May 9, 2025

Liquidity Management Under AIFMD2: Near-Final RTS for Open-Ended Funds

Cameron Contizano, Matthew Dixon-Ward, Andrew Henderson, Chris Ormond

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Following our September 2024 Alert “Liquidity Management Under AIFMD2: RTS for Open-Ended Funds,” the European Securities and Markets Authority (ESMA) has now published Final Reports for “Guidelines on LMTs of UCITS and open-ended AIFs” (Guidelines) and “Draft Regulatory Technical Standards on Liquidity Management Tools under the AIFMD and UCITS Directive” (RTS).

The Guidelines and RTS will supplement the liquidity management provisions for open-ended funds under the revised Alternative Investment Fund Managers (AIFMs) Directive (AIFMD2) to:

Ensure better alignment between asset liquidity and redemption terms
Mitigate material investor dilution and potential first-mover advantage, in particular for funds investing in inherently illiquid assets

The Guidelines and RTS show that ESMA has taken into account many of the points raised during the consultation process. The processes are more streamlined and give AIFMs more flexibility in how they can select and apply their liquidity management tools (LMTs).

The European Commission will now have to consider whether to adopt or amend the RTS within three to four months from the date of submission by ESMA. EU member states must implement AIFMD2 by 16 April 2026.

The RTS and Guidelines will both apply from that date, but managers of existing funds will have 12 months to give effect to the Guidelines. Therefore, all managers will need to prepare for the selection of new LMTs by April 2026, but managers of existing funds will have until 16 April 2027 to apply detail of the Guidelines. Both EU national competent authorities (NCAs) and AIFMs must make “every effort” to comply with the Guidelines.

We have set out below the principal points of how the rules apply to the managers of open-ended EU alternative investment funds (AIFs) and key changes of some of the specific LMTs, along with a table showing the main requirements for each LMT as set out in the RTS and Guidelines.

We have also prepared a blackline version of the below table setting out the changes made to the proposals following ESMA’s July 2024 consultations. This is available at the following link.

Main Points

The Guidelines emphasise that the AIFM has primary responsibility for liquidity risk management and for the overall selection, calibration, activation, and deactivation of appropriate LMTs (including, where appropriate, redemptions in kind). ESMA does, however, stress the importance of AIFMs not using LMTs as a backstop for the purpose of addressing liquidity issues stemming from inadequate fund structuring, poor investment decisions, or inappropriate risk management, in particular for funds marketed to retail investors that need a higher level of investor protection.
AIFMs can select more than two LMTs as well as additional liquidity measures of their own.
The governance and organisational principles in the draft LMT have been removed because the AIFMD and its level 2 measures already cover these. In a similar vein, specific guidance addressed to depositaries has been removed.
The provisions requiring an AIFM to provide appropriate disclosures to investors has been removed from the final Guidelines, in acknowledgement that the AIFMD2 amendments include additional investor disclosures on liquidity risk management and the AIFM’s selected LMTs (and, for instance, will include how an AIFM treats redemption orders in the case of suspension or subscriptions, redemptions, and repurchases).
ESMA has kept the guideline that encourages AIFMs to consider the merit of selecting (for use under normal and stressed market conditions):
- At least one anti-dilution tool (such as redemption fee, swing pricing, dual pricing, or anti-dilution levy)
- At least one quantitative-based tool (such as redemption gate or extension of notice period)
LMT selection criteria is not exhaustive, and AIFMs can consider other elements they deem relevant.
The defined but nonexhaustive list of examples of exceptional circumstances has been retained.
Although there are some specific provisions for funds that invest in inherently illiquid assets (or are usually liquid but can become less liquid during stressed market conditions), in general the requirements apply for all types of funds.
An AIFM should ensure that the level of subscription and redemption orders received is treated in a manner that avoids some investors benefiting from information on the probability that LMTs can be activated (for instance, redemption gate activation threshold reached).
An AIFM will be required to:
- Assess and use LMTs in conjunction with other threshold considerations, such as the fund’s legal structure, investment strategy and policy, dealing terms (including minimum notice period, lock-up and settlement periods, redemption policy, and dealing frequency), liquidity profile, results of liquidity stress testing, characteristics of the fund’s investor base, its distribution policy, and any other relevant operational barriers and complexities that may affect the feasibility of implementing certain LMTs
- Give due consideration that the selected tools are as comprehensive as possible to address different circumstances and will allow effective management of the fund’s liquidity in both normal and stressed market conditions
- Demonstrate on request from their NCA that their selected LMTs are in the best interest of all investors and are appropriate and effective in light of market conditions and relevant fund characteristics (e.g., liquidity profile, underlying assets, investor base)
- Select more LMTs and/or other liquidity measures at their discretion (for example, “soft closures” that consist of suspending only subscriptions or redemptions in the fund and that are not “LMTs” for the purposes of the RTS and Guidelines) and use tools individually or in combination in each instance

Key Changes for Liquidity Management Tools

Suspensions of subscriptions, repurchases and redemptions: ESMA resisted the feedback to its consultation to allow an AIFM flexibility in keeping a fund open for subscriptions whilst closing it to redemptions, noting that this LMT is available only in exceptional circumstances and that at least two LMTs are to be selected otherwise. Therefore, this LMT does not permit a suspension of subscriptions, repurchases, or redemptions without providing a suspension for all of them for the same period of time. There are no longer prescriptive rules regarding the treatment of nonexecuted redemption orders once a suspension is lifted, instead allowing AIFMs to determine what is most suitable and to cater for different cancelling order scenarios.
Side pockets: Side pockets are no longer obligated to be managed with the sole purpose of being liquidated. This helpfully reflects that a manager’s objective should be to maximise value for investors and that it should not, for instance, be required to sell assets at an undervalue.
Redemption gate: A level of flexibility has been introduced in setting the threshold for the redemption gate to be activated. This threshold may now be set for other units of measurement beyond a percentage of the NAV of the AIF, to include a monetary value (or a combination of both), or a percentage of liquid assets. In addition to this and to provide flexibility for different market practices, the activation threshold may now be determined by either gross or net redemption orders. An alternative method has also been introduced whereby smaller redemption orders below a predetermined redemption amount can be fully executed, leaving only larger redemption orders subject to the redemption gate. Provisions on the nonexecuted part of redemption orders have also been removed. The introduction of proportionality to this LMT is useful to acknowledge the operational realities of changing market conditions and cost-benefit trade offs.
Extension of notice periods: The requirement for a time buffer to be applied equally to all share classes has been removed (after ESMA concluded that this was beyond its mandate), as has the restriction on accepting redemption orders placed after a notice period extension that do not comply with the extension. This helpfully gives a manager flexibility to apply extensions of notice periods differently between classes (that may have different liquidity terms for different types of investors) as well as on how to process orders placed but not executed prior to an extension.
Redemptions in kind: In order to avoid unintended consequences for the functioning of the primary market of ETFs that are AIFs, the RTS contain a new provision that clarifies that the pro rata rule does not apply to authorised participants and market makers on the primary market.
Redemption fees: The fee imposed on those redeeming should now be calculated on a gross basis, as opposed to on an individual basis, and may be set either as a monetary value or a percentage of the redemption order.
Swing pricing: As with extension of notice periods (and also for dual pricing), the provision on application of swing pricing at the level of share classes has been removed. This helpfully reflects that when calibrating swing pricing share classes may differ in terms of expense rates, distribution policies, currencies or minimum holdings.
Dual pricing: The second predetermined mechanism (to impose transaction costs on investors) has become less prescriptive, requiring the AIFM to calculate only one NAV for both subscribing and redeeming investors rather than specifying that an adjustable spread should be set to one NAV in which assets are priced on a midmarket basis. This addresses some of the concerns raised in industry feedback, to request that the RTS should set out the general principles and objectives of unit pricing rather than trying to set out specific rules which may not be appropriate for all asset classes.
Anti-dilution levy: As with redemption fees, the amount of the levy may now be set at a monetary value.

Please do not hesitate to speak to one of the authors of this guide or your usual Goodwin contact if you have any questions or want to discuss how the final proposed regulatory rules on liquidity management of open-ended funds may affect your fund structures and investments.

Selected liquidity management tools (LMTs) (Annex V, points 2-8, of AIFMD2) that an AIFM has to preselect (at least two) and are set out in the fund rules/constitutional documents.
LMT	What it is	LMT characteristics proposed in the final draft RTS under draft Delegated Regulation	Final ESMA guidance on selection and calibration of LMTs (and minimum expectations/examples on activation)
Anti-dilution tools¹
Redemption fee	Fee, within a predetermined range and that takes account of the cost of liquidity, that is paid to the fund by investors when redeeming interests and that ensures that investors who remain in the fund are not unfairly disadvantaged.	A predetermined range of redemption fees that take into account the estimated explicit and implicit costs of redeeming units or shares, including any estimated significant market impact of asset sales to meet those redemptions. Based on gross redemption orders or as a monetary value, and deducted from the money paid to redeeming investors, for the benefit of the fund. Fees may vary depending on size of redemption orders.	Most applicable to funds that invest in assets with fixed/transparent and/or foreseeable transaction costs (e.g., real estate agency or notary fees); and that are invested in assets that are less liquid and for which other tools such as swing pricing might be challenging to implement due to infrequent and limited pricing sources. AIFM to apply a methodology to calibrate the predetermined range of fees that, if static, allows for review and adjustment to reflect higher cost of liquidity/stressed market conditions.
Swing pricing (cannot select this with dual pricing only)	Predetermined mechanism by which the NAV of the interests is adjusted by the application of a swing factor that reflects the cost of liquidity.	The purpose of the swing factor (expressed as a percentage of the AIF’s NAV) is to impose on redeeming or subscribing investors the estimated explicit and implicit costs of redemptions and subscriptions, including any estimated significant market impact of asset purchases of sales to meet them. When activated, the NAV of the AIF is to be adjusted; AIFM to choose if this is on every dealing day when there is net activity of any size between redemptions or subscriptions (full swing) or only if the difference exceeds a predefined activation threshold (partial swing). If net capital activity on a given dealing day is more subscriptions, NAV is adjusted upward by the swing factor (and vice versa for net redemptions). AIFM to choose a single swing or (depending on the net capital activity) a progressively increasing tiered approach. An AIFM can have different swing factors corresponding to different activation thresholds.	Most applicable for funds whose underlying assets are actively traded or for which information on trading costs is available and frequently updated, in particular for assets with market-contingent liquidity costs (less appropriate where trading costs are not readily available). AIFM to determinate activation and calibration on market conditions, based on the AIFM’s methodology. AIFM to base swing pricing on the estimated cost of liquidity, including any significant market impact of the trades, in the light of market conditions. AIFM may set a maximum swing factor that, if exceeded, it can justify afterward, if required by an NCA. Any recalibration should be justified and made in the investors’ best interest.
Dual pricing (cannot select this with swing pricing only)	Predetermined mechanism by which the subscription and redemption prices of the interests are set by adjusting the NAV per interest by a factor that reflects the cost of liquidity.	AIFM can choose between two mechanisms (with the same objective of including estimated explicit and implicit costs of subscriptions or redemptions, including of significant market impact of asset purchases or sales to meet them): (i) calculating one NAV that incorporates assets’ ask prices (for subscribing investors) and another NAV that incorporates assets’ bid prices (for redeeming investors); or (ii) calculating one NAV for both subscribing and redeeming investors.	Most applicable for funds that invest mainly in assets with liquidity costs that consist primarily of a bid-ask spread. Any significant market impact or explicit transaction costs should be accounted for separately by additional adjustment to NAV.
Anti-dilution levy	Fee that is paid to the fund by investors when purchasing or redeeming interests that compensates the fund for the cost of liquidity incurred because of the size of that transaction and ensures that other investors are not unfairly disadvantaged.	Impose on subscribers and redeemers the estimated explicit and implicit costs of subscriptions or redemptions, including any estimated significant market impact of asset sales/purchases used to meet them. It will be expressed either as a percentage of the redemption/subscription orders or a monetary value. It is applied when the difference between redemption and subscription orders on a given dealing date exceeds a predefined activation threshold. If net redemptions, anti-dilution levy to be deducted from amount paid to redeeming investors; if net subscriptions, anti-dilution levy is charged to subscribing investors.	Most applicable for funds with a high investor concentration or a small number of investors (to address the impact of redemption at short notice); with significant levels of subscription and/or redemption activity that could negatively affect the fund’s existing investors (e.g., smaller funds suffer higher liquidity costs when affected by large redemptions); funds that invest in assets that are less liquid; or where information on trading costs is generally available (e.g., funds that invest in assets with market-contingent liquidity costs). Can be activated on an ongoing or dynamic basis based on predefined thresholds. AIFM should review calibration in changing market conditions to ensure its effectiveness in preserving fund liquidity. Calibrated on same factors as for swing, including all estimated explicit and implicit transaction costs, and should be reviewed and adjusted in light of market conditions.
Quantitative LMTs
Redemption gate	Temporary and partial restriction of the right of investors to redeem their interests so that investors can redeem only a certain portion of their units or shares within a given period.	An activation threshold is to be provided, below which the gate will not be activated for all investors. The threshold is to be based on the total redemption orders (net or gross) for a given dealing date, expressed in proportion to the NAV of the AIF, a monetary value, or a combination of both); or as a percentage of liquid assets held. AIFM to have flexibility to determine the level at which redemption orders are executed, either by executing redemption orders for a given dealing date on a proportionate basis from all investors for an amount equal to at least the level of the activation threshold, or setting a predefined redemption amount of individual redemption orders below or equal to which all orders will be executed in full, with redemption applied only to a portion over that amount. This allows AIFMs not to apply redemption gates to individual redemption orders that are below a certain predetermined amount (in other words, avoiding small redemption orders being penalised by larger orders that would trigger a gate).	Most applicable for funds with a concentrated investor base and those with illiquid/hard-to-sell assets (or those that may become so during stressed market conditions). To be considered when the threshold of redemption requests is exceeded. May be less suited when a fund has valuation issues (when instead an AIFM could consider suspensions, together with NAV suspension). An AIFM should calibrate the activation threshold to be able to limit redemptions in the best interest of investors, and give due consideration to the NAV calculation frequency, investment objective, liquidity of underlying assets, current market conditions, and expected cash flows. AIFM should determine duration and use of redemption gates on a case-by-case basis, ensure that they are temporary in nature, and not restrict these terms. Activation threshold to be disclosed in fund rules/ constitutional documents.
Extension of notice periods	Extending the period of notice that investors must give to fund managers, beyond a minimum period that is appropriate to the fund, when redeeming their interests.	A period of time that is added to the minimum notice period for redemption orders. This does not include the settlement process. Can apply to a predefined number of dealing dates. When activated, the redemption orders should be executed at the end of the extended notice period. Should not affect redemption frequency (i.e., when an AIFM extends the notice period, it should not modify the redemption frequency, and AIFs should continue to offer the same redemption frequency to their investors).	To be considered for all funds, but especially for funds whose liquidity can deteriorate quickly in times of stress and for AIFs invested in assets that are less liquid (namely, real estate and private equity funds that should already have appropriate redemption frequency in place). Should be considered in normal and stressed market conditions and in certain circumstances (e.g., redemption pressures, providing additional time to liquidate underlying assets). The length of the extension of notice periods is to be carefully calibrated (considering the time necessary for the orderly liquidation of the underlying instruments in the best interests of the investors) to avoid prompting an increase in redemption requests.
Other LMTs
Redemptions in kind	Transferring assets held by the fund, instead of cash, to meet redemption requests of investors. These provisions are without prejudice to specific rules for European Long Term Investment Funds (ELTIFs, subject to separate Delegated Regulation; see our client alert for more).	Redemptions in kind can be used to prevent the sale of sizable blocks of securities in the AIF in response to redemption requests where such a sale would create significant transaction costs/ market price impacts to investors. A redemption of shares in an AIF ETF by an authorized participant or market maker in the ordinary course to similarly authorized participants will not be an activation of this LMT (because it does not relate to liquidity management).	In the selection of this tool, an AIFM should consider the fund structure, investor concentration, and asset types; and in view of the restriction that unless solely marketed to professional investors or for AIFs that are EU-regulated exchange-traded funds tracking an index, redemptions in kind can be used for redemption requests only by professional investors and if the redemption corresponds to a pro rata share of the assets held by the AIF.

Available liquidity management tools (LMTs) (Annex V, points 1 and 9, of AIFMD2) that are available to AIFMs (without the need to preselect them) only in exceptional circumstances² and where justified having regard to the interests of AIF investors
LMT	What it is	LMT characteristics proposed in the draft RTS under draft Delegated Regulation	Draft ESMA guidance on calibration of LMTs
Suspension of subscriptions, repurchases and redemptions (quantitative LMT)	Temporarily disallowing investors from subscribing, repurchasing, or redeeming fund interests.	Suspensions of subscriptions to be applied simultaneously/in parallel with suspensions of repurchases and redemptions, on a temporary basis, to all investors. In other words, any suspension must disallow all rights (subscribing, repurchasing, or redeeming) and apply to all share classes of an AIF. As set out above, this is contrary to industry feedback that expressed a preference to allow a manager to manage suspension and redemption independently – on the basis that this reflects situations that relate to both (i) asymmetric liquidity of the underlying assets for purchases and sale and (ii) improvement of fund level liquidity in the presence of investors with heterogenous behaviour (and that could result in shorter and less impactful redemption suspension than if applied on a simultaneous basis).	Can be applied together with a suspension of the NAV calculation, particularly in the case of uncertain valuation and when it is not possible to compute the fund NAV. In other cases, the AIFM should continue to value the fund assets and publish a NAV to ensure proper information is provided to investors (including the fact that the fund is closed for subscriptions, repurchases, and redemptions). Manager to ensure that suspensions are activated only on a temporary basis (i.e., with a view to reopen or liquidate the fund or to activate side pockets if necessary). AIFMs to consider calibrations criteria for assessing and monitoring the conditions that prompted a suspension activation and for reviewing/revising the decision to suspend and change in circumstances that would warrant this.
Side pockets (other LMT)	Separating certain assets, whose economic or legal features have changed significantly or become uncertain due to exceptional circumstances, from the other assets of the fund.	AIFM can choose between a specific share class of the fund (accounting segregation) or a separate fund to separate those assets from other assets of the AIF (physical separation). For physical separation, any assets whose economic or legal features have changed significantly or become uncertain due to exceptional circumstances should either be transferred into a new fund or remain in the original AIF. For accounting segregation, such assets should be allocated to a dedicated share class of the AIF; and new subscriptions, redemptions, and repurchases are executed based on fund NAV (with assets of the side pocket excluded). In either case, investors to receive interests on a pro rata basis to their AIF holding; side pockets should be closed-ended and closed for subscriptions.	Calibration to include determining the activation circumstances and when such conditions no longer exist; criteria for assessing and monitoring conditions that prompted the use; the merit of placing some cash to manage the potential liabilities of side pockets; and for reviewing and potentially revising the side-pocket decision.

^[1] These tools are relevant to all fund types to mitigate material investor dilution and potential first-mover advantage. Their use is not to affect the AIFM’s valuation duties. In more challenging circumstances such as limited market liquidity and/or valuation uncertainty, AIFMs may consider the use of other LMTs in addition to anti-dilution tools.
^[2] The guidelines (at paragraph 5.2.1) set out a nonexhaustive list of exceptional circumstances for suspensions as asset valuation difficulties; severe liquidity issues (e.g., due to margin calls, significant withdrawal) where executing the sale of underlying assets could cause liquidity issues for the fund (e.g., large discounts in asset sales, large dilution of remaining investors); critical cyber incident that impacts on the fund, the fund manager, and/or fund’s services provider capacity to operate; unforeseen market closures, trading restrictions, closure of trading venues; severe financial and/or political crisis; identification of significant fraud; natural disaster. And for exceptional circumstances for the activation of side pockets as significant valuation uncertainty and/or illiquidity of a specific portion of the portfolio of the fund for which there is no active market and/or for which trading is prohibited (e.g., due to sanctions) and/or for which fair valuation is temporarily unavailable, with the view of segregating it from the rest of the fund (to enable this part to remain open for investors); fraud, financial crisis, or war affecting a particular sector or region.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.