TITLE: European Securities and Markets Authority Issues Guidance on Liquidity Management Tools for UCITS and Open-Ended Alternative Investment Funds
BODY:
On 12 March 2026, the European Securities and Markets Authority (ESMA) published guidance on the selection, calibration, and activation of liquidity management tools for Undertakings for Collective Investment in Transferable Securities (UCITS) and open-ended Alternative Investment Funds (AIFs) managed by Alternative Investment Fund Managers (AIFMs).
The guidance implements requirements from Directive (EU) 2024/927, which amended the UCITS Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). ESMA's guidance addresses how fund managers should select and calibrate liquidity management tools to mitigate liquidity risk and financial stability risks under both normal and stressed market conditions.
The guidance covers quantitative liquidity management tools (redemption gates, extended redemption periods, redemption suspensions) and anti-dilution tools (redemption fees, swing pricing, dual pricing, anti-dilution levies). It also addresses redemptions in kind and side pockets. Fund managers retain primary responsibility for liquidity risk management but must select at least two appropriate tools from the regulatory lists, considering factors including fund structure, investment strategy, distribution terms, underlying asset liquidity profiles, stress test results, investor base characteristics, and operational constraints.
ESMA emphasises that fund managers must demonstrate to competent authorities that selected tools are activated and calibrated in all investors' interests and are appropriate given market conditions and fund characteristics. The guidance prohibits fund managers from providing certain investors information about liquidity management tool activation thresholds.
Competent authorities must notify ESMA within two months of publication whether they comply with the guidance or intend to diverge, using a template available on ESMA's website. The guidance applies from the date of application of the relevant regulatory technical standards, with a twelve-month transition period for existing funds.