The European Securities and Markets Authority (ESMA) is requiring the implementation of Liquidity Management Tools to facilitate liquidity management during redemption shocks and stressed market conditions.
In light of previous liquidity issues affecting funds under stressed market conditions, the purpose of the Liquidity Management Tools (LMT) requirement is to reduce potential financial stability risks and promote harmonization of liquidity risk management within the investment fund sector.
Background
Considering upcoming amendments to the AIFM Directive and the UCITS Directive regarding liquidity management tools, ESMA published draft guidelines and Regulatory Technical Standards (RTS) on July 8th to establish the characteristics of available liquidity management tools and guidelines on how to select and calibrate these tools.
The goal is for these guidelines to be approved by the European Commission on April 16, 2025, and subsequently implemented by fund managers within 12 months, by April 16, 2026, at the latest.
General requirements
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Managers of UCITS and AIF managers must implement at least two liquidity management tools for each fund (in addition to redemption fees and the possibility of suspending or deferring subscriptions and redemptions).
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The chosen liquidity management tools must be specified in the fund rules, which will require processing by the Financial Supervisory Authority (FI).
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Fund management companies also need to establish policies and processes for activating and deactivating the selected liquidity management tools, as well as implement operational and administrative procedures for the tools.
Selection of LMT
The Financial Stability Board (FSB) has recommended a balance between Anti-Dilution Tools (ADT) and Quantitative tools. Therefore, fund management companies that choose to implement two liquidity management tools should select one ADT and one Quantitative LMT.
1. Suspension of subscriptions, redemptions* (Quant. LMT)
2. Redemption gates (Quant. LMT)
3. Extension of notice periods (Quant. LMT)
4. Redemption fees* (ADT)
5. Swing pricing (ADT)
6. Dual pricing (ADT)
7. Anti-Dilution Levy (ADT)
8. Redemption in kind (other)
9. Side pockets* (other)
* Suspension, Redemption fees, and Side pockets are not included in the selection of two Liquidity Management Tools (LMTs). Instead, at least two additional LMT must be chosen.
Stefan Gavelin
Head of Risk Services
