March 22, 2024

ELTIF 2.0 RTS: Commission Orders ESMA to Think Again

Alexandrine Armstrong-Cerfontaine, Glynn Barwick, Justin Cornelius, Andrew Henderson, Bhargavi Mudakavi, Chris Ormond, Philip Spilberg

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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.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.