In our previous alert, we looked at the draft revised Regulatory Technical Standards (RTS) supplementing the amended ELTIF Regulation (ELTIF 2.0) published by the European Securities and Markets Authority (ESMA) in its December 2023 Final Report.
On 6 March 2024, and just before the expiry of its initial adoption window, the European Commission published a Communication in which it states that it "considers it necessary to take a more proportionate approach to the drafting of the RTS, in particular with regard to the calibration of the requirements relating to redemptions and liquidity management tools."
It also chastised ESMA, reminding it that the RTS are technical and do not imply strategic decisions or policy choices. This reflects many market participants' feedback to the consultation, that critiqued ESMA's approach to the draft RTS. We await the detail in the amended RTS text before being able to champion any consequent changes, but the Commission's comments would mean that the ELTIF redemption and liquidity provisions would better align with market practice for semi-open-ended structures and would allow an ELTIF manager more discretion in its liquidity modelling and implementation.
Three key areas of change the Commission outlines are:
- Deletion of the mandatory 12-month notice period for investor redemption requests. This is welcome because the RTS as drafted would mean that for an ELTIF that invests, for example, 100% in real assets, with no UCITS or other liquid asset exposure, the notice period for redemptions (which are to be no more frequently than quarterly) will have to be at least 12 months. This would have been more prescriptive than other vehicles (including the open-ended authorised UK Long Term Asset Fund).
- Amendment to the liquidity-related requirements linked to notice periods so that they specifically take into account the principle of proportionality, the existing market practices for retail long-term funds, and the individual situation of ELTIFs. This helpfully recognises that the fixed liquid-asset thresholds as drafted could create a cash drag and hence calls into question the attractiveness of the ELTIF and its viability for targeted investment strategies such as infrastructure, real estate, and private equity long-term investment funds.
- Deletion of additional ELTIF-specific requirements in the RTS for selecting and implementing liquidity management tools.
ESMA has until 17 April 2024 to amend the draft RTS and resubmit them to the Commission for adoption; failing this, the Commission can adopt the RTS with the amendments it considers relevant, or reject them.
In the table below, we set out the key features of the liquidity provisions in the RTS and the proposed changes highlighted in the Commission's Communication.
Feature | Draft RTS provision (in the ESMA Final Report) | Commission-suggested change |
Material change to
redemption policy |
The ELTIF manager has to
notify its national competent authority (NCA) "as soon as
reasonably practically possible and not later than within 3
business days" from the date when it knows/should have known
that there is a material change to the information provided (on
authorisation and on an ongoing basis) in relation to, or that may
affect, its redemption policy and liquidity management tools. The
ELTIF manager must provide the updated versions of the information
within 20 business days. |
Amend to make clear that
the ELTIF manager must notify its NCA of any such material changes
in advance (unless beyond the manager's control). |
Minimum holding
period during which redemptions cannot be granted |
An ELTIF manager must
demonstrate to its NCA the appropriateness of its minimum holding
period and its compatibility with valuation procedures and the
ELTIF redemption policy, based on the specified criteria (and there
is no fixed minimum stated period). |
No comment/change |
Redemption
frequency |
No more than quarterly, but
derogation allowed when an ELTIF manager can justify a higher
frequency to its NCA, based on the ELTIF's individual features
and having a reliable, sound, and updated asset valuation. |
No comment/change |
Redemption notice
period and size limit |
A mandatory minimum
redemption notice period of 12 months is to apply for each
investor's redemption requests, with shorter notice periods
allowed (see below). |
The requirement of a
minimum 12-month notice period should be removed. It does not
sufficiently take into account the specific situation of individual
ELTIFs. |
Liquidity
requirements related to standardised notice period
requirements |
Shorter notice periods to
be calibrated as set out in a table (see page 58 of the Final Report) based on the ELTIF's minimum
holding in UCITS/liquid assets and maximum amount of liquid assets
that can be used to satisfy redemptions. For example, the
redemption notice period can be 3 to 6 months only if the ELTIF
holds at least 40% in UCITS/liquid assets at all times and the
redemption limit is 40% of the ELTIF's UCITS/liquid asset
holdings. |
These should be amended to
specifically take into account the principle of proportionality,
the existing market practices for retail long-term funds, and the
individual situation of ELTIFs. The Commission proposes that an
ELTIF's liquidity profile should be carefully calibrated,
applying a combination of factors (the minimum percentage of liquid
assets held, maximum percentage of assets subject to redemption,
redemption frequency, and notice period). Full analysis will follow
once ESMA has revised the text. |
Liquidity
management tools (LMTs) |
An ELTIF manager must
implement at least one anti-dilution mechanism (in addition to
notice periods) — anti-dilution levies, swing pricing, or
redemption fees — but can select other LMTs provided it
justifies those to its NCA (and having taken due account of the
investors' interests). |
There should be no
ELTIF-specific requirements with respect to selecting and
implementing LMTs (including the ELTIF manager's capacity to
select an LMT) beyond those set out in the ELTIF Regulation. |
Redemption
gates |
Can be implemented in a
similar way to the shorter notice periods as well as in certain
specific circumstances (e.g., to mitigate any potential risk in
financial stability and in stressed market conditions in which
asset sales to meet redemption requests are impossible or imply
highly discounted prices). |
The implementation and
activation of redemption gates should not be limited to
"certain specific circumstances" or exclusively
contingent on the notice period set out in the calibration table
proposed by the draft RTS. |
ELTIF manager's
matching mechanism and pricing |
An ELTIF manager wanting to
offer the matching mechanism will need to set out in its
constitutional documents the procedures, format, process, and
timing of the matching mechanism, the frequency/periodicity and
duration of the matching window, the dealing dates, deadlines for
submission of purchase and exit requests, settlement and payout
periods, how undue risks for the ELTIF are to be avoided, and how
the mechanism differs from its redemption policy. |
No comment/change |
In addition, the Commission also seeks better alignment of the requirements on cost disclosures (both methodology and presentation) with the PRIIPs Regulation, MiFID, and AIFMD.
Conclusion
As mentioned in the European Parliament's Capital Markets Union: Ten Years Later report, the hope is that ELTIF 2.0, available since 10 January 2024, will be "more powerful" than the "disappointing impact" of the first ELTIF legislation in 2015. These proposed amendments to the liquidity provisions would certainly help to try to move the dial in terms of more take-up of the revised ELTIF framework.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.