UCITS VI & AIFMD II: Luxembourg’s New Regulatory Architecture

written by Romain Massul

PART I: Global Overview

The Law of 3 March 2026 (the “Law”) transposes Directive (EU) 2024/927 into Luxembourg law. The Law was published in the Mémorial A on 9 March 2026. Directive (EU) 2024/927 amends Directives 2009/65/EC (UCITS) and 2011/61/EU (AIFMD); accordingly, the Law amends the Luxembourg law of 17 December 2010 relating to undertakings for collective investment (the “UCI Law”) and the law of 12 July 2013 on alternative investment fund managers (the “AIFM Law”).

Context and philosophy of the reform

Far from representing a regulatory revolution, the Law constitutes a measured evolution of the UCITS and AIFMD frameworks and reflects Luxembourg’s long-standing commitment to avoiding regulatory gold-plating. It brings more clarity to delegation arrangements and more transparency for investors via the obligation to select at least two Liquidity Management Tools (LMTs). It also establishes a harmonised European framework for Loan-Originating Alternative Investment Funds (LO-AIFs), a measure that applies only to alternative funds. Finally, it aligns the UCITS reporting framework more closely with that applicable to alternative investment funds through the introduction of enhanced reporting requirements.

Entering into force on 16 April 2026, with a deferral until 16 April 2027 regarding the new reporting obligation, as well as grandfathering until 16 April 2029 for certain existing LO-AIFs, UCITS VI and AIFMD II – as they are commonly known – give more clarity and reinforce alignment between the UCITS and AIF regimes.

The new paradigm of the Liquidity Management Tools

UCITS VI and AIFMD II introduce a new framework for the management of liquidity by requiring managers of UCITS and open-ended AIFs to select at least two LMTs from a harmonised EU list. Money market funds are an exception and may select a single LMT.

This new duty derives directly from the lessons learned during the COVID-19 pandemic (in particular the market shock of March 2020) and the recommendations of the European Systemic Risk Board (ESRB). Faced with large-scale redemption requests, many fund managers experienced significant difficulties in meeting them. To address this vulnerability, which is inherent in open-ended structures, lawmakers now require fund managers to establish robust and transparent liquidity management frameworks on a proactive and detailed basis, notably through enhanced disclosure in fund prospectuses.

From now on, UCITS management companies and AIFMs managing open-ended AIFs must select their LMTs from the harmonised list provided by the legislation, identify them in the fund documentation and communicate their selection to the CSSF. For UCITS, the CSSF must also be notified before any LMT is activated or deactivated. The list contains nine tools, which can be grouped into three categories:

Anti-dilution tools (swing pricing, dual pricing, redemption fees, anti-dilution levies)
Quantitative tools (redemption gates, extension of notice periods, redemptions in kind)
Exceptional tools (suspension of subscriptions, repurchases and redemptions, side pockets)

One combination restriction applies: swing pricing and dual pricing cannot be selected together as a fund’s only two LMTs. In addition, ESMA’s guidelines recommend combining at least one quantitative tool with an anti-dilution LMT.

The suspension of subscriptions, repurchases and redemptions and side pockets are reserved for exceptional circumstances. As a consequence, they do not count towards the minimum of two LMTs.

Strengthened Delegation and Substance Requirements

The Law seeks to reinforce the delegation rules to ensure genuine operational substance within the European Union, notably by requiring that the business be effectively conducted by at least two natural persons who are either employed full-time by the manager or committed full-time to that function, and who are resident in the Union.

In practice, Luxembourg investment fund managers, both UCITS management companies and AIFMs, were already largely aligned with these requirements under CSSF Circular 18/698.

The objective of the new rules is to reduce the risk of so-called “letterbox entities”, and to give more visibility to national authorities regarding the delegations in place. Thus, management companies and AIFMs must be able to demonstrate and justify their delegation arrangements in a transparent and objective manner. As a pragmatic clarification, the distribution of fund units by distributors acting on their own behalf does not constitute delegation.

Lastly, ESMA will perform a review of delegation practices every two years to promote supervisory convergence across the European Union.

Depositary Oversight and Liability Framework

UCITS VI and AIFMD II clarify how the use of central securities depositories (CSDs) is treated within the depositary’s custody chain.

A distinction is drawn between a CSD acting as an “issuer CSD” (which initially records securities in a book-entry system and maintains top-tier securities accounts) and a CSD acting as an “investor CSD” (an intermediary participating in a settlement system operated by another CSD). A depositary using the services of an issuer CSD, for example where newly issued securities are recorded, is not considered to have delegated its custody functions: it merely uses market infrastructure. By contrast, using an investor CSD constitutes a delegation of custody functions.

As investor CSDs are already subject to strict regulation, the depositary is exempted from ex ante due diligence when selecting and appointing them, while ongoing monitoring remains required.

This distinction matters, as it determines both the custody chain and the extent of the depositary’s liability. Where a financial instrument held by such a delegate is lost, the depositary remains subject to its existing strict obligation to return an identical instrument, or the corresponding amount, without undue delay. Under the UCITS regime, this liability cannot be contractually excluded, whereas under the AIFMD the depositary may be discharged from it only under strict contractual conditions.

The prudential reporting and transparency requirements

UCITS VI aligns the prudential reporting and transparency obligations of UCITS management companies with the Annex IV reporting framework applicable to AIFMs.

Accordingly, UCITS management companies will be required, just like alternative investment fund managers, to report information on leverage, stress test results, and all relevant market, instrument and exposure data (for AIFMs, reporting will no longer be limited to the principal markets and instruments in which they trade). This reporting framework will also require highly granular information on delegation arrangements relating to portfolio and risk management, including, in particular, the number of dedicated full-time equivalents (FTEs) and the outcomes of due diligence reviews.

The frequency and format of this reporting remain subject to ESMA’s forthcoming publication of the relevant Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS).

These reporting obligations will apply from 16 April 2027.

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