Background
A new EU framework governing the use of liquidity management tools (LMTs) by UCITS took effect on 16 April 2026. Although these are EU-specific regulations, managers of UCITS authorised by the Securities and Futures Commission (SFC) are expected – when implementing such LMTs – to take appropriate measures in line with the SFC’s expectation to safeguard the interests of Hong Kong investors.
New EU LMTs framework
The new EU LMTs framework comprises:
(a) Level 1 Requirements: Directive (EU) 2024/927 of the European Parliament and of the Council of 13 March 2024 (Directive), which amends the UCITS Directive to, inter alia, mandate selection of at least two appropriate LMTs from a specified list of acceptable LMTs (i.e. redemption gate, extension of notice periods, redemption fee, swing pricing, dual pricing, anti-dilution levy, and redemption in kind). The Level 1 Requirements apply from 16 April 2026.
(b) Level 2 Requirements: An EU Commission Delegated Regulation (RTS) setting down the specific characteristics of the available LMTs. The Level 2 Requirements apply to all UCITS established on or after 16 April 2026 with immediate effect. UCITS established before 16 April 2026 are deemed to comply until 16 April 2027, providing a one-year transition period for existing funds to comply with the detailed requirements under Level 2.
The new framework is also supplemented by new ESMA guidelines on the selection and calibration of those LMTs.
Actions to be taken by managers of SFC-authorised UCITS
Liquidity risk management is an integral component of the overall risk management framework of SFC-authorised funds managers and any LMT must be deployed in the best interests of investors.
Based on guidance given by the SFC, fund managers of SFC-authorised UCITS should:
(i) Selection of LMTs: carefully evaluate the appropriateness of each LMT under the Directive, especially tools such as redemption gates (which may impose redemption caps or disallow automatic carry-over of unexecuted redemption requests) and extensions of notice periods as they may not be suitable for every fund. For example, for funds investing primarily in highly liquid assets, such tools may not be suitable under normal market conditions, particularly if a very low redemption threshold is to be set. If such tools were to be adopted, the SFC may expect certain conditions or qualifications (e.g., activation only under exceptional circumstances) be imposed for the deployment of these tools.
(ii) Continued compliance with the UT Code: ensure compliance with applicable provisions of the Code on Unit Trusts and Mutual Funds (UT Code) including 10.6 to 10.8 of the UT Code regarding suspension and deferral of dealings.
(iii) Investor notification: notify Hong Kong investors in advance if new LMTs not currently disclosed in the fund’s Hong Kong offering documents (HKOD) are to be introduced, or if there are changes to existing LMTs (for example, amending the threshold and/or mechanism for activating a redemption gate/deferral). The notice to investors and the HKOD should clearly describe the LMTs, explain the circumstances in which they may be used, highlight their potential impact on the fund, and disclose any associated risks for investors.
Fund managers of SFC-authorised UCITS are encouraged to consult the SFC as soon as possible to ensure the smooth adoption of new LMTs, or changes to LMTs by their SFC-authorised UCITS.
Additional notes for SFC-authorised non-UCITS
On a final note, while the new EU LMT framework does not have a direct impact on non-UCITS, managers should also note that the SFC’s own proposed enhancements to liquidity risk management for SFC-authorised funds are currently in the pipeline. For details, please see the SFC’s consultation paper to proposed amendments to the UT Code (dated October 2025), accessible here. Our article on this topic is accessible here.
