On 19 December 2023, ESMA published its final report (ESMA34-1300023242-159) setting out the draft regulatory technical standards (“RTS”) under the revised ELTIF Regulation (“ELTIF II” – Regulation (EU) 2023/606).
The main aspects covered by the draft RTS are considerations on the life of a European long-term investment fund (“ELTIF”) and its compatibility with the life-cycles of each of the individual assets but also important features of the redemption policy of the ELTIF and the costs disclosures.
Other aspects covered by the draft RTS are:
- criteria for establishing the circumstances in which the use of financial derivative instruments solely serves hedging purpose;
- circumstances for the use of the matching mechanism; and
- criteria to be used for certain elements of the itemised schedule for the orderly disposal of the ELTIF assets.
In its report, ESMA suggests the specific rules to be applied, providing a detailed framework for aspects such as the following:
1) Minimum holding period: The ELTIF manager is allowed to select the minimum holding period that is best adjusted to an individual ELTIF, based on criteria set in the RTS, and upon justifications to the competent authority.
2) Maximum redemption frequency: Proposal to include a maximum quarterly redemption frequency, while allowing the ELTIF manager to deviate from it, upon justifications to the competent authority which seems positive (subject to the content of item 4) below).
3) Choice of liquidity management tools: ESMA suggests the mandatory implementation of at least one anti-dilution mechanism (in addition to a notice period) and redemption gates, while allowing the ELTIF manager to deviate from it, in specific circumstances, and upon justifications to the competent authority.
4) Prior Notice period for redemption requests, minimum percentages of liquid assets to be held and maximum percentage of liquid assets that can be redeemed: In addition to imposing predetermined minimum percentages of liquid assets to be held where the prior notice period for redemptions is of less than 12 months (usually 1 to 3 months for quarterly redemptions in retail alternative funds), the draft RTS limit the percentages which can be redeemed on the liquid assets. These rules are not as flexible as expected by the industry and do not take into account other parameters that would be fundamental in determining the liquidity profile of ELTIFs, such as its underlying strategy, the expected cash flow or the actual percentage available for redemptions.
Next steps
ESMA submitted the draft RTS to the European Commission for endorsement and final approval. The Commission has three months (with a possible one month extension) to decide whether or not do adopt the draft RTS. More information on ELTIF II is available on our website.
