Scope of the liquidity section
FUND 3.6 applies to a full-scope UK AIFM of a UK AIF and of a non-UK AIF. Its two operative rules differ in scope.
An unleveraged closed-ended fund sits outside the systems and stress-testing rule, inside the consistency rule.
The benchmark in limb (1)(b) is the fund's underlying obligations, which reach margin and collateral calls, drawdown commitments to underlying vehicles, financing obligations and fee and expense liabilities, rather than redemption requests alone.
Articles 46 to 49 of the AIFMD level 2 regulation carry the detailed supplementing rules (FUND 3.6.4G).
The consistency assessment
No method and no frequency are stated, so the assessment answering FUND 3.6.2R is a firm-imposed discipline: one document per fund, produced at manufacture and re-run on a stated cycle. Four inputs carry it.
- The portfolio sorted by time to realise at a defensible price, in the sizes the fund would have to sell.
- What the fund owes and when: redemptions, margin and collateral, financing, operating expenses and commitments to underlying vehicles.
- The investor register, with concentration modelled directly through nominee and omnibus accounts.
- What a forced sale would realise against the carrying valuation.
A change of strategy, a material redemption, a change in investor concentration or in the redemption terms forces an off-cycle run.
Proposed, not law
At CP26/28 7.22 the FCA says it would not consider there to be alignment if 50% of the value of scheme property is invested in inherently illiquid assets but redemptions are subject neither to a notice period nor to an alternative means of restricting the liquidity provided to investors. It is a consultation paragraph, usable as a design benchmark.
Tool selection and calibration
A liquidity management tool prices a redemption, delays it, or reduces it. Pricing does not create cash, so a fund holding assets that take months to sell can price a redemption correctly and still not fund it.
Calibration fixes the number that activates the tool, its owner and the escalation route before launch, and requires written confirmation from the administrator, transfer agent and depositary that they can operate it.
The Article 16(2b) selection duty
EU law
Directive (EU) 2024/927 inserts Article 16(2a) to (2i) into the AIFM Directive, with a transposition deadline of 16 April 2026. It reaches a UK firm through an EU fund, an EU entity in the group, or marketing into the Union, and does not bind a UK manager of UK funds.
An AIFM managing an open-ended fund must select at least two liquidity management tools from Annex V, points 2 to 8, after assessing their suitability against the fund's pursued investment strategy, liquidity profile and redemption policy, and must include them in the fund rules or instruments of incorporation for possible use in investors' interest. Swing pricing and dual pricing, points 5 and 6, cannot be the only two. Suspension and side pockets, points 1 and 9, do not count. A money market fund authorised under Regulation (EU) 2017/1131 may select only one.
Annex V lists nine tools in order: suspension of subscriptions, repurchases and redemptions; the redemption gate; extension of notice periods; the redemption fee; swing pricing; dual pricing; the anti-dilution levy; redemption in kind; and side pockets. Redemption in kind may be activated only for redemptions requested by professional investors and must correspond to a pro rata share of the assets, the pro rata requirement falling away where the fund is solely marketed to professional investors or is an index-replicating exchange-traded fund.
The manager must also implement activation and deactivation policies with the arrangements for using each tool, and communicate the selection and those policies to its home competent authority.
Proposed, not law
CP26/28 states at 7.14 that the FCA does not consider wholesale reform warranted for current full-scope UK AIFMs. Its draft rule at 7.23 would require a small AIFM of an open-ended or leveraged closed-ended fund to have the tools it deems necessary: no list, no minimum of two, no constitutional document requirement.
Investor disclosure
- Before investors invest, a description of the fund's liquidity risk management, including redemption rights in normal and in exceptional circumstances and the existing redemption arrangements with investors (FUND 3.2.2R(8)), where the tools appear in the exceptional-circumstances limb.
- A description of how the AIFM ensures fair treatment and, where an investor obtains preferential treatment or the right to it, of that treatment, the type of investor receiving it and any legal or economic links to the fund or manager (FUND 3.2.2R(10) and (11)). Side letters granting differentiated notice periods or excuse rights sit inside limb (11).
Alongside this module
Where this subject is covered elsewhere in the course.