Dear Sir or Madam,
Over the coming months, we will provide you with occasional updates on the changes introduced by Directive (EU) 2024/927 of the European Parliament and of the Council amending Directives 2011/61/EU and 2009/65/EC as regards delegation arrangements, liquidity risk management, supervisory reporting, the provision of depositary and custody services and loan origination by alternative investment funds (“AIFMD II”)^[1] . The provisions of AIFMD II must be implemented into national law by 15 April 2026. In this five-part newsletter series, we will examine the changes brought about by AIFMD II on topics such as delegation by AIFMs, investor disclosure and regulatory reporting obligations, host AIFMs, liquidity management and lending.
The first edition focuses on the impact of AIFMD II on the liquidity management of AIFs. The new requirements aim, among other things, to improve the management of liquidity risks in times of market stress and to enhance investor protection.

Changes to AIFMD II: Strengthening Liquidity Management for Open-Ended AIFs

With the recently adopted AIFMD II, the European Union has substantially revised the existing regulations on the supervision of alternative investment funds (“AIFs”). AIFMD II aims to strengthen the transparency, stability and integrity of the market for AIFs in the EU. It includes a number of amendments and additions to the requirements for alternative investment fund managers (“AIFMs”) to ensure improved supervision, more effective risk management and clearer regulatory reporting. The modifications under AIFMD II will enter into force on 15 April 2024 and must, in principle, be transposed into the national law of the Member States within 24 months, i.e. by 15 April 2026.

Detailed Requirements for Liquidity Management

The obligation to establish and apply appropriate liquidity management for open-ended AIFs is not new: In accordance with Art. 16(1) of the Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (“AIFMD”) and Art. 46 et seq. of the Level II Regulation^[2] , AIFMs must establish procedures for appropriate liquidity management. In addition, Art. 16(2) of the AIFMD stipulates for both open-ended and closed-ended AIFs that the investment strategy, liquidity profile and redemption policy of an AIF must be aligned. Under AIFMD II, these requirements are now becoming more stringent and more specific. AIFMD II requires AIFMs
that manage open-ended AIFs to select appropriate liquidity management tools (“LMTs”) from the list set out in Annex V of the consolidated version of the AIFMD^[3] and to incorporate them in the prospectus of the open-ended AIF in accordance with Art. 23(1)(h) of the Consolidated AIFMD. This is intended to ensure that AIFMs can react flexibly in stress situations. The LMTs defined in Annex V of the Consolidated AIFMD include:

(i) suspension of subscriptions, redemptions, and repurchases; (ii) redemption gate;
(iii) extension of notice periods; (iv) redemption fee; (v) swing pricing; (vi) dual pricing;
(vii) anti-dilution levy; (viii) redemption in kind and side pockets.

AIFMs managing an open-ended AIF must select at least two appropriate LMTs from those referred to in Annex V, points 2 to 8 Consolidated AIFMD.^[4] It is not possible for that selection to include only the tools referred to in Annex V, points 5 and 6 Consolidated AIFMD.^[5] Redemption in kind as referred to in Annex V, point 8, may only be selected 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. ^[6]

Selection and Activation of LMTs

The LMTs are selected by the AIFM taking into account the investment strategy, the liquidity profile and the redemption guidelines of the respective AIF. ^[7]

The AIFMs must establish detailed guidelines for the activation and deactivation of LMTs. In addition, AIFMD II requires that investors are fully informed about the possibility and conditions of using LMTs. ^[8]

The selection of LMTs and the detailed policies and procedures for the activation and deactivation of LMTs must be notified to the competent authorities of the home Member State of the AIFM. ^[9]

Increased Role of Supervisory Authorities

AIFMD II extends the powers of the supervisory authorities and the European Securities and Markets Authority (“ESMA”). In exceptional situations, national supervisory authorities can thus impose the activation or deactivation of LMTs in order to ensure investor protection and financial stability. ^[10] ESMA, on the other hand, may request that the competent national supervisory authority take this measure. ^[11] AIFMs must also inform their national supervisory authorities immediately when activating or deactivating LMTs. ^[12]

Draft Regulatory Technical Standards

Pursuant to Art. 16(2e) of the Consolidated AIFMD, ESMA is required to draw up draft regulatory technical standards (Draft Regulatory Technical Standards, “Draft RTS”). To this end, it has already consulted market participants by means of the Consultation Paper of 8 July 2024^[13] . The Draft RTS should be available no later than by 16 April 2025 and then submitted to the European Commission for approval.

The Draft RTS are to include specific provisions on the application and characteristics of the LMTs set out in Annex V of the Consolidated AIFMD. The aim is to establish mechanisms that enable AIFs and their AIFMs to manage liquidity pressures without destabilizing the market. In addition, the protection of investors’ interests is a key focus, e.g. by ensuring that AIFs are able to manage redemptions and refunds in line with market conditions at all times.

The establishment of binding standards at European level will create a harmonized legal framework to make the liquidity management of AIFs more transparent and predictable.

Implications for AIFMs and Investors

The new regulations increase the requirements for AIFMs, especially for open-ended AIFs. They must not only select and implement the appropriate LMTs but also ensure that their LMTs are compatible with the investment objectives and redemption policies of the AIFs. In the future, AIFMs will assume greater responsibility for responding proactively to liquidity risks and ensuring investor protection.

In addition, AIFs and their AIFMs are expected to provide detailed information on their liquidity management in the prospectus and annual reports. This includes information on redemption rights under normal and exceptional circumstances and on the conditions for using LMTs.

Conclusion

With AIFMD II, liquidity management has increasingly become a regulatory focus. The new requirements aim to strengthen investor protection. They take into account the interests of investors who wish to redeem their shares as well as those of the remaining investors.

Although the 24-month transposition period ending on 15 April 2026 and the longer transitional period for individual provisions of AIFMD II give AIFMs some leeway for implementation, liquidity management is already a key issue for open-ended AIFs. AIFMs should therefore familiarize themselves with the new requirements at an early stage in order to adapt their strategies accordingly and minimize regulatory risks.

We are happy to answer any questions you may have about the changes to AIMD II:

Legal-team@aiqunited.com
+352 26202332 30 (office)
https://aiqunited.com/

Isabell Becker
Associate
Isabell.becker@aiqunited.com

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[1] Available at: https://eur-lex.europa.eu/eli/dir/2024/927/oj/eng.

[2] Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament and of the Council with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision.

[3] Consolidated version with the amendments under the AIFMD II (“Consolidated AIFMD”).

[4] Art. 16(2b), subpara. 1 of the Consolidated AIFMD.

[5] Art. 16(2b), subpara. 1 of the Consolidated AIFMD.

[6] Art. 16(2b), subpara. 4 of the Consolidated AIFMD.

[7] Art. 16(2b), subpara. 1 of the Consolidated AIFMD.

[8] Art. 16(2b), subpara. 3 of the Consolidated AIFMD.

[9] Art. 16(2b), subpara. 3 of the Consolidated AIFMD.

[10] Art. 46(2)(j) of the Consolidated AIFMD.

[11] Art. 47(4)(d) of the Consolidated AIFMD.

[12] Art. 16(2d) of the Consolidated AIFMD.

[13] Consultation Paper, Draft Regulatory Technical Standards on Liquidity Management Tools under the AIFMD and UCITS Directive, 8 July 2024; available at https://www.esma.europa.eu/document/consultation-paper-regulatory-technical-standards-liquidity-management-tools-under-aifmd.

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