This circular addresses the implementation of Directive (EU) 2024/927 (the AIFMD II), which amends Directive 2011/61/EU (the AIFMD) and Directive 2009/65/EC (the UCITSD). These changes are not merely administrative, they represent a fundamental shift in how liquidity risk is managed across the European Union. These amendments necessitate changes to national laws (Law 56(I)/2013 and Law 78(I)/2012 in Cyprus), requiring fund managers to integrate specific liquidity management tools (LMTs) into their constitutional documents.

This post outlines the key changes, critical compliance deadlines, and the specific actionable steps fund managers must take to ensure alignment with the new regulatory framework.

Key LMTs

Central to this directive is the introduction of a harmonised list of nine LMTs. This list provides a toolkit for managers to handle redemption pressures effectively.

The directive introduces the following tools:

1. Suspension of subscriptions, repurchases and redemptions: Temporarily halting trading
2. Redemption gates: Limiting the amount that can be redeemed on a single dealing day
3. Extension of notice periods: Increasing the time between a redemption request and settlement
4. Redemption fee: Charging a fee to redeeming investors to cover liquidity costs
5. Swing pricing: Adjusting the Net Asset Value (NAV) to reflect dealing costs
6. Dual pricing: Using bid and offer prices for subscriptions and redemptions
7. Contribution to prevent impairment (Anti-dilution levy): Applying a levy to subscriptions or redemptions to protect remaining investors
8. Redemption in kind: Paying redemption proceeds in assets rather than cash
9. Side-pockets: Segregating illiquid assets from the main portfolio

Selection requirements

Under the new rules, AIFMs managing open-ended AIFs and UCITS management companies must select at least two appropriate LMTs from the list above (specifically from points 2 to 8).

Crucially, the selection cannot consist solely of swing pricing (5) and dual pricing (6). These tools must be included in the fund's rules or instruments of incorporation for potential use in the best interests of investors.

Compliance deadlines and requirements

CySEC has established a clear timeline for compliance. Adherence to these dates is critical to avoid regulatory friction.

Submission details

Entities must submit applications or notifications to CySEC to amend their fund rules or instruments of incorporation. These submissions must be accompanied by:

• A confirmation statement: Declaring that the suitability of the selected tools has been assessed against the fund’s investment strategy, liquidity profile, and redemption policy.
• Applicable fees: Payment of the relevant fees as determined by current directives.

Exemptions and special cases

While the directive applies broadly, specific nuances exist for certain fund types.

• Money Market Funds (MMFs): If an open-ended AIF or UCITS qualifies as a Money Market Fund under Regulation (EU) 2017/1131, the manager is only required to select one liquidity management tool from the list (points 2 to 8), rather than two.
• Exceptional activation: In extraordinary circumstances where it serves the investors' best interests, managers may activate suspension of redemptions (1) or side-pockets (9) even if these tools were not explicitly included in the fund's constitutional documents.

Next steps for fund managers

Ensure your fund is prepared for the upcoming changes. Review your liquidity management strategy, update your governing documents.

For comprehensive details, refer to Circular E743 here (only in Greek)