AIFMD II in Cyprus: Supervision Ahead of Legislation

The transposition deadline passed in April without the statute being finished. CySEC has been supervising to the new expectations through circulars regardless, and one of its deadlines bit seven months ago.

Two facts about AIFMD II in Cyprus, which are harder to hold together than they first appear.

The first is that the transposition deadline of 16 April 2026 passed without full Cyprus transposition. Bills to amend the Alternative Investment Fund Managers Law and the UCITS Law are still being progressed. The directive is not yet fully part of Cypriot law.

The second is that CySEC set a deadline of 27 February 2026 for fund managers to complete a substantive piece of AIFMD II compliance, and that deadline has now been and gone.

Both are true at once, and the gap between them is the most important thing for a Cypriot fund manager to understand this year. The legislature has not finished. The supervisor has started anyway.

What AIFMD II actually does

It is worth saying clearly what this directive is not, because the name suggests something larger than the reality.

IN PLAIN TERMS

AIFMD II, formally Directive (EU) 2024/927, is a targeted revision rather than a rewrite. It does not change what an alternative investment fund is, who counts as a manager, or the basic structure of the delegation model. It tightens four specific areas where practice and supervisory expectation have moved on since the original directive in 2013: liquidity management for open-ended funds, oversight of delegated functions, rules for funds that originate loans, and the detail expected in supervisory reporting.

For most Cypriot managers, that framing matters. The question is not whether the fund needs restructuring. It is whether the existing framework can be shown to work, in areas where the standard of proof has risen.

Cyprus is in an unusual position

Member states were required to transpose the directive by 16 April 2026. Cyprus did not, and it is not alone in having found the timetable difficult. What distinguishes the Cypriot position is how CySEC has responded to the gap.

Rather than wait for the amending legislation to complete its passage, the regulator has begun implementing through circulars setting out supervisory expectations in advance of formal transposition. Circular C743 of 19 December 2025 is the principal early instrument, with further guidance following.

This is a pragmatic approach and a defensible one. It gives the market direction rather than leaving it idle while a bill moves through the House. But it puts managers in a position that is genuinely unusual, and which most compliance frameworks are not designed for: being supervised against a standard that is not yet in the statute book.

Cyprus is not the only member state to have found April difficult, and the comparison is instructive rather than embarrassing. Luxembourg, the largest fund domicile in Europe, submitted its own transposition bill to parliament in October 2025 and took the approach of mirroring the directive closely without adding national requirements. The difference is not that Cyprus is behind on legislation. It is that Cyprus has chosen to supervise in the interim rather than pause, which is a more demanding position for managers than a straightforward delay would have been.

The two dates that have already passed

This is the part most likely to have been missed, because the first date arrived before the directive's own deadline and while the local law was still in draft.

Circular C743 required managers of open-ended alternative investment funds, and UCITS management companies, to select at least two of the harmonised liquidity management tools introduced by AIFMD II, and to incorporate them into fund rules, articles of association or partnership agreements. It asked that the corresponding applications or notifications be submitted to CySEC by 27 February 2026. The substantive obligation, that the selection and the supporting policies actually be in place, applied from 16 April 2026.

Both dates are now behind us, and the second is the one that matters. A manager of an open-ended AIF or UCITS that has not embedded liquidity management tools in its fund rules is not merely late with a filing.

Liquidity management tools are the mechanisms a fund can use when redemptions threaten to outpace its ability to sell assets in an orderly way: redemption gates, notice periods, swing pricing, redemption fees, redemptions in kind and similar. AIFMD II harmonises a list of nine across the European Union and requires managers to have chosen from it in advance, rather than improvising under pressure.

The detail of the requirement repays attention, because it is more specific than "pick two". The selection is made from items (2) to (8) of the harmonised list, and it cannot consist only of swing pricing and dual pricing. Suspension of subscriptions and redemptions, and side pockets, sit outside the minimum and remain available to every fund. Money market funds within the meaning of Regulation (EU) 2017/1131 may select a single tool rather than two. And the choice has to be justified against the fund's strategy, liquidity profile and redemption policy, not simply recorded.

The technical detail is settled rather than pending. Commission Delegated Regulation (EU) 2026/465 specifies the characteristics of each tool and has applied since 16 April 2026, though existing funds have until April 2027 to finalise those detailed characteristics. Inclusion of a gate or a levy in a prospectus does not establish that it has been calibrated, or that the administrator can actually operate it.

The population affected is not small. CySEC supervised 312 management companies and collective investment undertakings in the fourth quarter of 2025, with assets under management of around 11.2 billion euros, having reported 11.4 billion across its supervised sector for the year as a whole. Every open-ended structure among them falls within scope.

What changes when the regulator moves first

The practical consequence of supervision running ahead of legislation is a shift in what compliance actually consists of, and it is worth stating explicitly because it changes how a fund should be preparing.

When obligations sit in a statute, compliance is largely a question of reading the text and meeting its terms. When a supervisor is applying expectations in advance of the statute, the question becomes narrower and more practical: what will CySEC expect to see, and can the fund demonstrate it?

That elevates evidence above documentation. A policy that describes an intention is weaker than a record showing the intention was carried out. Minutes, dated decisions, approved amendments and a gap analysis the board has actually seen are worth considerably more in this environment than a well-drafted manual nobody has applied.

There is also a timing risk that is easy to miss. When the amending laws do complete their passage, managers who deferred work until the statute was final will be starting from behind, against a supervisor that has been setting out its expectations for the best part of a year and will reasonably assume the market has been listening.

SUPERVISED ON EVIDENCE Liquidity tools selected, documented, and the constitutional amendments approved by CySEC Delegation arrangements evidenced by real oversight: minutes, reviews, decisions taken here A written record of why each judgement was made, dated at the time it was made The board has seen the gap analysis and can say what remains outstanding

WAITING FOR THE LAW Tools identified in principle, with documentation to follow once the statute is final Delegation described in the programme of operations but thinly evidenced in practice Reasoning held in people's heads, to be written up when somebody asks The board has been told it is in hand, without a date or an owner

The four areas that actually change

Beyond liquidity, three further areas warrant attention, and their relevance varies considerably by fund.

• Delegation and substance. AIFMD II tightens the oversight expected where functions are delegated, including to entities outside Cyprus. The model itself is not altered, but the manager must be able to evidence genuine oversight rather than a contractual arrangement. For an island whose funds industry depends substantially on delegation, this is the provision with the widest reach.

• Loan origination. The directive introduces a harmonised regime for funds that originate loans, including diversification limits, risk retention where loans are transferred, and constraints on leverage and on open-ended structures. Reported guidance in Cyprus has highlighted a 20 per cent limit on exposure to a single borrower in defined circumstances. If your fund does not originate loans, none of this applies; if it does, it is the most substantive change in the package.

• Supervisory reporting. The detail required in regulatory reporting expands, with the relevant technical standards still being finalised at European level. The practical implication is that data which is not currently captured may need to be, and that the time to start capturing it is before the templates arrive rather than after.

• Liquidity management. Covered above, and already subject to a domestic deadline that has passed.

It is worth being honest about the cost of this, because it is not trivial for a smaller manager. Producing a defensible gap analysis, amending constitutional documents, obtaining regulatory approval and building the evidence trail is a real exercise in fees and management time, arriving at a point when the final legal position is not yet settled. The argument for doing it now is not that the work is cheap. It is that the same work becomes substantially more expensive under a deadline, and more expensive again if a supervisor asks first.

If you think this does not reach you

Two categories of manager tend to assume the package is somebody else's problem, and one of those assumptions is safer than the other.

Managers of closed-ended funds are right that the liquidity management tools requirement, which applies to open-ended structures, does not bite in the same way. They are not necessarily outside the delegation and reporting provisions.

Sub-threshold managers, operating below the assets under management levels that trigger full authorisation, are in a more nuanced position. The regime that applies to them is lighter, but it is set nationally and sits within the same legislative amendments now in progress. The safe assumption is not that nothing changes, but that what changes is not yet fully visible, and will become clear when the bills complete.

What to check now

None of the following requires waiting for the statute.

• Establish whether the February deadline was met. Not whether tools were chosen, but whether the constitutional amendments were made and approved. This is a specific, checkable fact and it is the first thing a supervisor would ask.

• Produce a gap analysis and give it to the board. Across liquidity, delegation, loan origination and reporting, with an owner and a date against each item. The existence of the document is itself evidence of a functioning framework.

• Test delegation oversight against what you could show. Not what the agreement says, but what records exist demonstrating that oversight actually happened.

• Identify what data you are not currently capturing. Reporting requirements expand, and historical data cannot be recreated once the period has passed.

• Track the bills. The amending legislation will complete, and the terms on which it does may adjust some of what is currently set out in circulars.

The practical takeaway

The instinct to wait for a final statute before committing resource is a reasonable one in most circumstances. It is the wrong instinct here.

CySEC has made its expectations known, has attached dates to them, and has allowed one of those dates to pass. The amending laws will arrive and will settle the detail. But the standard being applied in the meantime is real, and the evidence that a fund met it has to be created contemporaneously. It cannot be assembled afterwards from memory.

Anyone who followed the end of the MiCA transition earlier this year will recognise the shape of the risk. The misunderstanding there was that a pending application permitted continued operation. The misunderstanding here is that an unfinished statute permits continued waiting. Neither is correct, and in both cases the cost of the error falls due at the least convenient moment.