AIFMD Review: A Legal Analysis of New Liquidity Management Rules for Open-Ended Funds 

7th March 2024

Introduction 

On November 25, 2021, the European Commission initiated targeted proposals to amend Directive 2011/61/EU, known as the Alternative Investment Fund Managers Directive (“AIFMD”) and Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (“UCITS Directive”). These amendments focus on areas such as authorisation, delegation, liquidity risk management, supervisory reporting, and the provision of depositary and custody services, as well as loan origination by alternative investment funds. After an extensive two-year process, which included numerous technical trilogue discussions, a provisional agreement was reached by the European Parliament and the EU Council on 19 July 2023 and on 9 November 2023, the EU Council published the final compromise text 

The forthcoming AIFMD II introduces a pivotal shift in the regulation of open-ended funds, emphasizing robust liquidity management under stressed market conditions. This article seeks to elucidate the legal nuances of these incoming rules, their practical implications, and the anticipated regulatory developments.  

Clarification and Expansion of LMTs 

AIFMD II expands and clarifies the scope of Liquidity Management Tools (“LMTs”) detailed in Annex IIA. Notably, it incorporates:  

  • suspension of redemptions and subscriptions,  
  • redemption gates, notice periods,  
  • redemption fees,  
  • swing pricing and dual pricing,  
  • anti-dilution levy,  
  • redemptions in kind and  
  • side pockets.  

Mandatory Selection of LMTs  

A pivotal requirement under AIFMD II is the obligation for AIFMs managing open-ended funds to select at least two appropriate LMTs. This selection must align with the fund’s investment strategy, liquidity profile, and redemption policy, ensuring a tailored approach to liquidity risk management. The directive mandates the implementation of detailed policies and procedures for the activation and deactivation of these tools, enhancing the fund’s operational readiness and regulatory compliance. 

Money market funds are required to select a minimum of one LMT. 

Notification Requirements and Exceptional Circumstances 

 A critical procedural aspect introduced is the mandatory notification to the National Competent Authorities (“NCAs”) of the Member States by the AIFMs upon activating or deactivating LMTs.  

AIFMs are obligated to promptly notify their NCAs when deciding to suspend redemptions and subscriptions or when activating or deactivating side pockets. Additionally, AIFMs should inform the NCAs when they activate or deactivate any other LMTs in a manner not typically envisaged in their fund rules or instruments of incorporation. 

 Additional ESMA Regulatory Technical Standards on LMTs and harmonisation with the UCITS Directive 

ESMA is tasked with providing further details on LMTs through Level 2 measures. This includes developing draft regulatory technical standards (“RTS”) to specify the characteristics of LMTs as per Annex V of the AIFMD II. Furthermore, ESMA will develop guidelines for selecting and calibrating LMTs, focusing on liquidity risk management and mitigating financial stability risks. This guidance is expected to harmonize practices across the EU, ensuring a standardized and effective approach to liquidity risk management. 

To ensure consistent harmonisation in the area of liquidity risk management by the UCITS and to facilitate market and supervisory convergence, the European Commission shall adopt delegated acts to specify the characteristics of the liquidity management tools set out in Annex IIA of the UCITS Directive, taking due account of the diversity of investment strategies and underlying assets of UCITS. ESMA should develop guidelines on the selection and calibration of liquidity management tools by the UCITS management companies.  

Implications for Clients 

The implications of these changes are multifaceted. AIFMs will need to reassess and potentially revamp their liquidity risk management strategies. The selection and implementation of LMTs will require careful consideration and alignment with the fund’s specific characteristics. Moreover, the increased reporting and notification obligations will necessitate robust internal processes and rapid response mechanisms. However, these changes also present an opportunity to enhance the fund’s resilience to market stresses, potentially attracting more risk-averse investors seeking stable and well-managed investment avenues. 

Transitional Provisions 

The final text of the AIFMD II was approved by the European Parliament on 7 February 2024 and on 26 February 2024, formally adopted by the EU Council. The entry into force will occur 20 days after the publication in the Official Journal of the European Union. The member states will then have a two-year period to transpose AIFMD II into their national laws, with the exception of the measures implementing reporting requirements, which must be applied three years after the entry into force of the AIFMD II. 

How can Zeidler help?  

As your trusted partner, the Zeidler legal team stands ready to assist and provide support. Our global team of professionals is well-versed in the latest legal, regulatory, and compliance developments impacting the asset management industry. We have closely monitored the developments of AIFMD II since the Original Draft. If you require additional information or assistance in understanding AIFMD II and its implications for your business, please get in touch with us.

 

Author

Serena Goldberg