After assessing suitability with regard to the investment strategy pursued, the liquidity profile and redemption policy, an AIFM that manages an open-ended AIF should select at least two appropriate LMTs from the list set out in Appendix V, points 2 to 7 (i.e. redemption gates, notice periods, liquidity fees on redemption, swing and/or dual pricing, anti-dilution levy, and redemptions in kind) for possible use in the interests of the AIF’s investors. By way of derogation, the AIFM may select only one LMT from Appendix V points 2 to 7 for an AIF it manages, if that AIF is authorised as a money market fund according to Regulation (EU) 2017/1131. The Commission proposal and European Parliament draft report refer to only one LMT, among different lists of LMTs, without mentioning money market funds. By contrast, the Council position includes special provisions applying to the money market funds, and it is the only one to include dual pricing in appendix V.

Under the Commission proposal, the AIFM should implement detailed policies and procedures for the activation and deactivation of any selected LMT and the operational and administrative arrangements for using such a tool. However, the Council position requires the AIFM to communicate such a decision and relevant explanations to the regulatory authorities of the AIF’s home member state.

Redemption in kind, as referred to in Appendix V point 7, can be activated only to meet redemptions requested by professional investors and if the redemption in kind corresponds to a pro rata share of the assets held by the AIF. By way of derogation, the redemption in kind may not correspond to a pro rata share of the assets held by the AIF if that AIF is solely marketed to professional investors or whose investment policy is to replicate the composition of a particular stock or debt securities index, and additionally if that AIF is an exchange-traded fund as defined by MiFIR article 2(26). This provision is mentioned only in the Council position.

An AIFM that manages an open-ended AIF may, in the interest of its investors, temporarily suspend the repurchase or redemption of the AIF’s units or shares, or activate or deactivate other LMTs from the list set out in Appendix V points 2 to 7, and included in the fund rules or the articles of incorporation of the AIF. In the interest of AIF investors, to ensure subscriptions and redemptions are processed at a fair price, the AIFM may also activate side-pockets, as referred to in point 8 of Appendix V, in situations where the AIFM cannot ensure fair and accurate valuation of some assets or where some assets have become non-tradable. The temporary suspension and activation of side-pockets may be carried out only in exceptional cases where circumstances so require, and they are justified with regard to the interests of investors.

An AIFM should, without delay, notify the regulatory authorities of its home member state when activating or deactivating the suspension of redemptions and redemption gates referred to in points 1 and 2 of Appendix V. The Commission proposal provides for such notification in relation to three LMTs, and the European Parliament draft report requires notification for four LMTs.

An AIFM should notify the same regulatory authorities when activating or deactivating side-pockets, as referred to in point 8, in a reasonable timeframe before the activation or deactivation of this LMT. A member state may require notification from the AIFM to the regulatory authorities of the AIFM’s home member state when the AIFM decides to activate redemption in kind, extend the notice period or increase the liquidity fee, the cap of the swing factor of the swing pricing or the anti-dilution levy fee set out in the fund prospectus, or increase the bid-ask spread in dual pricing for liquidity management purposes. This wording is only included in the Council position.

The regulatory authorities of the AIFM’s home member state member should notify, without delay, the regulatory authorities of a host member state of the AIFM and ESMA of any notifications received under this paragraph and, if there are potential risks to the stability and integrity of the financial system, the European Systemic Risk Board. The approach of the Council position regarding notification of the ESRB is similar to that in the European Parliament draft report.

Member states should ensure that at least the LMTs set out in Appendix V are available to AIFMs managing open-ended AIFs, namely:

• Suspension of redemptions and subscriptions.
• Redemption gates are defined as partial, not full, as in the European Parliament draft report.
• Notice periods.
• Liquidity fees.
• Swing and/or dual pricing. Dual pricing only appears in the Council position.
• Anti-dilution levy.
• Redemption in kind.
• Side-pockets.

The Council position does not amend the power of regulatory authorities to require AIFMs to activate or deactivate certain LMTs. In contrast, it is amended in the Commission proposal and the European Parliament draft report. Therefore, article 46(2) point j is not modified in the Council position, meaning that the regulatory authorities may require suspension of the issue, repurchase or redemption of shares or units in the interest of shareholders/unitholders or the public, as it is already the case in the current version of the AIFMD.

ESMA should develop draft RTS to specify the characteristics of the LMTs set out in Appendix V, as included in the Commission proposal but deleted from the European Parliament draft report.

ESMA should draw up guidelines determining criteria for selecting and using appropriate LMTs by AIFMs for liquidity risk management, including proper disclosures to investors, considering the capability of such tools to reduce undue advantages for investors that redeem their investments first and to mitigate financial stability risks. The Commission proposal and the European Parliament draft report refer to draft RTS to be drawn up by ESMA, not guidelines. These guidelines should also indicate the circumstances in which side-pockets can be activated.

The power of ESMA to require the activation or deactivation of certain LMTs by non-EU AIFMs that are marketing AIFs that they manage within the union or EU AIFMs managing non-EU AIFs is not added by the Council position nor the European Parliament draft report, but it is by the Commission proposal.

Regarding the cooperation obligation, the Council position requires notification of the ESRB in various cases, but only if there are potential risks to the stability and integrity of the financial system. By contrast, the Commission proposal does not refer to the stability and integrity of the financial system. Although the Commission proposal requires ESMA to draw up draft RTS indicating in which situations the regulatory authorities may exercise the powers set out in Article 46(2) point (j), the Council position requires ESMA to draw up guidelines.

Access the European Council position of June 2022 here.