ESMA publishes proposed Level 2 RTS for ELTIF 2.0

On 19 December 2023, ESMA published a final report (the Report) setting out its proposed Level 2 Regulatory Technical Standards (RTS) for the European Long-term Investment Fund (ELTIF) Regulation, as amended by the new Regulation often referred to as 'ELTIF 2.0'. The Report has been submitted to the European Commission (the Commission) for its endorsement before being passed to the European Parliament and Council for final approval.

What's the background?

ELTIF 2.0 provides that ESMA shall develop RTS to specify how the new requirements on the ELTIF's redemption policy and matching mechanism will work, as well as other matters including the costs disclosure. On 23 May 2023, ESMA published a consultation paper(CP) setting out the proposed Level 2 RTS. See our reporting on the CP here. The Report includes the revised RTS developed taking into account the feedback received in response to the CP.

What does the Report include?

The Report sets out key provisions and changes to the RTS.

• Changes to requirements around the use of redemption and liquidity management tools

The Report proposes that redemptions would only be permitted if a notice period of at least 12 months is provided. However, there are exceptions to the 12 months' notice period based on the minimum percentage of liquid assets and the maximum percentage:

• Less than 1 year to 9 months -13% minimum percentage of liquid assets and 50% of maximum percentage;
• Less than 9 months to 6 months - 27% minimum percentage of liquid assets and 45% of maximum percentage;
• Less than 6 months to 3 months - 40% minimum percentage of liquid assets and 40% of maximum percentage;
• Less than 3 months to 1 months - 40% minimum percentage of liquid assets and 35% of maximum percentage, and a requirement to justify (to the relevant NCA) why the notice period is less than 3 months; and
• Less than 1 month - 40% minimum percentage of liquid assets and 20% of maximum percentage, and a requirement to justify (to the relevant NCA) why the notice period is less than 3 months.

The Report proposes to include a common maximum quarterly redemption frequency that ELTIF managers will be able to deviate from if they are able to justify this to their NCA. The Report outlines different circumstances in which redemption gates may be used and suggests that ELTIF managers still use at least one anti-dilution liquidity management tool (LTM) (e.g. anti-dilution levies, swing pricing, redemption fees). ELTIF managers will be allowed to use other LTM if they can justify this to their NCA. When marketed to retail investors, ELTIFs will be required to explain the LMTs they use in non-technical language. If the ELTIF is marketed only to professional investors it may be exempt from justifying the selection of additional LMTs that go beyond the one mandatory anti-dilution liquidity management tool.

• Flexibility on a minimum holding period

The Report suggests the removal of the time-based requirement for a set minimum holding period. It proposes that ELTIF managers should be allowed to select the minimum holding period that is most appropriate for an individual ELTIF. The ELTIF manager will have to make this decision based on criteria set out in the RTS.

• Proposed changes to the prescribed notice period and maximum percentage of liquid assets that can be redeemed

The Report proposes that depending on the length of the notice period ELTIF managers shall hold a minimum percentage of liquid assets. Different percentages of maximum amount of liquid assets that can be redeemed will be applied to them. Under the proposed RTS, all redemptions are only possible if a notice period of at least 12 months is given by each investor. However, there are exceptions to the 12 months' notice period based on the minimum percentage of liquid assets and the maximum percentage. Furthermore, ELTIFs that only market to professional investors can request an exemption from having to explain why notice periods are less than 3 months.

What happens next?

There is some concern in the industry that the minimum notice periods for redemptions in the current proposal may deter sponsors of semi-liquid funds from using the ELTIF passport. Some stakeholders may therefore be advocate for amendments to the proposal.

The Commission has three months (which may be extended by another month) to adopt the draft RTS. It may also amend the draft RTS and return it to ESMA for further consideration.

Once the Commission adopts the draft RTS, the European Parliament and Council have 3 months to scrutinize them.

ELTIF 2.0 Level 1 comes into force on 10 January 2024 and it remains unclear as to whether the Level 2 RTS will be adopted by then.

For a summary of the key changes made to the original ELTIF Regulation by ELTIF 2.0, see our previous article here.