CSSF Circular 25/901: a unified framework for the risk management of Luxembourg’s Part II UCIs, SIFs and SICARs

The Circular also introduces a more pragmatic and strategy-driven approach to temporary diversification exemption during the ramp-up period, as follows: 

Overview of the investment limits rules under Circular 25/901 (to update with update of text below)

2. Borrowing & leverage rules

The Circular sets clearer rules in terms of borrowing, including specific thresholds, transparency requirements and exceptions: 

• Temporary borrowing fully covered by investor commitments are not considered as borrowings (same applies to debt issuances linked to the performance of the assets in portfolio)
• Retail investors: Borrowing limit capped at 70% of the assets or commitments
• Well-informed or professional investors:  the limit is under the discretion of the fund
• Leverage is assessed consistently with the borrowing framework

Overview of borrowing rules

3. Transparency rules

Circular 25/901 sets clearer transparency rules at the level of investments, of redemptions and subscriptions, of borrowing, and other information.

Overview of the transparency requirements

4. Techniques for portfolio management

Circular 25/901 clarifies the conditions in which portfolio management techniques (e.g., repurchase or reverse repurchase agreements, securities lending) may be used, as follows:

5. What changes for SICARs

The Circular 25/901 modernizes the SICAR framework by replacing Circular 06/241 and clarifying how “risk capital” must be assessed in practice. The Circular formalizes the three core criteria:

• Development objective: Value creation steps at the level of the tarhet entity must be demonstrated
  
  
• High risk profile: The risks associated must go beyond mere market risk
  
  
• Exit strategy: The objective of SICAR consists, in principle, in acquiring financial assets in order to resell them with a profit after holding period. The investment must be limited in time.

Moreover, it provides specific restrictions in terms of risk capital, including securities, cash, debt, derivative instruments, real estate assets, infrastructure assets, commodities, UCIs, other investment vehicles, investment through intermediary vehicles. Circular 06/241 did not specify such exclusions.

Practical insights

Circular 25/901 introduces an updated concise framework that goes beyond mere compliance: it reshapes how Luxembourg fund managers can approach investment strategies. By clarifying investment limits, defining borrowing and leverage policies, and strengthening transparency requirements, the Circular aims to enhance investor confidence and market integrity. These changes are not restrictive; they create room for innovation, allowing managers to design tailored ramp-up and wind-down periods, explore flexible financing structures, and differentiate their offerings through clearer disclosures.

For forward-thinking managers, this is an opportunity to position their funds as more transparent, resilient, and investor-centric. Enhanced clarity on risk capital and leverage opens doors to attract both retail and sophisticated investors seeking well-governed vehicles. By embracing these principles proactively, managers can turn regulatory evolution into a competitive advantage, reinforcing Luxembourg’s reputation as a hub for alternative investments.

Key recommendations:

• Review and update fund documentation: Clearly define investment limits, borrowing policies, and disclosure practices to align with the Circular while highlighting strategic flexibility
• Implement robust transparency frameworks: Go beyond minimum disclosure — provide detailed insights on portfolio composition, leverage, and risk management to build investor trust
• Leverage ramp-up and wind-down flexibility: Use permitted periods strategically to optimize portfolio deployment and exit timing without breaching investor expectations
• Enhance risk capital assessment processes: Establish internal criteria and governance to ensure investments meet the Circular’s definition of risk capital, reinforcing credibility
• Communicate opportunities to investors: Position these regulatory changes as a value proposition — emphasize improved governance, flexibility, and long-term stability in marketing materials

How EY can help

EY offers comprehensive support to help organizations navigate the regulatory landscape. At the heart of this support is EY Regulatory Compliance Manager (EY RCM), a platform designed to address the challenges of regulatory compliance across wealth and asset management. 

Beyond technology, EY offers a dedicated knowledge team of regulatory experts who provide guidance and insights on all regulatory topics for wealth and asset management. This team ensures you have access to the latest interpretations, best practices, and strategic advice to strengthen your compliance framework. 

EY Law Luxembourg advises sponsors and fund managers throughout the entire fund lifecycle beginning with the structuring and establishment process, helping identify the optimal structure tailored to specific investor needs and strategic objectives. EY Law Luxembourg’s expertise covers both regulated (UCITS, Part II UCIs, SIFs, SICARs) and unregulated (RAIFs/AIFs) vehicles, master-feeder structures, parallel fund structures and incentivization/carry vehicles, across all asset classes (PE/VC/RE/debt/infrastructure) and investment strategies (liquid/illiquid).

Together, EY RCM, EY’s regulatory specialists and EY Law Luxembourg empower you to stay ahead of regulatory changes, reduce compliance risk, and make informed decisions with confidence.