On 19 July 2024, the European Commission adopted a new Delegated Regulation implementing certain level two measures (the “Level 2 RTS”) required pursuant to Regulation 2015/760 on European Long Term Investment Funds as amended by Regulation 2023/606 (the “ELTIF 2.0 Regulation”). By enhancing liquidity options, broadening eligible assets, improving risk management capabilities, and strengthening investor protection, the Level 2 RTS aim to make ELTIFs a more effective tool for channelling long-term investments.
Background
As we have previously discussed, the usual process of developing such measures (ESMA produces draft regulatory technical standards and the European Commission adopts them, usually without any significant change) has been far from smooth on this occasion.
ESMA’s first draft in December 2023 was rejected by the European Commission, and, after ESMA had submitted a revised text in April 2024 at the European Commission’s request, the European Commission has again not accepted all of ESMA’s proposal.
The European Commission has now adopted the Level 2 RTS and sent them to the European Parliament and to the Council of the EU – these have three months to scrutinise them, extendable by a further three months by either institution.
The expectation is that Level 2 RTS is to be agreed and published in the EU Official Journal sometime in Q4 2024. It will enter into force the day following publication.
Key Changes in the Level 2 RTS
The Level 2 RTS supplement Articles 9(3), 18(6), 19(5), 21(3) and 25(3) of ELTIF 2.0 Regulation as specified hereafter.
Redemption policy and liquidity management
The new Level 2 RTS introduce greater flexibility to investment managers in building and calibrating their redemption policies.
ELTIF 2.0 provides that at the time of authorisation and throughout the life of the ELTIF, the manager of the ELTIF that allows redemptions during the life cycle of the fund should be able to demonstrate that an appropriate liquidity management system and effective procedures for monitoring the liquidity risk of the ELTIF are in place, which are compatible with investment strategy of the ELTIF and the proposed redemption policy.
In this regard, the fund manager must provide, the ELTIF’s national competent authorities, at the time of authorisation of the ELTIF, with a comprehensive list of information, including on the redemption policy and those responsible for the management of the redemption process, on how the assets and liabilities are to be managed to meet redemption requests, on liquidity stress testing and the implementation of liquidity management tools.
Throughout the life of the ELTIF, changes to certain of the information provided on authorisation have to be notified to the competent authorities and they may request information on stress testing and activation of liquidity management tools.
The elements to be contained in a redemption policy are set out in Article 5 of the Level 2 RTS.
The percentage of an ELTIF’s assets which can be redeemed is to be calibrated, at the fund manager’s discretion, on the basis of either:
- the ELTIF’s redemption frequency and notice period according to the options set out in Annex I; or
- the ELTIF’s redemption frequency and minimum percentage of liquid assets as specified in Annex II.
Article 5 also provides that an ELTIF fund manager may (but does not have to) implement at least one anti-dilution liquidity management tool from among the following:
- anti-dilution levies;
- swing pricing; and
- redemption fees.
The fund manager may also at its discretion select and implement other liquidity management tools. In such a case, the fund manager shall upon request provide the competent authority of the ELTIF with information on why, on the basis of the features of the ELTIF, the anti-dilution liquidity management tools referred above are not adequate for that specific ELTIF or why another set of liquidity management tools would be more appropriate, considering the interests of the ELTIF and of its investors.
Use of derivatives solely for hedging purposes
ELTIFs are prohibited from using financial derivative instruments, except where the use of such instruments solely serves the purpose of hedging the risks inherent to other investments of the ELTIF. Article 1 of the Level 2 RTS clarifies that such use is permitted where it is:
- "economically appropriate" for the ELTIF,
- consistent with the ELTIF’s risk-profile,
- aimed at a verifiable reduction of the risks, and (iv) the underlying of the financial derivative instruments are assets to which an ELTIF is exposed, or, where the financial derivative instruments to hedge the risks arising from the exposure to such assets are not available, the underlying of financial derivative instruments are of the same or economically similar asset class.
Life-cycle of the ELTIF and minimum holding period
Article 2 of the Level 2 RTS sets out the circumstances in which the life of an ELTIF is to be considered compatible with the life cycles of each of its individual assets.
The manager of an ELTIF should consider the liquidity profile of each of the ELTIF’s individual assets, the liquidity profile of the ELTIF’s portfolio on a weighted basis, the timing of acquisition of those individual assets, and the valuation of those individual assets. In those ELTIFs offering redemption the redemption policy of the ELTIF also needs to be considered.
Article 3 of the Level 2 RTS sets out a list of criteria to be considered when imposing a minimum holding period (i.e. the minimum period of time before an investor can redeem from an ELTIF. The ELTIF manager is required to consider, among other things:
- the long-term nature and investment strategy of the ELTIF;
- the ELTIF’s underlying asset classes, their liquidity profile, and their position in their life cycle;
- the ELTIF’s investment policy; and
- the ELTIF’s investor base.
ELTIF transfer request matching
Pursuant to Article 7 of the Level 2 RTS, if an ELTIF provides for the full or partial matching of transfer requests of units or shares in the ELTIF of existing and incoming investors, its matching policy must contain certain minimum criteria including:
- the format, process, and the timing of the matching;
- the frequency or periodicity of the matching window, and the duration of that window;
- the dealing dates;
- the requirements for the submission of purchase and exit requests, including the deadlines for submitting such requests; and
- the settlement and pay-out periods.
Cost transparency
ELTIF 2.0 provides that the prospectus shall prominently inform investors of the level of the different costs borne directly or indirectly by the investors and grouped into certain headings. Article 12 of the Level 2 RTS provides clarifications on what has to be included in each group. This focus on cost transparency aims to empower retail investors, allowing them to make informed decisions based on a thorough understanding of fees.
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