On 15 April 2025, the European Securities and Markets Authority (ESMA) published its final report on the Guidelines for Liquidity Management Tools (LMTs) of UCITS and open-ended Alternative Investment Funds (AIFs), along with draft Regulatory Technical Standards (RTS). These updates are part of the broader AIFMD II and UCITS Directive amendments under Directive (EU) 2024/927.
Key Takeaways
- Selection & Calibration of Liquidity Management Tools (LMTs)
- Fund managers must select at least two appropriate LMTs based on the fund’s investment strategy, liquidity profile, redemption frequency, investor base, and legal and operational setup. Fund managers must implement:
- One quantitative-based tool (ex., redemption gates, notice periods, redemptions in kind, suspensions).
- One anti-dilution tool (ADT) (ex., swing pricing, anti-dilution levies, dual pricing, redemption fees).
- Governance and Procedures
- Managers must define clear policies for the activation, ongoing application, and deactivation of LMTs.
- Pre-approval from National Competent Authorities (NCAs) may be required for certain tools such as side pockets and suspensions.
- Reporting & Disclosure
- Fund managers must notify competent authorities of the activation and deactivation of LMTs.
- Investors must be informed in advance about which LMTs may be used, under what conditions, and how they impact redemptions via fund documentation such as the prospectus, periodic reports, and/or rules of incorporation.
- Implementation Deadlines
- ESMA has submitted the draft RTS to the European Commission for adoption.
- Once adopted and published, national competent authorities will have 2 months to notify ESMA of compliance.
- Funds established before the RTS enters into force will have 12 months to comply with the guidelines.
Changes from Prior Regulations
- The revised guidelines provide more detailed criteria for the selection and calibration of LMTs, aiming to enhance liquidity risk management and mitigate financial stability risks.
- The introduction of side pockets is now more clearly defined, with specific conditions for their activation and use.
- The two-tool minimum is a marked shift from the prior discretionary regime, creating a more harmonized baseline across the EU.
Final Thoughts
The new ESMA guidelines and RTS mark a major milestone in EU fund regulation, aimed at improving market resilience and investor outcomes. These updates are crucial for fund managers to ensure compliance and effective liquidity risk management. We recommend reviewing the full guidelines and preparing for the upcoming implementation deadlines.
