I. Background
Under the reform of the alternative investment fund managers directive (AIFMD) and undertakings for collective investment in transferable securities directive (UCITSD), the European Securities and Markets Authority (ESMA) was mandated to namely (i) draft regulatory technical standards (RTS) to determine the characteristics of the liquidity managements tools set out in Annex V of AIMFD and Annex IIA of UCITSD, and (ii) develop guidelines (the Guidelines) on the selection and calibration of liquidity management tools by alternative investment fund managers (AIFMs) or UCITS management companies (UCITS ManCos).
In that context, ESMA launched on 8 July 2024 two consultations (the Consultations) on liquidity management tools (LMTs), respectively on draft Guidelines and RTS under the revised AIFMD and the UCITSD. These aim to harmonise liquidity risk management in the investment funds sector, mitigate potential financial stability risks and enhance EU fund managers’ ability to manage fund liquidity during market stress situations. For more information on ESMA Consultations, please refer to our publication of 26 July 2024.
On 15 April 2025, ESMA published its final draft RTS and Guidelines on LMTs.
The purpose of this publication is to provide an overview of the key elements of ESMA’s final draft RTS and Guidelines and the key changes following feedback from the Consultations.
II. Key elements
a. The RTS
The RTS define the constituting elements of each LMT in turn, such as calculation methodologies and activation mechanisms (the below list containing the most relevant parts):
Redemption gates:
They must have an activation threshold and apply to all investors. In the Draft RTS, ESMA has introduced flexibility in defining activation thresholds for redemption gates. For AIFs, thresholds can be expressed as a percentage of the net asset value (NAV), a monetary value, a combination of both, or a percentage of liquid assets. Additionally, either net or gross redemption orders shall be considered when determining the activation threshold.
ESMA has also introduced a new alternative method for applying redemption gates. Under this method, redemption orders that are below or equal to a certain pre-determined amount can be fully executed, while orders exceeding this amount are subject to the redemption gate. The aim of this is to prevent small redemption orders from being impacted by larger redemption orders pushing the total orders amount above the activation threshold.
Extension of notice period:
When the notice period is extended, the dealing frequency of AIFs/UCITS should not be modified. The extension shall apply to all investors.
Anti-dilution levies (ADL):
They cover estimated explicit and implicit costs of subscriptions or redemptions, including significant market impacts of asset transactions. Anti-dilution levies can be expressed as a percentage of the orders or as a monetary value.
They may be applied when the difference between redemption and subscription orders on a given date exceeds a set threshold. If this threshold is exceeded: (a) For net redemptions, the levy is deducted from the amount paid to redeeming investors. (b) For net subscriptions, the levy is charged to subscribing investors.
Redemptions in kind (RiK):
They should only be available for redemption orders placed by professional investors and executed on a pro-rata basis of their assets held by the AIFs/UCITS.
In the usual course of regular dealing activities involving the direct redemption of shares in a AIF/UCITS exchange-traded fund (ETF) by an authorised participant or market-maker, the transfer, either in full or in part, of underlying securities held by, or on behalf of, a AIF/UCITS ETF to authorised participants or market-makers to fulfil such redemption requests shall not be regarded as the activation of the liquidity management tool for redemptions in kind.
Side pockets:
They shall take the form of a physical separation or an accounting segregation of assets for which there are valuation issues or legal uncertainty.
ESMA did not incorporate any provisions regarding the management of side pockets in the Draft RTS, as they determined that this was not in the scope of the mandate.
b. The Guidelines
These Guidelines aim at establishing common standards in relation to the selection, activation and calibration of LMTs to harmonise their use among Member States, while promoting disclosure to investors and a clear governance framework around the LMTs.
Guidelines on general principles
The Guidelines on LMTs revolve around three pillars: the selection, the calibration and the (de)activation of LMTs. While the selection only applies to LMTs under points 2 to 8 of Annex V of AIFMD or Annex IIA of UCITSD (i.e. redemption gate, extension of notice periods, redemption fee, swing pricing, dual pricing, anti-dilution levy, redemption in kind, together the Predefined List), the calibration and (de)activation also apply, on top of the Predefined List, to the suspension of subscriptions, repurchases and redemptions, as well as side pockets.
ESMA reminds that the primary responsibility for liquidity risk management, and for the selection, calibration and (de)activation of LMTs, lies with the fund manager.
The revised AIFMD and UCITSD require the selection of at least two appropriate LMTs from the Predefined List, which suitability should be assessed based at least on:
· The fund’s legal structure and specific structural features (for instance master-feeder structure or ETFs);
· The fund’s investment strategy and investment policy;
· The dealing terms of the fund, notably with respect to the duration of the notice period, the lock-up period, settlement period and dealing frequency;
· The fund’s liquidity profile, its underlying assets and liquidity demands, considering not only redemptions but also other potential sources of liquidity risk coming from the liability side of the fund balance sheet (for instance margin calls) under normal and stressed market conditions;
· The results of liquidity stress testing;
· The fund’s redemption policy and the characteristics of its investor base; and
· Any other relevant operational barriers and complexities.
Fund managers should evaluate the benefits of choosing at least one quantitative-based LMT, such as redemption gates or extension of notice periods, and at least one Anti-Dilution Tool (ADT), such as redemption fees, swing pricing, dual pricing, or ADL.
Managers may opt to implement more than two LMTs along with other liquidity measures to enhance the fund's overall resilience and its capacity to handle liquidity during different market circumstances. When choosing additional LMTs, fund managers should evaluate their appropriateness considering all pertinent factors, including at least those mentioned above.
Upon request from the relevant national competent authority (NCA), the AIFM/UCITS ManCo should be able to demonstrate that the activation/calibration(s) of the selected LMTs are in the best interest of all investors, appropriate and effective for the characteristics of the fund and the prevailing market conditions (normal or stressed).
Guidelines on targeted LMTs
This section provides targeted guidelines on the selection, activation and calibration of for each type of LMT.
For instance, the Guidelines on redemption gates invite fund managers to activate this tool especially when redemption requests exceed the threshold. It would however be less suited when the fund has valuations issues, in which case it may be more advisable to activate suspensions together with a suspension of the NAV calculation. Additionally, the extension of the notice periods - providing additional time to liquidate the underlying assets - is better suited for AIFs invested in less liquid assets such as private equity and real estate and whose liquidity is more susceptible to deterioration in times of market stress.
III. Key changes operated following feedback from the Consultations
The RTS:
· Introduction of more flexibility for redemption gates;
· Deletion of the provisions requiring the same level of LMTs to be applied to all share classes;
· Application of the rules on RiK to ETFs.
The Guidelines:
· Deletion of the guideline on the governance principles;
· Deletion of the guideline on the disclosure to investors;
· Guideline addressed to depositaries not retained;
· Deletion of other guidelines that imposed more restrictive obligations on the selection, activation and calibration of LMTs; and
· The Guidelines were streamlined to avoid any overlaps with the RTS on the characteristics of LMTs and the Level 1 text.
IV. What’s next?
As a reminder, Directive (EU) 2024/927 (known as AIFMD II), modifying both the AIMFD and the UCITSD, entered into force on 15 April 2024, and Member States have until 16 April 2026 to implement its rules, to the exception of certain measures that must be implemented from 16 April 2027.
The publication of the draft RTS and Guidelines mark an important step towards the implementation of AIFMD II.
The draft RTS have been submitted to the European Commission (EC) for adoption. From the date of submission, the EC has three months to decide whether to adopt the RTS, with the possibility of extending this period by one month.
Following the EC's adoption of the draft RTS, ESMA will translate the Guidelines. If the EC makes amendments to the draft RTS that affect the Guidelines, ESMA will adjust the Guidelines to ensure they are fully consistent with the RTS. Once the translations are published on the ESMA website, national competent authorities will have two months to inform ESMA whether they comply or intend to comply with the Guidelines.
The Guidelines will become applicable on the date the RTS enter into force. Funds that existed before the RTS come into force will have twelve months to comply with the Guidelines.
If you have any questions on this topic, please reach out to our experts Aurélien Hollard, Julia Bruzzese, Benjamin Bada, Julien Robert or Margherita Armand-Hugon
In the meantime, do you hesitate to have a look at our LMT dedicated page where you will find the webinar recordings of our four-part webinar series the complexities of liquidity management applicable to investment funds.
