- ESMA has responded to the EU Commission’s March 2024 proposed amendments to the ELTIF 2.0 RTS.
- ESMA has notably rejected the EU Commission’s alternative option of determining the maximum redemption amount by reference to the redemption frequency and the notice period.
- ESMA maintains its original December 2023 position – namely that that a minimum percentage of liquid assets must be held by the ELTIF when granting redemption rights, and that this minimum percentage is to be determined in light of the duration of the prior notice period.
Regulation (EU) 2023/606 amending the ELTIF Regulation (ELTIF 2.0)1 mandated ESMA2 to develop regulatory technical standards (RTS) to (amongst others) provide guidance on the redemption policy, the notice period to request the redemption of units, the liquidity requirements and the use of liquidity management tools and redemption gates of open-ended ELTIFs.
ESMA delivered its initial report3 that included the draft RTS to the European Commission (EU Commission) on 19 December 2023. On March 6, 2024, the EU Commission wrote a letter4 that included proposals to amend ESMA’s draft RTS. The EU Commission’s view was that ESMA should take a more “proportionate approach” and take into consideration the variety of ELTIFs and their investment strategies.5
On April 22, 2024, ESMA released its opinion6 on the EU Commission’s proposed amendments together with the amended RTS. While many of the EU Commission's proposed amendments to the RTS were retained, ESMA has not changed its initial position on certain items, notably the following:
Determination of the maximum redemption amount7
ESMA rejected the EU Commission’s alternative option of determining the maximum redemption amount by reference to the redemption frequency and the notice period. ESMA maintained the view that a minimum percentage of liquid assets must be held by the ELTIF when granting redemption rights, and that this minimum percentage is determined in light of the duration of the prior notice period. ESMA did not increase the minimum percentages of liquid assets introduced by the EU Commission, which are significantly lower than the minimum percentages ESMA proposed in their first draft RTS.
Minimum holding period
Contrary to the EU Commission, which considers that the setting of a minimum holding period is only an option, ESMA maintains it is one of the key aspects of the redemption policy and consequently any open-ended ELTIF is to set such a minimum holding period.
Disclosure of the redemption policy
ESMA rejected the proposal from the EU Commission to disclose the redemption policy solely on the website of the ELTIF manager. ESMA requires that the redemption policy is described in the ELTIF prospectus as well as on the website of the ELTIF manager.
Notification obligations to the competent authority
ESMA’s April draft RTS proposes that where there is a material change to the information provided to the competent authority on the redemption policy and related items, the ELTIF manager is to give written notice to the competent authority of the ELTIF as soon as possible, and at least one month before implementing the change. If the material change is not planned by the ELTIF manager and is beyond its control, the ELTIF manager is to inform the competent authority of the ELTIF as soon as the change becomes known to the ELTIF manager. Furthermore, the results, assumptions and inputs used by the ELTIF manager for carrying out liquidity stress tests under normal and exceptional liquidity conditions (enabling the ELTIF manager to assess the liquidity risk of the ELTIF, including the resilience of the redemptions of units and the fluctuations in the value of the assets) should be notified by the ELTIF manager to the competent authority. This requirement is more stringent than ESMA’s original draft RTS, but reflects the EU Commission’s concern that all material changes should be subject to regulatory approval prior to their implementation. This approach is in line with what is already required for a Luxembourg ELTIF, which is structured as an undertaking for collective investment under part II of the Luxembourg act of December 17, 2010, on undertakings for collective investment, as amended.
Valuation frequency of assets
ESMA would like RTS to clarify that the valuation of assets and calculation of the net asset value are to be carried out at a frequency that is both appropriate to the assets held by the ELTIF and consistent with the issuance and the redemption of units. This is more specific than the EU Commission’s proposal, which referred only to valuation procedures that are substantial, reliable, sound and up to date at the time of valuation of the relevant asset.
Conclusion
It will be interesting to see how the EU Commission will react to the few changes proposed by ESMA, including the removal of the EU Commission’s proposal to determine the maximum redemption amount by reference to the redemption frequency and the notice period. Finalisation of the RTS is an important step as it would provide ELTIF managers with a settled legal framework. Once the EU Commission adopts the draft RTS, the EU Parliament and Council will have a further three months to object, meaning the RTS is unlikely to be published before autumn 2024.
- For a summary of ELTIF 2.0, please refer to our OnPoint 'ELTIF 2.0: retailization of private funds – the gateway to heaven or a storm in a teacup?'.
- European Securities Market Authority, the EU's financial markets regulator and supervisor.
- For a summary on the key points of the draft RTS, please refer to our OnPoint 'ELTIF 2.0 RTS: ESMA adopts a conservative approach toward open-ended ELTIFs'.
- The EU Commission letter to ESMA is available here.
- For a summary on the key points of the amendments from the EU Commission on the draft RTS, please refer to our OnPoint 'European Commission Requests Changes to ELTIF 2.0 Draft Regulatory Technical Standards'.
- ESMA’s April 2024 Opinion is available here.
- Article 18(2), first paragraph, point (d) of ELTIF 2.0.