On 8 July 2024, the European Securities and Markets Authority (ESMA) issued two consultation papers on liquidity management tools (LMTs) for funds.

The first consultation covers draft regulatory technical standards (RTS) on LMTs under the Alternative Investment Fund Managers Directive (AIFMD) and the UCITS Directive. The second consultation deals with draft guidelines on LMTs of UCITS and open-ended alternative investment funds (AIFs).

Draft RTS

Directive (EU) 2024/927 made amendments to the AIFMD and the UCITS Directive in the area of LMTs, supervisory reporting and depositories. It also amended the AIFMD in relation to loan-originating AIFs. The revised AIFMD and UCITS Directive establish a list of LMTs that shall be available to AIFs and UCITS. The list of LMTs and their definitions are the same in both Directives. The draft RTS being consulted on are based on Article 16(2)(g) of the AIFMD and 18a(3) of the UCITS Directive and specify the characteristics of all the LMTs set out in the relevant Annexes of both Directives.

The draft RTS do not, however, cover the conditions under which the LMTs selected by fund managers are activated because the scope of the RTS is limited to the characteristics of each LMT and there is no empowerment for ESMA to determine the circumstances according to which the selected LMTs shall be activated (except for side pockets for which ESMA is tasked with determining the circumstances where side pockets may be activated in the context of the guidelines on LMT for UCITS and open-ended AIFs).

Draft guidelines

The draft RTS on the characteristics of LMTs should be read in conjunction with the draft guidelines that ESMA is consulting on. These draft guidelines concern the selection and calibration of LMTs by UCITS and AIFMs of open-ended AIFs for liquidity risk management and for mitigating financial stability risks. The draft guidelines recognise that the primary responsibility for liquidity risk management remains with UCITS and the AIFM. They include indications as to the circumstances in which side pockets can be activated and allow adequate time for adaptation before they apply, in particular for existing UCITS and AIFs.

The deadline for responding to both consultations is 8 October 2024.

Following this, ESMA will deliver the final RTS and guidelines by 16 April 2025.