EU regulatory updates to strengthen liquidity management in investment funds

EU regulatory updates to strengthen liquidity management in investment funds

The European Securities and Markets Authority (ESMA), a pivotal regulator and supervisor within the EU, has launched a public consultation on draft guidelines and technical standards pertaining to the revised Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive.

These directives are essential for reducing potential financial stability risks and fostering uniform liquidity risk management across the investment funds sector.

Verena Ross, ESMA Chair, highlighted the significance of the updated directives, stating, “The revised AIFMD and UCITS Directive have introduced long-awaited provisions on the availability and use of Liquidity Management Tools. ESMA is now consulting on how to apply these provisions in practice. These new rules being proposed are in line with the latest global standards provided by the FSB and IOSCO, and will contribute to the strengthening of the EU regulatory and supervisory regime for investment funds.

“By having the right implementing rules in place, we can make the EU framework for investment funds both more resilient and more efficient, supporting the development of attractive, effective and stable EU capital markets.”

In its draft Regulatory Technical Standards (RTS), ESMA outlines the defining elements of Liquidity Management Tools (LMTs), such as calculation methodologies and activation mechanisms. Furthermore, ESMA has issued draft guidelines on the LMTs for UCITS and open-ended AIFs. These guidelines provide directives on how managers should choose and fine-tune LMTs, taking into account their investment strategy, liquidity profile, and the redemption policy of the fund.

The drafted RTS and guidelines are intended to ensure a uniform application of the directives for both UCITS and open-ended AIFs, preparing EU fund managers to effectively manage fund liquidity, especially in anticipation of market stress situations. The guidelines also aim to standardize the use of specific LMTs, like side pockets, which currently vary widely across the EU.

The release of these consultations marks a critical phase in the implementation of the new AIFMD and UCITS Directive. ESMA is welcoming feedback on these consultations until 8 October, with plans to finalize the RTS and guidelines by 16 April 2025.

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