AIFMs of open-ended AIFs based in any member state are required to choose at least one LMT from the harmonised list set out in Appendix V under points 2, 3, 4, 5, 6 and 8) (i.e. redemption gates, notice periods, redemption fees, swing pricing, anti-dilution levy and side-pockets). The European Parliament draft report added the last three LMTs.

An AIFM that manages an open-ended AIF may, in the interest of the AIF’s investors, temporarily suspend the repurchase or redemption of the AIF’s shares or units or activate redemption gates, notice periods and redemption fees, swing pricing, anti-dilution levy or side-pockets if these LMTs are cited in the fund rules or the articles of incorporation of the AIFM. Similarly, the final three LMTs have been added by the European Parliament draft report.

An AIFM should promptly notify the regulatory authorities of its home member state when activating or deactivating one of the following LMTs in situations of liquidity stress: the suspension of redemptions and subscriptions, redemption gates, notice periods or redemption fees. The references to situations of liquidity stress and suspension of redemptions and subscriptions have been added by the European Parliament draft report. The regulatory authorities of the AIFM’s home member state should notify, without delay, the regulatory authorities of a host member state of the AIFM and ESMA. The European Systemic Risk Board should be notified only if there is a potential risk to the stability and integrity of the financial system. The restriction of the ESRB notification to such cases differs from the Commission proposal, a difference commensurate with ESRB’s mission. 

The European Parliament draft report has deleted the draft RTS specifying the characteristics of the LMTs, replacing them with draft RTS from ESMA on the criteria to be used by regulatory authorities for determining whether an AIF demonstrates liquidity robustness.

The draft RTS from ESMA on criteria for the selection and use of suitable LMTs by AIFMs for liquidity risk management is maintained in the European Parliament draft report. However, the latter provides that the RTS should recognise that the primary responsibility for liquidity risk management remains with the AIFM. They would also allow adequate time for adaptation before they apply, in particular, for existing AIFs.

In exceptional circumstances and after consulting the AIFM, national regulators may require an AIFM to activate or deactivate an LMT, such as suspension of redemptions and subscriptions and redemption gates or another LMT selected by the AIFM as considered the most suitable given the type of open-ended AIF or group of open-ended AIFs concerned, if financial stability risks that necessitate this requirement, in the interest of investors. The European Parliament draft report refers only to the interest of investors, not the public. Moreover, this power given to regulators is restricted to exceptional circumstances and consultation of the AIFM, whereas they are not mentioned in the Commission proposal. The LMT to be activated or deactivated should be the most suitable considering the type of open-ended AIFs and if financial stability risks necessitate this requirement. These two criteria are cumulative in the European Parliament draft report. In contrast, in the Commission proposal, suitability to the type of open-ended AIFs and investor protection are alternative to financial stability risks. The similar power for ESMA included in the Commission proposal has been deleted in the European Parliament draft report.

The definition of redemption gates by the European Parliament draft report is similar to that in the Commission proposal. However, the temporary restriction of the right of shareholders to redeem their shares or units cannot be full, only partial, stipulating that investors can redeem a certain portion of their shares or units.

The redemption fee is defined as a pre-determined fee charged to investors when redeeming the fund’s units or shares. The European Parliament draft report requires a redemption fee to be pre-determined, whereas the Commission proposal does not.

The Commission proposal and the European Parliament draft report define the anti-dilution levy similarly. However, the European Parliament draft report adds the following requirement: calculation of the anti-dilution levy should consider ongoing liquidity costs and market conditions.

Access the draft report of 16 May 2022 from the European Parliament here.