Why Irish fund managers should heed Central Bank LMT guidance

The Central Bank published its guidance at the start of April, part of an ongoing effort at global, EU and domestic level to promote greater and more consistent use price based LMTs across open ended funds.

The guidance comes after the bank’s own survey found that while 83% of funds based in Ireland have at least two LMTs available to them, just 35% of them made use of one.

Despite the disparity, the Central Bank has emphasised that price-based LMTs should not be viewed as tools to be applied in exceptional or stressed market conditions, but as components of everyday liquidity risk management that should be deployed more widely and consistently, and in a manner that fully captures the cost of liquidity.

For funds operating or domiciled in Ireland, the guidance provides useful advice for fund managers on why they should be looking to bolster their use of the tools.

Regulatory and supervisory direction

The Guidance builds on the FSB’s recommendations on addressing liquidity mismatch in funds (December 2023), and the International Organization of Securities Commissions guidance on anti dilution and price based LMTs.

It also builds on the LMT Regulatory Technical Standards issued by the European Securities and Markets Authority, which were adopted in November 2025 and apply to funds authorised from 16 April 2026.

Across these initiatives, regulators have highlighted concerns that price-based LMTs were historically underutilised, inconsistently applied, or insufficiently calibrated, particularly during periods of market stress.

The Central Bank shares the FSB’s and IOSCO’s objective for the greater adoption and more harmonised use of price based LMTs, with the aim of reducing investor dilution, limiting first mover advantage and enhancing system wide resilience.

Accounting for the Full Cost of Liquidity

When investors subscribe or redeem from a fund, a fund may incur transaction costs associated with buying or selling underlying assets. These costs encompass:

• Explicit costs, such as broker commissions, taxes and levies; and
• Implicit costs, which are market driven, variable and more difficult to predict, such as bid ask spreads and costs resulting from market impact.

The Central Bank has emphasised that effective and consistent application of price-based LMTs requires managers to allocate both explicit and implicit costs to transacting investors.

Where this does not occur, remaining investors suffer dilution and redeeming investors may benefit from a first mover advantage, which runs counter to investor protection and financial stability objectives.

Market Impact

A key feature of the guidance is its focus on “market impact” trading costs, which is an estimate of the costs incurred by a fund where the trading activity required to meet net flows results in investments being acquired or disposed of at prices which deviate from the prevailing market.

This is particularly relevant in the case of large trades relative to available market liquidity, investments in less liquid assets, or trading during stressed or volatile market conditions. In determining the costs to a fund of market impact, there are several factors that should be considered:

• Trade size, relative to average daily trading volumes;
• Market depth, including order book liquidity;
• Market volatility, which amplifies execution risk; and
• Trading venue, distinguishing between exchange traded and OTC markets.

What this highlights is how the Central Bank would like managers to improve their liquidity management frameworks, including assessing the market impact of net subscriptions and net redemptions. The Central Bank recommends the use of market data to identify the full costs incurred by a fund in acquiring and disposing investments, which should be allocated to transacting investors.

Governance readiness

Acknowledging the challenges of estimating implicit costs, the guidance encourages managers to draw on a combination of internal trade data, broker estimates, third party data and stress testing.

Price based LMTs calibration is described as an iterative process, requiring periodic back testing and refinement.

This underlines that the Central Bank expects boards and designated persons to exercise active oversight of price based LMTs calibration, with clear documentation supporting methodologies, assumptions and review processes.

This will be particularly relevant for supervisory engagement, where firms may be expected to demonstrate not just the existence of price based LMTs, but their consistent and credible application.

What this means for fund managers

For fund managers, the guidance reinforces that:

the Central Bank expects greater use and more consistent application of price based LMTs;

• price based LMTs should be calibrated to capture the full cost of liquidity, including implicit costs such as market impact; and
• robust data, governance and disclosure will have greater importance in demonstrating compliance with the Central Bank’s expectations.

Through the guidance the Central Bank is signalling a shift from whether price based LMTs should be used to how effectively and consistently they are deployed. As such, fund managers should ensure that their liquidity frameworks, documentation and operational processes reflect this supervisory direction.