Commission Delegated Regulations On Liquidity Management Tools For AIFs And UCITS

The European Commission has adopted two Delegated Regulations specifying the characteristics of liquidity management tools (LMTs) for (i) alternative investment funds (AIFs) and (ii) UCITS, respectively. These acts implement the harmonised list of tools introduced by AIFMD II and the UCITS Directive and translate ESMA's April 2025 draft RTS into binding Level 2 measures.

In short, they standardise the operation, activation thresholds, and calculation methodologies for key liquidity tools across the EU and introduce common governance and disclosure expectations. Following Council and Parliament scrutiny, the Regulations will be published in the Official Journal, enter into force 20 days after their publication, and apply from 16 April 2026.

Scope – who does this apply to?

These Delegated Regulations apply to all EU managers of open-ended funds.

In line with AIFMD II and the amended UCITS Directive, managers must select and incorporate at least two liquidity management tools from the harmonised list for each such fund (money market funds need only select one), ensuring they are available for activation in the interests of investors.

The LMTs

Both Regulations cover the same suite of liquidity management tools listed in Annex V to AIFMD and Annex IIA to the UCITS Directive. They are designed to enhance investor protection and market stability, while preserving calibration flexibility for different strategies and market conditions.

The Regulations set the characteristics and operational parameters for the full harmonised list of tools: suspension of subscriptions, repurchases and redemptions; redemption gates; extensions of notice periods; redemption fees; swing pricing; dual pricing; anti‑dilution levies; redemptions in kind; and side pockets. This ensures that managers can deploy them consistently across the EU in a manner aligned with fund strategy and investor protection. More details of the mechanics are set out below.

Suspensions, gates and notice extensions

• Suspension: must apply simultaneously to subscriptions, repurchases and redemptions, for the same period and across all share classes, ensuring equal treatment and avoiding selective liquidity. "Soft closure" (restricting new subscriptions only) is expressly not an LMT. Activation should be backed by a documented assessment of necessity and proportionality, with clear investor communications and a defined review cadence for lifting the suspension.
• Redemption gates: require predefined, disclosed activation thresholds and pro‑rata execution of orders above the threshold, with non‑executed portions carried forward in line with pre‑set rules. The AIF Regulation permits fund‑level, investor‑level or combined gates with thresholds expressed in terms of NAV, cash, monetary amounts or combinations thereof; whereas the UCITS Regulation confines gates to the fund level with thresholds expressed as a percentage of NAV. Managers must establish robust governance procedures for repeated use and clear escalation protocols where gating persists.
• Notice extensions: are permitted to manage liquidity formation without altering the stated dealing frequency; settlement timelines are excluded from the extension, so that post‑trade processing remains unchanged. Thresholds and lead times must be disclosed in advance, and application should be even‑handed across investor types.

Anti‑dilution tools (cost‑passing mechanisms)

• General rule: redemption fees, swing pricing, dual pricing and anti‑dilution levies must, in aggregate, transfer estimated liquidity costs arising from subscriptions and redemptions to the transacting investors, thereby protecting long‑term holders from dilution and discouraging opportunistic flows.
• Cost components: each tool's calibration must reflect explicit transaction costs (brokerage, taxes, custody, spreads) and, where appropriate, implicit costs including material market impact and slippage; where empirical data are unavailable, managers should adopt reasonable estimation methodologies, subject to oversight and periodic back‑testing.
• Swing pricing: the swing factor adjusts the published NAV up or down depending on net flows and may be applied on a full or partial (threshold‑based) basis, with single or tiered swing factors calibrated to expected trading costs. Policies should set data sources, governance for managing intra‑day volatility, and disclosure of whether thresholds are static or dynamic.
• Dual pricing: may be implemented via two NAVs (bid/ask) or a spread around a single NAV, with the spread reflecting the same cost components as swing pricing and subject to routine validation against observed execution costs.
• Anti‑dilution levy: may be charged to redeemers in net outflows and to subscribers in net inflows; levels may be expressed as a percentage or monetary amount and may vary with order size to reflect non‑linear market impact. Policies should specify how levy proceeds are retained for the fund and how exemptions (if any) are controlled.

Redemptions in kind and side pockets

• In‑kind redemptions: are permitted to avoid forced sales where cash realisation would be value‑destructive; in such cases, asset selection should be fair and representative of the portfolio. For ETFs, delivering underlying securities to authorised participants or market makers in the course of normal dealing is not treated as activation of the in‑kind LMT.
• Side pockets (set‑up options): may be established by accounting segregation (a dedicated share class closed to dealing, with other share classes priced net of segregated assets) or by physical separation, subject to robust valuation, governance and disclosure arrangements.
• AIFs: depending on the chosen architecture, affected or unaffected assets may be transferred between the original and new AIF vehicles, allowing managers to isolate problematic exposures while maintaining continuity for the remainder of the portfolio.
• UCITS: physical separation entails leaving affected assets in the original UCITS (which is then closed and liquidated) and transferring the remainder to a new UCITS authorised and managed in line with the original strategy, thereby preserving investment continuity for unaffected assets.
• Distributions: proceeds from the disposal or recovery of side‑pocketed assets are tracked separately and distributed pro rata to side‑pocket investors, with the operating fund's NAV excluding such amounts to avoid cross‑subsidisation.

Governance, disclosure and proportionality

• Equal treatment: the tools must be applied uniformly to all investors and, for suspensions, across all share classes, with clear policies to prevent preferential dealing or carve‑outs for particular investor cohorts.
• Calibration and safeguards: Calibration may reflect asset‑liquidity and investor‑base characteristics, but safeguards apply around activation thresholds, pro‑rata execution, and transparent, pre‑disclosed conditions for carrying forward non‑executed orders under gates. Documentation should evidence the rationale and be subject to periodic review.
• Cost methodology: the Regulations prescribe minimum cost components for anti‑dilution tools but avoid setting fixed parameters, thereby permitting model‑based or empirical approaches supported by governance, record‑keeping and validation against realised execution data.

Entry into force and transition; linkage to broader reforms

Following scrutiny by the Council and Parliament, the Delegated Regulations will enter into force 20 days after publication in the Official Journal and will apply from 16 April 2026. A one‑year transitional period applies for pre‑existing AIFs and UCITS constituted before 16 April 2026; they are deemed compliant until 16 April 2027 but may opt into the new regime from 16 April 2026 subject to regulatory notification.

AIFMD II and UCITS now require managers to select at least two appropriate LMTs from the harmonised lists for potential use in investors' interests, and these Delegated Regulations operationalise that obligation by defining how the tools must work in practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.