ESMA publishes Final Draft RTS & Guidelines on LMTs

What’s new?

On 15 April 2025, ESMA published two final reports setting out the draft technical standards and final guidelines relating to liquidity management tools (LMTs) to be used by managers of open-ended AIFs and UCITS. These documents follow the consultation papers published in July 2024 – see our summary here.

In its final drafts, we are pleased to see that ESMA has adopted a more flexible approach that takes greater account of the differences between UCITS and AIFs, and ESMA has removed the requirement to apply the same rules to all share classes.

What does the report say?

Redemption Gates

The definition of a redemption gate refers to ‘a partial and temporary restriction that does not entirely suspend redemptions but limits the amount or proportion of units or shares that shareholders can redeem within a given period’.

Previously, a redemption gate was to be expressed as a percentage of the fund’s NAV, after having considered all redemption orders received at a given dealing date. Now, ESMA has taken the view that an AIF should be allowed to use an activation threshold expressed in any of the following terms:

• a percentage of the AIF’s NAV
• the monetary value
• a combination of NAV and monetary value or
• a percentage of liquid assets.

ESMA’s final draft also includes a new method for applying redemption gates – redemption orders below or equal to a certain pre-determined redemption amount can be fully executed, while redemption orders above the redemption amount would be subject to the redemption gate.

Side Pockets

As ESMA felt that the mandate given to it under the Amending Directive did not empower it to specify how side pockets shall be managed, the final draft RTS includes no provisions for side pocket management, although ESMA is proposing that UCITS side pockets which are created through physical separation must be liquidated to avoid the ManCo from managing a UCITS in violation of the UCITS rules.

Likewise, for the same reason, ESMA removed from the final draft RTS the obligation for an AIFM or UCITS ManCo to place cash in side pockets created via physical separation in order to manage any potential liabilities.

Guidelines on selection and calibration of LMTs

ESMA has retained the principle which requires fund managers to select at least one quantitative LMT and one Anti-Dilution Tool (ADT) when selecting LMTs.

The final Guidelines also clarify that both the primary responsibility for liquidity risk management and the selection of the appropriate LMTs remain with the manager.

Next Steps

Draft RTS

ESMA has submitted the final draft RTS to the European Commission (EC). The EC now has three months to adopt them (or to decide not to adopt). If adopted, the draft RTS will be scrutinised by the European Parliament and the Council of the EU, with the final agreed text being published in the Official Journal.

Guidelines

The draft Guidelines will be translated into the official languages of the EU and posted on the ESMA website in due course.

The Guidelines will start to apply on the same day as the final RTS enter into force – however, managers of funds in existence before the application date will have a one year grace period before being required to comply.