The newly-published provisions aim to clarify and harmonise the application of LMTs, such as side pockets, which have historically varied greatly across Member States. By establishing a uniform framework, these rules are expected to mitigate financial stability risks and foster a cohesive approach to liquidity management. Notably, this work aligns with the ongoing revisions to the AIFMD and UCITS Directives, ensuring better availability and consistent use of LMTs throughout the EU.

Under the revised AIFMD II framework, Alternative Investment Fund Managers (AIFMs) managing open-ended AIFs are required to select and adopt at least two LMTs from the list provided in Annex V of the revised AIFMD.

This obligation aims to strengthen liquidity risk management and must be reflected in the relevant fund documentation to ensure transparency for investors. Importantly, closed-ended funds are exempt from this requirement due to their different liquidity profiles.

While both the revised AIFMD and the UCITS Directive mandate the selection of at least two LMTs—from Annex V of AIFMD II and Annex IIA of the UCITS Directive, respectively—AIFMs may choose to adopt more than two LMTs and implement additional liquidity measures to bolster the fund’s resilience across both normal and stressed market conditions.

When selecting LMTs, managers should assess their appropriateness, in light of all relevant factors, including the fund’s investment strategy, redemption policy, liquidity profile, and potential market stress scenarios. ESMA guidance recommends that AIFMs consider selecting at least one quantitative-based LMT (eg, redemption gates, extension of notice periods) and one anti-dilution tool (ADT) (eg, redemption fees, swing pricing, dual pricing, anti-dilution levies). This allows for flexibility in deploying different tools based on prevailing market conditions—such as using one under normal conditions and another under stressed conditions.

EU Member States must transpose AIFMD II into national law by 16 April 2026, following its entry into force on 15 April 2024. AIFMs are therefore encouraged to begin reviewing and updating their fund documentation and operational procedures as early as possible to ensure timely compliance and maintain investor trust.

ESMA’s development of these standards was rooted in an inclusive consultation process. A Consultation Paper on the draft RTS was initially presented in July 2024, with the public feedback period closing in October 2024. A diverse range of 33 responses was received from asset managers, investment firms, industry groups, and even consumer organisations. ESMA carefully reviewed the input and introduced several key adjustments to the draft RTS based on the feedback:

• Flexibility for redemption gates - ESMA added new flexibility for activating redemption gates under the AIFMD framework. These thresholds can now be expressed either as a percentage of the Net Asset Value (NAV), a monetary value, a percentage of liquid assets, or a combination thereof.
• Alternative redemption mechanisms - To prevent small redemption orders from being disproportionately impacted by larger ones, ESMA introduced an alternative method for applying redemption gates.
• Application of redemption in Kind for ETFs - Recognising concerns raised by respondents, ESMA clarified that certain redemption-in-kind transactions for ETFs should not qualify as LMTs, alleviating potential disruptions within the primary market.

Key provisions on applying LMTs to share classes were removed, as ESMA determined that its mandate did not allow for exhaustive rules on this topic.

Following the release of the draft RTS, ESMA has now submitted its proposals to the European Commission for approval.

For more information ESMA’s news release, the draft Regulatory Technical Standards, and the final report on the Guidelines on LMTs can be found here.