ESMA consults on Level 2 measures for ELTIF 2.0

On 23 May 2023, ESMA published a consultation paper setting out proposed Level 2 RTS for the European Long-term Investment Fund (ELTIF) Regulation, as amended by the new Regulation often referred to as ‘ELTIF 2.0’.

The RTS will specify how the new requirements on the ELTIF’s redemption policy and matching mechanism will work.

The consultation period closes on 24 August 2023.

In Q3 /Q4 2023, ESMA will consider the feedback it has received. It will then publish a Final Report with draft technical standards by 10 January 2024, when the ELTIF 2.0 amendments come into effect.

What does the consultation cover?

The consultation paper sets out ESMA’s proposals on the following points:

(a) Under Article 18 (Redemption policy and life of ELTIFs)

• guidance to ELTIF managers on the circumstances in which the life of an ELTIF should be considered compatible with the life-cycles of its underlying assets;
• criteria for determining the minimum period for which investors must hold an ELTIF and requiring the ELTIF manager to justify where there is a deviation from this minimum period;
• the minimum information to be provided to the ELTIF’s NCA under the new Article 18(2)(b) including on:
  • the ELTIF’s redemption policy;
  • the frequency and duration of redemption windows;
  • conditions for requesting redemptions and processing redemption requests received;
  • how the ELTIF maintains an adequate balance of assets and liabilities in case of redemptions;
  • the ELTIF’s valuation procedures; and
  • the description and procedures for implementation of the available liquidity management tools.
• criteria for the ELTIF’s redemption policy;
• the requirement to adopt at least one anti-dilution liquidity management tool; and
• criteria to assess the percentage of assets that can be redeemed.

(b) Under Article 19 (Secondary market)

• the circumstances and processes for, and role of the ELTIF manager or administrator in, matching transfer requests from exiting investors with those from potential investors, together with the information that the ELTIF must disclose to investors

(c) Under Article 21 (Disposal of ELTIF assets)

• the criteria for valuing assets to be divested – ESMA’s draft proposes a six month deadline by which the valuation process must be completed after informing the NCA of the disposal of the ELTIF’s assets

(d) Under Article 25(3) (Cost disclosure)

• this Level 2 measure under the original ELTIF Regulation was never finalised – the mandate required ESMA to take into account the corresponding RTS under the PRIIPs Regulation, which only entered into force in their final form on 1 January 2023.
• Taking the work up now, ESMA is proposing definitions, calculation methodologies and presentation formats of costs, including those in relation to setting up the ELTIF, the acquisition of assets, management and performance fees and distribution costs and other expenses.

What is happening with the current RTS?

Other Level 2 measures (in the form of Delegated Regulation (EU) 2018/480) are, of course, already in force to supplement the original ELTIF Regulation. These were made under:

• Article 9(3) on when the use of financial derivative instruments should be considered as solely serving the purpose of hedging the risks inherent to investments of ELTIFs;
• Article 21 – on disposal of the ELTIF’s assets; and
• Article 26(2) – on facilities available to investors.

The consultation paper also sets out how ESMA intends to approach these.

ESMA has concluded that the existing RTS made under:

• Article 9(3) are still relevant as ELTIF 2.0 has not amended these requirements;
• Article 21 need to be amended (see ESMA’’s proposals above). ELTIF 2.0 removes the requirement for an itemised schedule for the disposal of the ELTIF’s assets automatically to be disclosed to the relevant NCA and replaces it with the requirement to ‘inform’ the NCA on the orderly disposal; and
• Article 26(2) should be withdrawn as Article 26 was removed by ELTIF 2.0.

As a consequence, ESMA is proposing to repeal the existing Level 2 measures and replace it with a new Delegated Act which includes appropriate revisions (where required) to the existing RTS as well as the new RTS made under ELTIF 2.0.

ELTIF 2.0

For a summary of the key changes made to the original ELTIF Regulation, which will take effect from 10 January 2024, see our previous article here.