Background
On 19 December 2023, ESMA published a final report on the proposed level 2 regulatory technical standards (the “Final Report”) for Regulation (EU) 2015/760 of 29 April 2015 on the European Long-term Investment Fund, as amended (the “ELTIF Regulation”). The amended ELTIF Regulation entered into force on 10 January 2024, following the amendments of the ETLIF Regulation (EU) 2023/606 of 15 March 2023 (the “ELTIF 2.0”). The Final Report has been submitted to the European Commission for its endorsement.
The Final Report seeks to reach a balance by proposing prescriptive rules, while allowing ELTIF managers to deviate from these under specific circumstances.
Key points covered in the draft RTS
The Final Report covers:
- The circumstances in which the ELTIF’s life is compatible with the life cycles of its individual assets and the different features of the ELTIF redemption policy;
- The circumstances for the use of the matching mechanism, i.e. the possibility of full or partial matching (before the end of the life of the ELTIF) of transfer requests of units or shares of the ELTIF by existing ELTIF investors with transfer requests by potential investors; and
- The costs disclosures.
Specifically the following points were covered:
- Minimum holding period
The Final Report defines that the minimum holding period for an investor will be determined by the ELTIF manager which must consider various factors such as the investment strategy, the asset classes, the investor base, the liquidity profile, the valuation procedures, the extent of borrowings, lending and securities financing transactions used, the portfolio, the assets' life, the redemption policy, and the investment phase of the ELTIF. The ELTIF manager must also demonstrate to the competent authority of the ELTIF the appropriateness of the minimum holding period (Article 3 of the Final Report).
- Selection of one minimum liquidity management tool and maximum quarterly redemption frequency
On the one hand, if an ELTIF allows redemptions during its life, it must adopt a maximum quarterly redemption frequency, unless the ELTIF manager can justify to the competent authority of the ELTIF why a higher frequency would be more appropriate. The ELTIF manager must provide to the competent authority of the ELTIF at the time of its authorisation detailed information on the redemption policy, the frequency of redemption, the valuation procedures, the liquidity stress tests and the liquidity management tools of the ELTIF and inform it of any material changes within three business days (Article 5(4a) of the Final Report).
On the other hand, to manage liquidity, the ELTIF manager must choose and apply at least one of these tools: anti-dilution levies, swing pricing or redemption fees. However, if these tools are inadequate for the ELTIF, the ELTIF manager can explain to the competent authority why other tools may be more in the investors’ interest. The Final Report gives the possibility to the ELTIF manager, if the ELTIF is only marketed to professional investors, to request an exemption from using these types of tools.
- Impact of the notice period for redemptions on the minimum liquid assets and redemption limits
According to the Final Report redemptions would only be permitted if a notice period of at least 12 months is provided. However, the Final Report provides exceptions to such notice period based on the minimum percentage of liquid assets and imposes redemption gates. For example, if liquid assets represent a minimum of 27% the redemption notice period can be reduced to 6-9 months. In such a situation there should be a redemption gate of 45%.
If the notice period is less than three months, the ELTIF manager must further justify to the competent authority of the ELTIF the consistency of the notice period with the redemption policy requirements and the investors' interest (Article 5(4a) of the Final Report). However, the ELTIF manager may request an exemption from this requirement for ELTIFs marketed solely to professional investors (Article 5(10) of the Final Report).
- Matching mechanism
The Final Report specifies the rules and procedures for the matching of transfer requests between existing and new investors. The ELTIF manager must disclose in the constitutional documents of the ELTIF the format, process, timing, frequency, duration, dealing dates, deadlines, settlements and pay-out periods, the safeguard of investors' interests and the notice period, if any. The Final Report also requires the ELTIF manager to clearly disclose the differences between the redemptions and matching mechanisms in terms of frequency, periods, execution price and notice period (Article 7 of the Final Report).
The Final Report also provides for rules for dealing with any imbalance between exit and purchase orders, ensuring that the requests are either cancelled, carried over, or executed based on a criterion established by the ELTIF manager. The pro rata conditions shall be based on the size of each exit order and the available assets of the ELTIF, unless the ELTIF manager can justify a different approach (Article 8 of the Final Report).
- Cost disclosures
The Final Report sets rules on the calculation and disclosure of costs, using common definitions, calculation methodologies, and presentation formats for the different types of costs. They aim to align the cost disclosure with the existing cost disclosure requirements in other regulatory frameworks, such as the Regulation (EU) No 1286/2014 of 26 November 2014 on key information documents for packaged retail and insurance-based investment products, as amended (the “PRIIPs Regulation”), to the extent possible. The Final Report defines the costs of setting up the ELTIF, the costs related to the acquisition of assets, the management and performance related fees, the distribution costs, and the other costs, and provides the methodologies for expressing them as percentages of the capital of the ELTIF. The Final Report also sets a definition of the overall cost ratio of the ELTIF as the ratio of the total costs to the capital of the ELTIF and provides the formula for the calculating thereof based on the sum of the annual costs and the average of the fixed costs referred to above over the recommended holding period of the ELTIF. The Final Report requires the costs section of the prospectus of the ELTIF to contain a presentation of costs in the form laid down in the Annex “Format for the Presentation of Cost” of the Final Report, which includes a table with the one-off and ongoing costs.
The Final Report also imposes that the prospectus of the ELTIF contains narratives presenting both the PRIIPs overall reduction in yield figure and the ELTIF's overall cost ratio and explanations of any potential differences between those figures, in the case of ELTIFs subject to the PRIIPs Regulation (Article 12 of the Final Report).
Conclusion
The European Commission has three months (which may be extended by another month) to adopt the Final Report. It may also amend the Final Report and send it to the ESMA for further review and consideration. Once the European Commission adopts the Final Report, the European Parliament and European Council have three months to scrutinize it.
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