Consultation Paper No. 8 of 2022 - Proposed Regulatory Framework for Private Credit Funds

CONSULTATION PAPER
NO. 8 OF 2022
PROPOSED REGULATORY
FRAMEWORK FOR PRIVATE
CREDIT FUNDS
12 DECEMBER 2022

Consultation Paper No. 8 of 2022
Table of Contents
Introduction.................................................................................................................... 3
Why we are issuing this paper.....................................................................................................3
Who should read this paper .........................................................................................................3
How to provide comments............................................................................................................3
What happens next .......................................................................................................................3
Comments to be addressed to: ...................................................................................................4
Background.................................................................................................................... 5
Proposed Private Credit Fund Framework ..................................................................... 6
Proposed amendments to FSMR and FSRA Rulebooks ................................................ 9

Consultation Paper No. 8 of 2022
Why we are issuing this paper

1. The Financial Services Regulatory Authority ("FSRA") of Abu Dhabi Global
   Market ("ADGM") has issued this consultation paper to invite public feedback and comments on its proposed introduction of a specific regulatory framework, the “Private Credit Fund Framework”, that would enable Funds and their respective Fund Managers to originate and invest in Credit. Defined terms contained in this consultation paper have the meanings attributed to them in the FSRA’s Glossary Rulebook (“GLO”), unless otherwise defined in this paper.
2. In presenting the proposals outlined below, the FSRA is responding to interest
   from existing Fund Managers and potential Applicants seeking to establish such Funds that will raise investment for the purpose of investing in Credit, whether through the origination of, or participation in, Credit Facilities or the purchase of Credit-related instruments. Who should read this paper
3. This Consultation Paper should be of particular interest to Fund Managers,
   potential Applicants seeking to operate as Fund Managers within ADGM, as well as investors, individuals and organisations active in the funds industry, and their respective professional advisors. How to provide comments
4. All comments should be made in writing and sent to the mail address or email
   address specified below. If sending your comments by email, please use the Consultation Paper number in the subject line. If relevant, please identify the organisation you represent in providing your comments. The FSRA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making any comments. Comments supported by reasoning and evidence will be given more weight by the FSRA. What happens next
5. The deadline for providing comments on these proposals is 27 January 2023.
   When we receive your comments, we will consider whether any modifications are required to the proposed Private Credit Fund Framework. The Board and the FSRA will then proceed to enact the proposed Private Credit Fund Framework. You should not act on these proposals until the relevant regulations and rules are issued. The FSRA will issue a notice on the ADGM website when this happens. Introduction

Consultation Paper No. 8 of 2022
Comments to be addressed to:
Consultation Paper No. 8 of 2022
Financial Services Regulatory Authority
Abu Dhabi Global Market
ADGM Square
Al Maryah Island
PO Box 111999
Abu Dhabi, UAE
Email: consultation@adgm.com

Consultation Paper No. 8 of 2022

1. The FSRA adopts a risk-based approach to regulation and supervision of the
   entities that it authorises, taking into account the nature, size and complexity of their business activities. Currently, the FSRA has in place a proportionate regulatory framework for ADGM-based fund managers, having regard to the size of the funds they manage and the sophistication of the clients they serve. An example of this is that fund managers that manage funds targeting Professional Clients are therefore subject to less stringent regulatory requirements compared to managers of Public Funds.
2. Credit funds are Funds with investment strategies which seek to earn returns
   from lending or Credit related investments, either through the origination of, or participation in, loans to borrowers, the purchase of existing loans from third party Lenders, the purchase of instruments creating or acknowledging indebtedness, or a combination of the foregoing. The popularity of such investment strategies has grown with the opportunity to invest in loans on terms which may be comparably attractive when compared to other asset classes, and are driven in
   part by difficulties faced by smaller, growth-stage companies that fall below
   lending thresholds for traditional bank financing.
3. The global private credit market has grown in the last ten years from an estimated
   US$300 billion to almost US$900 billion, with Funds sitting on approximately US$300 billion of further commitments . Asset managers 2 are increasingly turning their focus to the private credit market as it is seen as an asset class that is growing. International context and benchmarking
4. In 2016, the European Securities and Markets Authority (“ESMA”)
   issued an opinion on the use of Alternative Investment Funds to originate loans and called for a common European framework for such Funds, considering the different frameworks in place in several member states. The key proposals from ESMA, as reflected in the changes proposed to the Alternative Investment Fund Managers Directive (“AIFMD”), have been considered by the FSRA in developing the Private Credit Fund Framework.
5. Credit funds in jurisdictions such as Ireland, Germany, Spain, Malta and Italy
   operate within established regulatory frameworks that impose investment and operating restrictions to address risks. Such Funds are typically closed-ended or have limited redemption rights and a fixed term. 1 https://enterprise-sharing.ft.com/redeem/5812e295-225b-4577-93c9-c4a110adc144 2 https://enterprise-sharing.ft.com/redeem/40a99b25-b86c-4f6e-8321-cae9c6e8330f 3 https://www.esma.europa.eu/sites/default/files/library/2016-596_opinion_on_loan_origination.pdf Background

Consultation Paper No. 8 of 2022
Potential for systemic risk
6. The growth of the size and importance of credit funds and other non-bank
sources of Credit has been identified by the Financial Stability Board and others as a potential source of risk to the greater economy, as reliance upon such non￾traditional sources of liquidity grows. Unlike banks, credit funds are not required to hold surplus capital to withstand economic shocks and are subject to the demands of Unitholders, who may individually seek to exit their investment, or collectively may decide to wind up the Fund. Such an exit may adversely impact borrowers which rely upon credit funds as sources of capital, with potential adverse consequences for the economy as a whole
7. The FSRA believes that credit funds that might be based in ADGM in the near
term will not constitute a significant proportion of the overall amount of lending in either the State or the region. The FSRA is therefore proposing a risk￾proportionate, ‘wait and see’ approach to the imposition of constraints that are found in some jurisdictions with a larger, more developed credit funds industry.
8. Within the credit fund industry in benchmarked jurisdictions, a variety of
strategies are employed to locate suitable investment opportunities as well as address risk. Sources of investments, beyond origination, may include participation in syndicated lending, co-investment alongside institutional Lenders as well as the purchase of instruments creating or acknowledging indebtedness such as trade receivables. Measures used to address risk include the use of security over the assets of the debtor or other credit enhancement measures such as guarantees, as well as the assessment of creditworthiness and the appropriate pricing of the Credit Facility being offered or instrument purchased. Investor base and maximum term
9. Given the inherent risks and limited liquidity of credit funds, it is the FSRA’s view
that such Funds are unsuitable for investment by Retail Clients, and should be operated as either a Qualified Investor Fund or Exempt Fund, referred to as a ‘Private Credit Fund’ for the purposes of this consultation paper.
10. The Private Credit Fund Framework does not currently specify a maximum term
on the duration of a Private Credit Fund; the FSRA is of the view that, given the closed-ended nature of the Fund, investor appetite will dictate the maximum term for which potential Unitholders may be willing to invest. Permitted investments
11. Private Credit Funds will be required to restrict their investments to Credit
Facilities which include loans which the Fund may originate, purchase or participate in as well as Specified Investments which create or acknowledge Proposed Private Credit Fund Framework

Consultation Paper No. 8 of 2022 indebtedness. Private Credit Funds will be permitted to invest in equity securities of entities or groups to which it has extended Credit and may hold non-Credit related Financial Instruments for treasury, cash management and hedging purposes.
12. Private Credit Funds will also be required to adhere to specific operating
restrictions, addressing conflicts of interest, concentration risk, disclosure, reporting, stress testing and leverage. Specific requirements include:
a. a requirement that a Private Credit Fund be closed-ended; b. a requirement that the Fund Manager must be located within ADGM;
c. a prohibition upon lending to certain types of borrowers, including Natural
Persons, other Funds, Related Persons, other Lenders, Financial Institutions and Persons intending to use proceeds of the Credit Facility for speculative investment purposes; d. concentration risk investment restrictions which require the Fund to diversity its exposures across multiple borrowers, while retaining flexibility that gives the Fund sufficient time to expand its loan portfolio to achieve the desired level of diversification; e. a requirement to document the Fund’s risk appetite statement and credit risk monitoring methods and disclose the same to potential Unitholders; and f. the adoption of a pricing methodology relating to Credit and systems and controls necessary to monitor the Fund’s existing Credit Facilities, including policies relating to the renewal and refinancing of Credit Facilities. Question 1 Should a Private Credit Fund be permitted to operate as a hybrid or ‘mezzanine’-type Fund, which may make equity investments in the businesses to which it extends Credit? Stress testing
13. The Private Credit Fund Framework compels a Fund Manager of a Private Credit
Fund to employ comprehensive and robust stress testing methods which consider principal market risk factors at a minimum on a monthly basis, such as changes in interest rate, FX rates and credit spreads, and apply multifactor stress testing considering severe economic events at minimum on a quarterly basis. The results of such stress testing are to be shared with the Governing Body of the manager of the Private Credit Fund at least quarterly.

Consultation Paper No. 8 of 2022
Question 2
Do you agree with the proposed approach to stress testing? Is the frequency of stress testing and reporting sufficient? The FSRA seeks comments concerning other additional stress testing scenarios which should be contemplated. Leverage
14. Whilst the FUND Rules do not currently limit the amount of financing a Fund
marketed to Professional Clients may employ to meet its objectives, amongst benchmarked jurisdictions limits on leverage have been imposed upon Private Credit Funds to contain the potential contagion effect of borrower default. The FSRA, after considering the levels of restrictions imposed in benchmarked jurisdictions, is of the view that a limit upon leverage is warranted. The Private Credit Fund Framework proposes to limit the use of leverage by the Fund to 100% of Net Asset Value (NAV), i.e. imposing a cap of 50% loan to value of the Fund’s portfolio. Question 3 Do you agree with the proposed limit upon leverage which may be used by a Private Credit Fund? Private Credit Funds within the FSRA’s regulatory framework
15. Given the significant systems and controls required to operate a Private Credit
Fund, the FSRA is of the view that a Private Credit Fund is unsuitable to qualify as a Venture Capital Fund.
16. Subject to specific exceptions, the FSRA currently requires ADGM-based lending
businesses and the persons who exercise rights under a Credit Facility on their behalf to possess a Financial Service Permission (“FSP”) enabling the firm to engage in Providing Credit. The FSRA’s view is that it would be impracticable to impose these FSP requirements (and associated organisational and prudential requirements) upon Private Credit Funds and their respective Fund Managers. The FSRA therefore proposes that Private Credit Funds and their Fund Managers be exempted from the requirement to hold a FSP, or satisfy a specified Base Capital Requirement, to carry on the Regulated Activities of Providing Credit or Arranging Credit.
17. Similarly, the FSRA considers the current fee and capital requirements to be
appropriate for managers of Private Credit Funds.
18. As with all Funds, a Fund Manager of a Private Credit Funds must perform
Customer Due Diligence (“CDD”) in respect of both the Unitholders of the Fund as well as the counterparties which enter into transactions with the Fund, in order to satisfy its obligations according to the AML Rulebook. In the case of a Private Credit Fund, a Fund Manager must perform CDD in relation to all borrowers and

Consultation Paper No. 8 of 2022 prospective borrowers which seek to obtain Credit from the Fund, or sell debt instruments to the Fund. Summary
19. The FSRA is proposing a proportionate, risk-appropriate regulatory framework
enabling Fund Managers in ADGM to manage Funds which may invest in Credit Facilities, whether originated by the Fund or acquired from third parties, that balances the desire to respond to industry demand with necessary regulatory safeguards to ensure that such Funds operate in a safe and sound manner.
20. In order to implement the Private Credit Fund Framework, the FSRA proposes
to introduce amendments to FSMR to enable Private Credit Funds and their managers to offer and arrange Credit, respectively, without imposing additional FSP requirements.
21. Proposed amendments to FUNDS and GLO would include the definition of a
Private Credit Fund and establish the operating and investment restrictions set out above in a new Chapter 13A. A number of additional consequential amendments would be required across several Rulebooks. The proposed FSMR amendments are set out in Annex A to this paper, while the proposed amendments to the Rulebooks are contained in Appendices 1 to 4.
22. Additionally, the FSRA is proposing to provide guidance (see Attachment 1) to
Fund Managers operating a Private Credit Fund, which will also cover their ongoing regulatory requirements after the granting of a Financial Services Permission. The detailed, proposed legislative amendments and proposed guidance are set out as follows.

• Annex A: Financial Services and Markets Regulations 2015 (FSMR)
• Appendix 1: Funds Rules (FUNDS)
• Appendix 2: Glossary (GLO)
• Appendix 3: Islamic Finance Rules (IFR)
• Appendix 4: Markets Rules (MKT)
• Attachment 1: Supplementary Guidance concerning Private Credit Funds
  Question 4
  Do you have any additional comments on the draft legislative amendments to implement the Private Credit Funds Framework? Proposed amendments to FSMR and FSRA Rulebooks

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Annex A
FINANCIAL SERVICES AND MARKETS (AMENDMENT No X) REGULATIONS 2023

Annex A
FINANCIAL SERVICES AND MARKETS (AMENDMENT NO X) REGULATIONS 2022 Regulations to amend the Financial Services and Markets Regulations 2015. Date of Enactment: [•] 2023 The Board of Directors of the Abu Dhabi Global Market, in exercise of its powers under Article 6(1) of Law No. 4 of 2013 concerning the Abu Dhabi Global Market issued by His Highness the Ruler of the Emirate of Abu Dhabi, hereby enacts the following Regulations–
1. Amendments to the Financial Services and Markets Regulations 2015
…
Part 22 General
258. Definitions
(1) In these Regulations, unless the context otherwise requires— … Borrower means a person who receives Credit under a Credit FacilityAgreement or a person to whom the rights and duties of a borrower under a Credit FacilityAgreement have passed by assignment or operation of law. Credit Facility Agreement means any facility which includes any arrangement or agreement which extends monetary Credit whether funded or unfunded to a Person including but not limited to any loan or syndicated loan, mortgage, overdraft, financial lease, letter of credit, financial guarantee, trade finance, transaction finance, project finance or asset finance. Lender means- (a) the person providing Credit under a Credit FacilityAgreement; or (b) … Private Credit Fund has the meaning given to that term in the Rules made by the Regulator.

Annex A
…
Chapter 3 Advising on Investments or Credit
The activity
28. Advising on Investments or Credit
(1) Advising a person is a specified kind of activity if the advice is— (a) advice on the merits of his doing any of the following (whether as principal or agent)— (i) Buying or Selling a Specified Investment (other than a Credit FacilityAgreement) or a Virtual Asset, or subscribing for or underwriting a particular investment which is a Specified Investment (other than a Credit FacilityAgreement) or a Profit Sharing Investment Account; (ii) exercising any right conferred by such an investment to Buy, Sell, subscribe for or underwrite such an investment; or (iii) entering into a Credit FacilityAgreement; and (b) given to the person in his capacity as (i) an investor or potential investor; (ii) agent for an investor or a potential investor; (iii) Borrower or potential Borrower; or (iv) agent for a Borrower or potential Borrower. …
Chapter 7 Credit
The activity
Providing Credit
(1) Entering into a Credit FacilityAgreement with a person in his capacity as a Borrower or potential Borrower is a specified kind of activity. (2) It is a specified kind of activity for the Lender or another person to exercise, or to have the right to exercise, the Lender's rights and duties under a Credit FacilityAgreement. Exclusions Incidental or connected lending and general exclusions (1) An Authorised Person does not enter into a Credit FacilityAgreement as Lender where entering into the agreement is incidental to or in connection with transactions in Specified Investments (other than Credit FacilitiesAgreements) or the carrying on of the Regulated Activities of Effecting Contracts of Insurance or Carrying Out Contracts of Insurance as Principal.

Annex A
(2) An Authorised Person does not Provide Credit when carrying on the Regulated Activity of Managing a Collective Investment Fund in relation to a Private Credit Fund. (3) A Collective Investment Fund that is a Private Credit Fund does not carry on the Regulated Activity of Providing Credit. (2)(4) Paragraph 48 is also subject to the exclusions in paragraphs 76 and 77. The activity Arranging Credit Making arrangements for another person, whether as principal or agent, to borrow money by way of a Credit FacilityAgreement is a specified kind of activity. Exclusions (1) A person does not Arrange Credit by— (a) providing means by which one party to a transaction is able to communicate with other such parties; (b) making arrangements under which another person accepts or is to accept an instrument creating or acknowledging indebtedness in respect of any loan, Credit, guarantee or other similar financial accommodation which he or his principal has made or provided; (c) making arrangements having as their sole purpose the provision of finance to enable a person to Buy, Sell, subscribe for or underwrite investments; or (d) making arrangements for the issue or redemption of Securities issued by that person.; or (e) Managing a Collective Investment Fund that is a Private Credit Fund. (2) A person does not Arrange Credit if the activity— (a) is carried on in the course of carrying on the activities specified in Rules 4 or 5 of the Commercial Licensing Regulations 2015 (Controlled Activities) Rules 2015, which does not otherwise consist of the carrying on of Regulated Activities; (b) may reasonably be regarded as a necessary part of any other services provided in the course of carrying on the activities specified in those rules; and (c) is not remunerated separately from the other services.

Annex A
Chapter 18
Exclusions Applying to Several Specified Kinds of Activity …
76. Activities carried on in connection with the sale of goods or supply of services
…
(9) There is excluded from paragraph 48 the entering into of a Credit FacilityAgreement by a supplier with a Customer for the purposes of or in connection with the sale of goods or supply of services, or a related sale or supply.
77. Groups and Joint Enterprises
…
(7) There is excluded from paragraph 48 the entering into of a Credit FacilityAgreement by a person if— (a) he is a member of a Group and enters into the agreement with another member of the same Group; or (b) he is, or proposes to become, a participator in a Joint Enterprise and the Credit FacilityAgreement is entered into with another person who is, or proposes to become, a participator in that enterprise for the purposes of or in connection with that enterprise.
Part 3
Sepcified Investments
…
97. Credit FacilityAgreement
Rights under a Credit FacilityAgreement.
…

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Appendix 1
Fund Rules (FUNDS)
*In this attachment underlining indicates new text and striking through indicates deleted text.

Appendix 1
…
3.4 The different types of Domestic Funds
This table illustrates the different Rules applicable to the three categories of Domestic Fund. The Fund Rules Chapters Public Fund Exempt Fund QIF … … … …
Chapter 13A: Requirements Specific
to Private Credit Funds
✓ ✓
… … … …
4. SPECIALIST CLASSES OF FUNDS
4.1 Specialist Funds
4.1.1 (1) A Domestic Fund that falls within one or more of the criteria specified in Rules
4.1.2 to 4.1.4 4.1.7 is hereby prescribed to be a Domestic Fund of that specialist
class or classes.
(2) A Foreign Fund that falls within one or more of the criteria specified in Rules
4.1.2 to 4.1.4 4.1.7 is hereby prescribed to be a Foreign Fund of that specialist
class or classes for the purposes of:
(a) managing that Fund in the Abu Dhabi Global Market; (b) marketing of the Units of that Fund in or from the Abu Dhabi Global Market; or (c) determining whether a Domestic Fund investing in such a Fund continues to meet any criteria or other requirements applicable to that Domestic Fund. … Private Credit Fund
4.1.7 A Fund is a Private Credit Fund if:
(a) it is a Domestic Fund that is either an Exempt Fund or a Qualified Investor Fund; (b) it is closed-ended; and (c) its operations are limited to:
(i) investment in Credit Facilities, whether by origination, purchase or participation; (ii) investment in Specified Investments which create or acknowledge indebtedness;

Appendix 1
(iii) activities related to (i)-(ii), including investment in the equity of a legal entity or the group to which it belongs and to which the Private Credit Fund lends; and (iv) the holding of Financial Instruments for the purposes of treasury, cash management and hedging. Guidance A Venture Capital Fund may not be a Private Credit Fund. …
12.3 Duties in relation to Fund Property
…
Risk management
12.3.10 A Fund Manager of a Domestic Fund must ensure that the risks inherent in the
operation of a Fund are adequately addressed, with due regard to the nature of the strategies and investment process employed by the Fund Manager and the role of Fund Administrators and Eligible Custodians and where appointed, prime brokers. (1) The Fund Manager of a Domestic Fund must, to the extent proportionate given the nature of the Domestic Fund and the nature and scale of the Fund Manager, ensure functional and hierarchical separation and independence between:
(a) the risk management functions (Fund valuation and asset pricing); and (b) the portfolio management functions (the investment management process). (2) Where the Fund Manager is unable to demonstrate adequate separation and independence in accordance with (1), the Regulator may require the Fund Manager to appoint an independent, suitably competent and experienced Fund Administrator to perform the functions specified in (1)0. Guidance

1. To provide segregation of the net asset value determination process of the
   Fund from the investment management process, generally personnel involved in the former should not be involved in the latter. An effective method of achieving such segregation is to delegate the calculation, determination and production of the net asset value to a suitably competent and experienced third party Fund Administrator.
2. Additional risk management requirements applicable to the Fund Manager
   of a Private Credit Fund are included in Chapter 13A.
   13A. REQUIREMENTS SPECIFIC TO PRIVATE CREDIT FUNDS 13A.1 Application

Appendix 1
13A.1.1 Chapter 13A applies in its entirety to the Fund Manager and, if appointed, the Trustee of a Private Credit Fund, unless otherwise expressly provided in this
Chapter.
Guidance

1. This Chapter must be read in conjunction with the FUNDS Rulebook as it
   contains additional Rules that are applicable to Funds and Fund Managers generally.
2. Fund Managers of Private Credit Funds are subject to specific systems and
   controls requirements that are included in this chapter. Additionally, Private Credit Funds are subject to concentration and diversification requirements that all other Exempt Funds and Qualified Investor Funds are not subject to. 13A.2 Systems and controls requirements for Fund Managers of Private Credit Funds 13A.2.1 The Fund Manager of a Private Credit Fund must maintain documented systems and controls that include suitable policies and procedures designed to ensure:
   (a) a Fund risk appetite statement is designed and incorporated into its investment process; (b) that provision of Credit to a Borrower is only made based upon a sound assessment and pricing methodology; (c) the ongoing monitoring of granted Credit, including policies for renewals and refinancing; (d) that adequate risk management is undertaken, including in relation to credit risk and concentration risk; (e) the application of stress testing methodologies as set out in Section 13A.7, below; (f) the management of collateral; (g) that bad debt and impairments are identified and managed; and (h) the timely, appropriate and accurate valuation of the Fund Property. 13A.3 Eligible investments and diversification requirements 13A.3.1 The Fund Manager of a Private Credit Fund must not allow for Credit to be provided to, or for the benefit of:
   (a) Natural Person(s);
   (b) an Affected Person;
   (c) a Collective Investment Fund;

Appendix 1
(d) a Person intending to utilise such financing for the purpose of speculative investment; or (e) a Bank or Lender. 13A.3.2 A Fund Manager must ensure that the investment strategy of a Private Credit Fund is designed to achieve a portfolio that meets the Fund’s specified diversification and concentration policies within a suitable, stated timeframe. 13A.3.3 The investment strategy of a Private Credit Fund must limit the maximum exposure to a single borrower (or group of connected borrowers) to 20% of the Net Asset Value of the Fund. 13A.4 Borrowing and leverage 13A.4.1 The Fund Manager must ensure that borrowing by a Private Credit Fund must not exceed 100% of the Net Asset Value of the Fund. 13A.5 Disclosure 13A.5.1 The prospectus issued or distributed in respect of a Private Credit Fund must include a prominent risk warning which draws attention to the unique risks which arise from investing in Credit and how the value of an investment in a Private Credit Fund is not guaranteed and is subject to the possibility of investment losses and illiquidity. In addition, the prospectus must include:
(a) information on the risk and reward profile to enable investors to identify the specific risks linked to a loan origination strategy; (b) information on the extent to which the Private Credit Fund intends to be concentrated as regards individual entities, geographical locations and sectors and the risks arising from those proposed concentrations; (c) details of the credit assessment and monitoring process used by the Private Credit Fund; and (d) information on whether the Fund Manager will provide Unitholders or potential Unitholders with access to records and staff for the purposes of a due diligence process as well as the terms and conditions under which such access may be granted. 13A.6 Reporting 13A6.1 The periodic reports issued by a Private Credit Fund must include the following information:
(a) a breakdown of the originated loans between senior secured debt, junior debt and mezzanine debt; (b) a summary of all committed, but undrawn Credit Facilities; (c) a breakdown of the originated loans between loans made with an amortising repayment schedule and loans made with bullet repayments;

Appendix 1
(d) a breakdown of the loan to value ratio for each originated loan; (e) information in respect of non-performing exposures and exposures subject to forbearance activities; and (f) material changes to the credit assessment and monitoring process of the Private Credit Fund. 13A.7 Stress testing 13A.7.1 The Fund Manager of a Private Credit Fund must have a comprehensive stress testing programme that:
(a) identifies possible events or future changes in economic conditions that could have unfavourable effects on the Private Credit Fund's credit exposures and assess the Private Credit Fund's ability to withstand such changes; (b) requires the outcomes of applying stresses to be compared against internal risk limits established by the Fund Manager in respect of the Private Credit Fund; (c) considers the evolution of both specific transactions and aggregate exposures, reflecting all forms of counterparty credit risk at the level of specific counterparties, across an appropriate time horizon that represents meaningful stress testing; (d) provides at least monthly exposure stress testing of principal market risk factors such as interest rates, FX and credit spreads for all counterparties of the Private Credit Fund in order to identify and enable the Fund Manager to reduce significant concentrations, relative to the internal risk limits, and specific risks when necessary; (e) provides at least quarterly multifactor stress testing scenarios and assess material risks including yield curve exposure and basis risks. Guidance Multiple-factor stress tests should, at a minimum, address scenarios where:
(a) severe economic or market events have occurred; (b) broad market liquidity has decreased significantly; (c) a large financial intermediary is liquidating positions. 13A.7.2 The results of stress testing performed in accordance with Rule 13A.7.1 must be reported regularly, at least on a quarterly basis, to the Governing Body of the Fund Manager. …

Appendix 1
APP 5 CONSTITUTION OF A DOMESTIC FUND
…
A General Information
The following information:
…
(5) The legal form of the Fund and whether it is open- or closed￾ended. … ..

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Appendix 2
GLOSSARY (GLO)
*In this attachment underlining indicates new text and striking through indicates deleted text.

Appendix 2
1.2 Defined Terms
1.2.1 In the Rulebooks:
(1) a word or phrase which is defined in GLO is a defined term and has the meaning given in GLO; and (2) a word or phrase which relates to a defined term must be interpreted accordingly. …. Defined Terms Definitions Associate In relation to:
(a) MIR and Chapter 8 of GEN, means, in respect of a person Person ‘A’ holding Shares or entitled to control the exercise of voting power in an Authorised Person or a Holding Company of an Authorised Person:
(i) the spouse of A;
(ii) a child or stepchild of A;
(iii) the trustee of any settlement, including any disposition or arrangement under which property is held on trust or subject to a comparable obligation, under which A has a life interest in possession; (iv) an Undertaking of which A is a director; (v) a Person who is an Employee or partner of A; (vi) where A is an Undertaking:
(A) a director of A;
(B) a subsidiary or wholly owned subsidiary of A; (C) a director or Employee of such a subsidiary or wholly owned subsidiary; or (vii) a Person who has an agreement or arrangement with A with respect to the acquisition, holding or disposal of Shares or other interests in the Authorised Person or the Holding Company of an Authorised Person or under which they undertake to act together in exercising their voting power in relation to an Authorised Person or the Holding Company of an Authorised Person or that other Person. (b) MKT, a person (the second person) is an associate of another Person (the primary person Person ‘A’) in relation to a Listed Entity if one or more of the following applies:

Appendix 2
(i) in the case A of a primary person who is a natural person, the second person is an entity Undertaking controlled by A the primary person controls; (ii) in the case A of a primary person who is an Undertaking entity, the second person is an Undertaking entity:
(A) the primary person A controls; or
(B) that controls A the primary person; or
(C) that is controlled by any Person entity that controls A the primary person; (iii) the second person is a Person with whom A the primary person has, or proposes to enter into, a relevant agreement for the purpose of controlling or influencing the composition of the Listed Entity’s board or the conduct of the Listed Entity’s affairs; or (iv) the second person is a Person with whom A the primary person is acting, or is proposing to act, in concert in relation to the Listed Entity’s affairs. (c) a Related Party of a natural person is to be taken to be an associate of the natural person unless the contrary is established. (c) References other than in MIR, MKT and GEN Chapter 8, means, in respect of a Person ‘A’, any Person, including an affiliated company which is:
(i) an Undertaking in the same Group as A; or (ii) any other person whose business or domestic relationship with A or his Associate might reasonably be expected to give rise to a community of interest between them which may involve a conflict of interest in dealings with third parties. (d) In all Rulebooks, if ‘A’ is a natural person, a Close Relative of A is taken to be an Associate unless the contrary is established. Credit Agreement Means any facility which includes any arrangement or agreement which extends monetary Credit whether funded or unfunded to a Person including but not limited to any loan or syndicated loan, mortgage, overdraft, financial lease, letter of credit, financial guarantee, trade finance, transaction finance, project finance or asset finance. Lender Has the meaning given in section 258 of FSMR. Private Credit Fund Has the meaning given in FUNDS Rule 4.1.7.

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Appendix 3
Islamic Finance Rules (IFR)
*In this attachment underlining indicates new text and striking through indicates deleted text.

Appendix 3
2.4 Islamic financial instruments and products
Authorised Persons
2.4.1 Unless otherwise stated in these Islamic Finance Rules, an Authorised Person
(whether acting as an Islamic Financial Institution or through an Islamic Window) will be entitled to carry on any Regulated Activity or specified category of Regulated Activity as Islamic Financial Business provided that:
(a) it has complied with all other applicable provisions of the Rulebooks issued by the Regulator in relation to the Regulated Activity or specified category of Regulated Activity to be carried on as Islamic Financial Business; and (b) the carrying on of such Regulated Activity or specified category of Regulated Activity as an Islamic Financial Business has been approved by its Shari'a Supervisory Board. Guidance … (x) Specified Investments are defined paragraphs 84 to 99 of FSMR. Any of the conventional specified investments defined paragraphs 85 to 99 of
Schedule 1 to FSMR can be offered in Shari’a-compliant form, provided
that the directions of the Shari'a Supervisory Board engaged in connection with such offer are complied with. Shari’a-compliant Specified Investment include, without limitation:
…
(F) rights under a Credit Facility Agreement where such Credit Facility Agreement is structured in the form of a Shari'a￾compliant Ccredit Facilityagreement including, without limitation, Shari'a-compliant Ccredit Facilitiesagreements using a Murabaha, Ijara, Istisna'a/Ijara, Wakala, Mudaraba and/or Musharaka structure. (xi) The Regulator will, when considering whether or not a Shari'a-compliant investment is a Specified Investment, take a "substance over form" approach giving particular weight to the economic substance of a particular investment over the legal and/or Shari'a form taken by that investment. (xii) The ADGM regulatory regime applies to Authorised Persons who carry on in the ADGM any regulatory activity in relation to any Shari’a-compliant products that fall within the definition of Specified Investments. However, particular products or instruments including, without limitation, Profit Sharing Investment Accounts (PSIAs), Takaful and Islamic Funds attract product/instrument specific additional conduct and other requirements, which are included in these Islamic Finance Rules. …

Appendix 3
2.5 Shari’a-compliant Regulated Activity
2.5.1 For the purposes of paragraph 64 of Schedule 1 to FSMR, carrying on a Regulated
Activity in manner that complies with Shari'a is a specified kind of activity. Such Shari'a-compliant Regulated Activities shall include without limitation:
…
(g) providing Shari'a-compliant Credit under Credit FacilitiesAgreements;

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Appendix 4
Market Rules (MKT)
*In this attachment underlining indicates new text and striking through indicates deleted text.

Appendix 4
APP 1 CONTENT OF A PROSPECTUS
….
A1.2 Securities note
A1.2.1 This table forms part of Rule 4.5.1(3)(c).
A1.2.2 (1) The reference to an "Issuer" in this APP 1 is a reference to the Person offering Securities under the Prospectus as specified in Rule 1.1.1(2)(a) and (b). (2) An Issuer must include the specified information in relation to the Securities identified with a "✓" in this table which are the subject of the relevant Prospectus. (3) If an asterisk is used when identifying a Security, the requirement to provide the item of information for that Security is qualified as specified in the relevant item. …. A1.2.2 CONTENTS OF PROSPECTUS – SECURITIES NOTE Shares Shares Warrants over Debentures Debentures Warrants over over Certificates Shares Debentures over Certificates Products Structured ….
7. ASSET BACKED SECURITIES
7.1 If the Securities or the underlying Securities are asset backed, describe all the material attributes
of the asset backed Securities, including:
(a) information about the assets backing the Securities including:
✓ ✓ ✓ ✓

Appendix 4
A1.2.2
CONTENTS OF PROSPECTUS – SECURITIES NOTE
Shares
Shares
Warrants over
Debentures
Debentures
Warrants over over
Certificates
Shares
Debentures over
Certificates
Products
Structured
….
(f) details of arrangements or other matters that may impact repayment of the principal capital or return on that capital to the holders of the Securities, including:
….
(iv) if the assets backing the Securities include loans and Credit Agreements Facilities; the principal lending criteria and an indication of any loans which do not meet these criteria and any rights or obligations to make further advances; ….

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Attachment 1
Supplementary Guidance – Private Credit Funds

Attachment 1
TABLE OF CONTENTS

1. INTRODUCTION .............................................................................................................................3
2. PRIVATE CREDIT FUNDS ............................................................................................................3
3. INVESTMENT RESTRICTIONS AND DIVERSIFICATION.......................................................4
4. SYSTEMS AND CONTROLS ........................................................................................................4

Attachment 1

1. INTRODUCTION
   1.1 This Guidance is issued under section 15(2) of the Financial Services and Markets
   Regulations 2015 (“FSMR”). It should be read in conjunction with FSMR, the relevant Rulebooks of the Financial Services Regulatory Authority (the “Regulator”) and the Guidance & Policies Manual of the Regulator. Unless otherwise defined or the context otherwise requires, the terms contained in this Guidance have the same meanings as defined in FSMR and the Glossary Rulebook (“GLO”).
   1.2 This Guidance is not an exhaustive source of the Regulator’s policies. The Regulator is
   not bound by the statements contained in this Guidance and may impose further, specific conditions to address any additional risks posed by the activities of an Authorised Person.
   1.3 The Guidance is relevant to Authorised Persons and Applicants seeking to act as a Fund
   Manager of a Private Credit Fund, as it describes the Regulator’s interpretation of the requirements which a Fund Manager of a Private Credit Fund must satisfy. These requirements are in addition to those generally applicable to all Authorised Persons contained in the General Rulebook (“GEN”), as well as those applicable to Fund Managers generally, as in the Fund Rules (“FUNDS”).
   1.4 In particular, this Guidance includes the eligibility and authorisation criteria that
   applicants must satisfy to be authorised as a Fund Manager in respect of a Private Credit Fund, as well as the ongoing regulatory requirements pertaining to Private Credit Funds.
2. PRIVATE CREDIT FUNDS
   2.1 Private Credit Funds are Funds that provide financing to companies as an alternative to
   traditional financing sources. Private Credit Funds will often have a specific risk appetite and as a result they are often able to provide Credit to start up and smaller businesses that may otherwise find it difficult to obtain lending from traditional sources.
   2.2 Private Credit Funds may also participate in non-direct lending via participation in
   syndicated loans, by purchasing loans from an originating Lender or by investing in trade receivables. In such cases, this guidance should be read in that context. Investors
   2.3 Private Credit Funds provide investors exposure to higher returns by investing in Credit
   Facilities and debt related instruments provided by higher risk debtors. Such investors should be sophisticated and financially well-resourced, and capable of understanding the risks involved. As such, the Regulator has limited Private Credit Funds to include only Exempt Funds and Qualified Investor Funds which may be offered to Professional Clients. Regulatory framework
   2.4 The Regulator has developed Rules in FUNDS that impose specific investment and
   operational requirements on Private Credit Funds and the Fund Managers that manage them. The Fund Manager of a Private Credit Fund must demonstrate to the Regulator that it has appropriate systems and controls in place which enable such requirements to be met.

Attachment 1
3. INVESTMENT RESTRICTIONS AND DIVERSIFICATION
3.1 The Regulator has put in place certain investment restrictions whereby Private Credit
Funds may not offer Credit to certain borrowers, including, but not limited to, natural persons, Affected Persons, speculative investors, Funds or other Lenders.
3.2 A Private Credit Fund Manager is also required to ensure that the investment strategy of
a Private Credit Fund will result in a diverse set of Credit counterparties in order to avoid a concentration risk. A Fund Manager of a Private Credit Fund should establish a clear diversification policy that is achievable within a reasonable, stated timeframe from the launch of the Fund. If the Fund will not satisfy its diversification policy, the Regulator expects that the Fund Manager should notify Unitholders and provide options for resolution.
4. SYSTEMS AND CONTROLS – MINIMUM REQUIREMENTS
4.1 The Regulator has enacted rules to ensure that Fund Managers of Private Credit Funds
implement and maintain suitable systems and controls to address risk, including, but not limited to, the following. Requirement Note Risk Appetite Statement A Fund Manager operating a Private Credit Fund must develop and adhere to a risk appetite statement for the Fund. Typically this will drive and / or form part of a Private Credit Fund’s investment policy as stated in the Prospectus and Constitution of the Fund. The risk appetite statement is necessary in order that potential investors in the Fund may understand the type and nature of the Credit Facilities and debt instruments that the Fund intends to invest in and the credit risk profile of the borrowers that the Fund is seeking. Lending Processes A Fund Manager of a Private Credit Fund must implement and maintain processes to ensure investments in Credit Facilities are only made based on a stated credit risk assessment and pricing methodology. The Regulator understands that such methodologies may differ amongst Fund Managers of Private Credit Funds in line with the risk appetite strategy of their respective Funds, and that lending criteria may differ from the standards adopted by conventional lenders. The Regulator will expect, however, a Fund Manager to be able to demonstrate robust, defined criteria for lending and how such criteria and methods will operate in practice. Risk Management A Fund Manager of a Private Credit Fund is expected to employ techniques that are appropriate to the risks facing the Fund, including, but not limited ongoing credit and concentration risk. Whilst a Fund Manager will inevitably seek to “score” the credit risk of

Attachment 1
Requirement Note each potential borrower as part of its lending process, it will also need to demonstrate how it will measure and mitigate that risk on an ongoing basis. Therefore, the Regulator will expect the Fund Manager to be able to demonstrate systems and controls that allow changes in the credit risk profile of each borrower to be identified over the duration of the Credit Facility. Stress Testing The Fund Manager of a Private Credit Fund is expected to employ stress testing methodologies in order to identify risks that may affect the Fund’s portfolio in adverse scenarios. The Fund Manager should therefore be able to demonstrate to the Regulator that it has systems in place that enable it to regularly stress test the Fund’s portfolio against potential adverse events and market conditions (and combinations thereof). The Fund Manager should also be able to demonstrate a strategy to allow the Fund to mitigate those risks and to take appropriate action should the identified adverse scenarios arise.