New rules governing Liquidity Management Tools in UCITS funds and open-ended AIFs
Topics: Fund distribution
The amended Alternative Investment Fund Managers Directive (AIFMD II) and the UCITS Directive (UCITSD) introduce new rules governing liquidity management tools (“LMTs”) applicable to Luxembourg AIFMs and management companies by 16 April 2026, subject to partial grandfathering in certain cases.
These new rules are set out in:
- Article 16 and Annex V of AIFMD II, and
- Articles 18a and 84(2) and Annex IIA of the UCITSD.
On 17 November 2025, the European Commission adopted two Commission Delegated Regulations (the “Regulations”) specifying the characteristics of LMTs under AIFMD II and the UCITSD. In particular, the Regulations standardise the operation, activation thresholds and calculation methodologies of key liquidity management tools across the EU, and introduce common governance and disclosure expectations.
The Regulations are based on Regulatory Technical Standards (RTS) developed by ESMA and are intended to apply from 16 April 2026. They are currently subject to a three-month scrutiny period by the European Parliament and the Council and are expected to be published in the Official Journal of the European Union in Q1 2026. In the absence of any objection, they will enter into force 20 days after publication and apply from 16 April 2026.
The main points of attention are summarised below.
Mandatory selection of liquidity management tools
At least two appropriate LMTs must be selected from those listed in points 2 to 8 of the relevant Annex, namely:
- redemption gates;
- extension of notice periods;
- redemption fees;
- swing pricing;
- dual pricing;
- anti-dilution levies; and
- redemption in kind.
Money market funds subject to Regulation (EU) 2017/1131 are required to select only one LMT.
AIFMD II does not expressly address the situation of ELTIFs. There are, however, arguments supporting the view that ELTIFs should not be required to select at least two LMTs where the ELTIF Regulation requires the selection of one LMT only, based on the lex specialis derogat legi generali principle. This point will nevertheless need to be assessed in light of the specific fund structure.
Ordinary versus exceptional use of LMTs
The LMTs listed under points 2 to 8 of each Annex may be used in the ordinary course of business of the fund.
By contrast, the LMTs listed under:
- point 1 (suspension of subscriptions, repurchases and redemptions), and
- point 9 (side pockets),
may only be used in exceptional circumstances, where justified having regard to the interests of fund investors.
ESMA guidance on the combination of tools
ESMA distinguishes between:
- “quantitative-based” LMTs (such as redemption gates and extensions of notice periods), and
- anti-dilution tools (“ADTs”) (such as redemption fees, swing pricing, dual pricing and anti-dilution levies).
While not a legal requirement, ESMA recommends selecting at least one quantitative-based LMT and one ADT. In practice, this distinction is relevant when assessing whether the selected tools appropriately address both liquidity stress and investor protection considerations.
Disclosure in fund documentation
The selected LMTs must be referred to in the constitutive document of the AIF or UCITS fund (i.e. articles of incorporation, management regulations or limited partnership agreement).
The constitutive document does not need to set out all detailed terms governing the application of the selected LMTs and may refer to the issue document (prospectus or offering memorandum) for further details. However, disclosure of the selected LMTs exclusively in the issue document is not permitted.
Policies, procedures and supervisory communication
In addition to the disclosure requirements, the AIFM or management company must:
- implement detailed policies and procedures governing the activation and deactivation of the selected LMTs; and
- communicate those policies and procedures to their home supervisory authority.
This implies a heightened focus on internal governance, decision-making processes and documentation around the use of LMTs.
“Particular attention must be paid to the definitions of the LMTs as laid down in each Annex. By way of example, a redemption fee mechanism may not satisfy the applicable definition if the fee is reduced to 0% after a certain period, as this may no longer reflect the cost of liquidity with a view to ensuring that remaining investors are not unfairly disadvantaged.”
Importance of RTS definitions and calibration
Particular attention must be paid to the definitions of the LMTs as laid down in each Annex. By way of example, a redemption fee mechanism may not satisfy the applicable definition if the fee is reduced to 0% after a certain period, as this may no longer reflect the cost of liquidity with a view to ensuring that remaining investors are not unfairly disadvantaged.
Against this background, the RTS set out in the Regulations (which, at the date of this note, remain in draft form) should be analysed carefully. They are intended to harmonise the characteristics of LMTs across the EU for open-ended AIFs and UCITS, with the objective of enhancing investor protection and financial stability.
Entry into force and grandfathering
The new rules will apply from 16 April 2026.
UCITS funds and open-ended AIFs constituted before that date will benefit from a grandfathering period until 16 April 2027 in relation to the compliance with the Regulations, after which full compliance will be required.
What managers should do now
With implementation deadlines approaching, managers should consider a phased preparation plan:
- Fund-by-fund assessment of liquidity profiles and existing LMTs.
- Selection of compliant LMTs aligned with the fund’s strategy and investor base, and compliant with the Regulations.
- Documentation updates, prioritising constitutional amendments where required.
- Communication of the selected LMTs along with the policies and procedures for the activation and deactivation of the LMTs to the CSSF;
- Operational testing with administrators, depositaries and distributors.
- Board and governance preparation, including approval processes and training.
- Notification of existing the investors where required.
Starting early will allow managers to address these changes in an orderly manner and avoid last-minute amendments ahead of the April 16, 2027 deadline applicable to grandfathered funds (bearing in mind that such grandfathering will only apply in relation to the Regulations setting forth the regulatory technical standards specifying the characteristics of LMTs while the requirement to specify at least two LMTs in the constitutive document of the relevant fund will have to be complied with by April 16, 2026 in any cases). New UCITS funds and open-ended AIFs that will be constituted as of April 16, 2026 will have to comply with all the new rules applying to LMTs.
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