On 19 July 2024, the European Commission (the "Commission") adopted a delegated regulation and accompanying annexes containing its regulatory technical standards ("RTS") supplementing Regulation EU 2015/760, as amended by Regulation 2023/606/EU (the "ELTIF Regulation").

The RTS specify the detail on a number of features mandated under the ELTIF Regulation, in particular:

• the circumstances in which the life of a European Long-Term Investment Fund ("ELTIF") is considered compatible with the life-cycles of each of the individual assets, as well as different features of the redemption policy of the ELTIF (including the minimum holding period, choice of liquidity management tools, notice periods and maximum percentage of liquid assets that can be redeemed);
• the circumstances for the use of a liquidity matching mechanism, i.e. the possibility of full or partial matching (before the end of the life of the ELTIF) of transfer requests of units or shares of the ELTIF by exiting ELTIF investors with transfer requests by potential investors;
•  the criteria for establishing the circumstances in which the use of financial derivative instruments solely serves the purpose of hedging risks inherent in certain investments; and
• the ELTIF costs disclosure.

The Commission's adoption of the RTS follows a public consultation and ESMA's final report on the draft RTS in 2023. As referenced in our previous advisory (March 2024) ESMA and the Commission subsequently exchanged correspondence, in light of certain legal and policy concerns, including on the non-compliance of ESMA’s proposed RTS with the mandate specified under the ELTIF Regulation.

In March 2024, the Commission had signalled to ESMA its intention to adopt the draft RTS containing revised proposals, outlining that a more proportionate approach should be taken to the drafting of the RTS, in particular, with regard to certain redemption and liquidity features which could pose challenges for ELTIF managers.

We have set out below a summary of the key features of the adopted RTS which include, but are not limited to, provisions on the following features:

A. Notice periods and redemption frequency (open-ended ELTIFs)

The Commission's re-working of ESMA's original proposals constitutes its proportional approach to calculating allowable redemptions from an open-ended ELTIF. Discretion is provided in the RTS for ELTIF managers to calibrate the gating of redemptions either on the basis of: 

i. the redemption frequency and the maximum length of the notice period, which represents the notice period (per the tables in annex I) or, alternatively,

ii. on the basis of the redemption frequency and the minimum percentage of liquid assets (per the table in annex II).

Under both methodologies the manager of the ELTIF may consider introducing a minimum notice period as part of the redemption policy without the mandating of a minimum notice period under the RTS.

Significantly, in determining the maximum redemption gate ELTIF managers may apply the sum of UCITS eligible assets at the redemption date, as well as the expected cash flow forecasted on a prudent basis over 12 months. ELTIF managers may only take into account those expected positive cash flows for which the ELTIF manager can demonstrate that there is a high degree of certainty that they will materialise and shall not consider as expected positive cash flows the possibility that the ELTIF can raise capital through new subscriptions.

B. Minimum holding period (open-ended ELTIFs)

While a minimum holding period can enable managers of ELTIFs which offer redemption facilities to complete the investments of its capital contributions, the RTS do not prescribe the duration of the minimum holding period. Instead, the manager of an ELTIF in considering the circumstances of the ELTIF should determine the requirement for any minimum holding period based on a set of certain criteria.

C. Liquidity management tools (open-ended ELTIFs)

The RTS clarify that the manager of an open-ended ELTIF is not required to, but may at its discretion and in accordance with the redemption policy, select and implement one anti-dilution liquidity management tool ("LMTs") from among any of the following anti-dilution LMTs:

(a) anti-dilution levies;

(b) swing pricing; and

(c) redemption fees.

The manager of the ELTIF may also additionally select and implement other liquidity management tools.

The manager of a retail investor ELTIF should provide the competent authority of the ELTIF, upon request of that authority, with the information on the choice of such other liquidity management tools and their appropriateness in the context of the ELTIF.

D. Costs

The RTS also provides for common definitions, calculation methodologies and presentation formats to ensure a common approach in relation to the disclosure of the costs (borne directly or indirectly) by investors in an ELTIF.

Next steps

Following adoption by the Commission, a three-month scrutiny period by the co-legislators has been triggered following which the RTS may be published and enter into force the day after its publication.

The adoption of the RTS has been keenly awaited and the approach taken by the Commission demonstrates a recognition of those concerns expressed by stakeholders as well as an effort to mitigate these concerns while also maintaining the protection of retail investors, ensuring the fulfilment of financial stability-related objectives of the capital markets union as well as maintaining the initial momentum behind the ELTIF 2.0 regime.

The ELTIF represents one of the most important developments in private markets in EU in recent years and is a significant opportunity for the Irish asset management and investment funds industry. This latest development follows the publication earlier this year of the final ELTIF chapter of the Central Bank of Ireland (the "Central Bank") AIF Rulebook, alongside the authorisation process for each category of closed-ended ELTIF.

The adoption of the RTS now pave the way for the establishment of a comprehensive regulatory regime, which addresses open-ended ELTIFs and is expected to be in place by Q4 of 2024 with the Central Bank in a recent speech also indicating its willingness to discuss with parties how an open-ended ELTIF might be structured (ahead of the official RTS application date).

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