is correct for the relevant purpose or demonstrate that it was reviewed before submission.
A defensible regulatory figure should have a traceable source, a documented methodology, a named owner, evidence of review and reconciliation with related internal and external reports. A board receiving an unsupported figure may otherwise be making risk and strategy decisions on unreliable information.
A risk-based internal-audit review should therefore test actual data lineage, reconciliations, exception reporting, management challenge and remediation—not merely the existence of policies and service agreements.
Six questions boards and compliance officers should answer
A practical AIFMD II review should enable the board to answer:
- Does the authorisation file and programme of operations still reflect the AIFM’s actual business, staffing and delegation model?
- Can each delegated function be traced to a retained decision, internal owner, monitoring control and evidence of challenge?
- Are the selected LMTs suitable, calibrated, documented and operationally tested?
- Have originated loans, shareholder loans, leverage and concentration exposures been correctly identified and assessed?
- Are administrator and depositary outputs subject to timely review, escalation and remediation?
- Can material regulatory figures be traced, reconciled and defended?
Where the answer is uncertain, the solution should not be limited to rewriting a policy. The AIFM may need to review its regulatory file, governance arrangements, fund documentation, service-provider controls, systems and board reporting together.
From AIFMD II change to a defensible operating model
AIFMD II readiness is not measured by the number of policies approved.
The stronger test is whether the AIFM can demonstrate that its authorisation and operating model remain aligned, delegation has not weakened retained control, liquidity arrangements reflect the underlying assets, selected LMTs can operate during stress and lending activity takes place through a controlled credit framework.
The same standard applies to service-provider oversight and regulatory data. A regulated administrator, depositary or delegate may perform an important role, but the AIFM must still understand, review and challenge the outcome.
Ultimately, the operating model, fund documents, governance arrangements and regulatory data must tell the same story.
AIFMD II readiness, licensing and internal-audit support
CX Financia supports fund promoters, authorised AIFMs and self-managed AIFs with fund-management licensing, authorisation-file and operating-model reviews, regulatory compliance implementation and independent internal-audit assignments.
A focused AIFMD II Readiness and Operating Model Review may assess governance and delegation, LMT implementation, loan-origination applicability, administrator and depositary oversight, regulatory reporting controls and any required alignment of the programme of operations or fund documentation.
The objective is not simply to produce amended documents. It is to identify the decisions required, assign accountable owners and build the evidence needed to demonstrate that the framework operates effectively under continuing CySEC supervision.
Ensure Your Fund’s AIFMD II Readiness Before 2027
Navigating CySEC Circulars C743 and C776, calibrating Liquidity Management Tools, and proving local operational substance requires more than routine policy adjustments – it demands a defensible operating model.
At CX Financia, our regulatory team provides end-to-end AIFMD II Gap Analyses, Operating Model Reviews, and LMT Stress-Testing Frameworks tailored to your fund structure.
This article is provided for general information and does not constitute legal or regulatory advice. Application of AIFMD II should be assessed by reference to the specific AIFM, fund structure, activities, applicable transitional provisions and Cyprus implementation measures.
The revised version follows the approved practical content framework while consolidating the overlapping LMT, closed-ended fund and loan-origination material.
