AIFMD II – Liquidity management tools for open-ended AIFs

In its review of Directive 2011/61/EU (AIFMD), the EU Commission concluded that there is a need to facilitate the use of liquidity management tools (LMTs) across the Union. The recently adopted AIFMD II includes new requirements for open-ended AIFs, to notably enable dealing with redemption pressures under stressed market conditions.

(AIFMD II) entered into force on 15 April 2024 with a two-year implementation period for EU Member States to transpose the new provisions into their respective national laws. AIFMD II notably provides for additional liquidity management requirements, the primary responsibility for which will remain with AIFMs, alongside the selection, calibration, activation and deactivation of LMTs. This will impact the governance framework for AIFMs, as they will need to set out the foregoing in a LMT policy, to supplement their existing liquidity risk management procedures.

The EU’s financial markets regulator and supervisor (ESMA) has been tasked with the development of (1) regulatory technical standards to specify the characteristics of the LMTs, ensuring a consistent harmonisation in the area of liquidity risk management by AIFMs (RTS) and (2) guidelines on the selection and calibration of liquidity management tools by AIFMs, to safeguard a uniform level of investor protection in the Union (Guidelines). On 8 July 2024, ESMA published drafts of the and for by 8 October 2024, with the aim of delivering the RTS and Guidelines by 16 April 2025.

Accordingly, AIFMs will need to ensure that the open-ended AIFs they manage select at least two LMTs from the harmonised list set out in Annex V, points 2 to 8, of the amended AIFMD. These LMTs include (1) quantitative-based LMTs, namely redemption gates, extension of notice periods and redemptions in kind, and (2) anti-dilution tools (ADTs) including redemption fees, swing pricing, dual pricing and anti-dilution levies. To facilitate such selection, in its Guidelines, ESMA highlighted the Financial Stability Board’s recommendation of having a balance between quantity based LMTs and ADTs. According to ESMA, it could also be considered to have one LMT to be used under normal market conditions (ADT) and another (quantitative-based LMT) in case of stressed conditions.

To select the most appropriate tools for an open-ended AIF, AIFMs should consider the investment strategy, the liquidity profile and the redemption policy of the AIF.

In addition, two other types of LMTs should be considered as always available, in addition to the selected LMTs, namely (1) the temporary suspension of subscriptions, repurchases and redemptions, and (2) the use of side pockets.

Though many elements have yet to be confirmed, some key ideas are emerging. First, we can expect increased scrutiny in the liquidity management field, as AIFMs will be required to notify the competent authorities of their home Member State in certain instances of the activation and deactivation of LMTs. Second, consideration of the interest of investors will be central. Indeed, under AIFMD II, disclosures to investors will need to include details on the possibility of, and conditions for, using the selected LMTs. According to the ESMA’s RTS and Guidelines, a number of LMTs would apply equally to all investors and the best interest of all investors should be considered in the activation and calibration of the selected LMTs.

Investment sponsors contemplating the establishment of open-ended AIFs could already consider the expected framework under AIFMD II, the RTS and the Guidelines, together with external AIFMs, whose role could potentially evolve in light of their anticipated responsibility in the context of LMTs.