The European Securities and Markets Authority (“ESMA”) responded to the European Commission's ("EC") request for amendments to the European long-term investment fund (“ELTIF”) regulatory technical standards (“RTS”).
Background
Since the introduction of ELTIFs in 2015, their adoption in the EU has been slow. To address this, the EC amended the original ELTIF rules with Regulation (EU) 2023/606 (the ELTIF Regulation, also known as "ELTIF 2.0") which took effect on 10 January 2024. These new regulations aim to make ELTIFs more attractive to both asset managers and investors. ELTIF 2.0 tasked ESMA with developing draft RTS to specify:
- the conditions under which the life of an ELTIF aligns with the life cycles of its individual assets and various features of its redemption policy.
- the requirements for cost disclosure. On 19 December 2023, ESMA submitted draft RTS to the EC. The EC responded on 6 March 2024, with concerns that ESMA's proposals extended beyond its technical mandate, particularly concerning redemptions and liquidity management tools.
ESMA revised RTS
On 22 April 2024, ESMA issued its response, including an opinion and revised RTS, addressing six key areas:
Notification of material changes to redemption policy
ESMA initially proposed that ELTIF managers inform regulators of changes to the fund's redemption policy within three business days of a material change. The EC preferred that these notifications be submitted in advance. ESMA agreed to this approach and now the ELTIF managers must notify regulators of any material changes at least one month before implementation, or as soon as possible after unplanned changes.
Minimum notice periods for redemption and liquidity requirements
ESMA originally proposed a 12-month minimum notice period for redemptions with liquid asset holdings based on a sliding scale. The EC found these requirements too strict for ELTIFs, which are meant for illiquid investments. ESMA revised the rules, reducing the liquidity requirements for shorter notice periods and removing the blanket 12-month rule.
Revised notice periods and requirements:
Liquidity management tools
ESMA had previously required ELTIF managers to implement at least one anti-dilution tool. The EC argued this would disincentivize the use of other suitable tools. ESMA ultimately removed this mandatory requirement.
Redemption gates
ESMA proposed linking redemption gates to notice periods, with a broader requirement for use in specific circumstances. The EC expressed concerns about limiting gates to "exceptional circumstances." ESMA clarified that redemption gates can be used alongside other liquidity management tools.
Cost disclosure
The EC found ESMA's proposed cost disclosure methodology inconsistent with existing EU legislation. ESMA agreed to change the cost calculation method from capital-based to net asset value-based, aligning with the EC's suggestion.
Minimum holding periods
The EC disagreed with ESMA's criteria for setting minimum holding periods, seeing it as mandatory and conflicting with ELTIF flexibility. ESMA maintained that minimum holding periods are essential and did not amend its stance.
Next Steps
ESMA's revised RTS shows a willingness to accommodate the EC's concerns on liquidity management and cost disclosures. However, issues remain around the redemption notice and minimum holding periods. The EC may adopt the RTS with relevant amendments or reject it. The European Parliament and the Council have three months to object to the adopted version.
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