ELTIF 2.0 RTS: Commission Orders ESMA to Think Again

In our previous alert, we looked at the draft revised Regulatory Technical Standards (RTS) supplementing the amended ELTIF Regulation (ELTIF 2.0) published by the European Securities and Markets Authority (ESMA) in its December 2023 Final Report.

On 6 March 2024, and just before the expiry of its initial adoption window, the European Commission published a Communication in which it states that it “considers it necessary to take a more proportionate approach to the drafting of the RTS, in particular with regard to the calibration of the requirements relating to redemptions and liquidity management tools.”

It also chastised ESMA, reminding it that the RTS are technical and do not imply strategic decisions or policy choices. This reflects many market participants’ feedback to the consultation, that critiqued ESMA’s approach to the draft RTS. We await the detail in the amended RTS text before being able to champion any consequent changes, but the Commission’s comments would mean that the ELTIF redemption and liquidity provisions would better align with market practice for semi-open-ended structures and would allow an ELTIF manager more discretion in its liquidity modelling and implementation.

Three key areas of change the Commission outlines are:

• Deletion of the mandatory 12-month notice period for investor redemption requests. This is welcome because the RTS as drafted would mean that for an ELTIF that invests, for example, 100% in real assets, with no UCITS or other liquid asset exposure, the notice period for redemptions (which are to be no more frequently than quarterly) will have to be at least 12 months. This would have been more prescriptive than other vehicles (including the open-ended authorised UK Long Term Asset Fund).
• Amendment to the liquidity-related requirements linked to notice periods so that they specifically take into account the principle of proportionality, the existing market practices for retail long-term funds, and the individual situation of ELTIFs. This helpfully recognises that the fixed liquid-asset thresholds as drafted could create a cash drag and hence calls into question the attractiveness of the ELTIF and its viability for targeted investment strategies such as infrastructure, real estate, and private equity long-term investment funds.
• Deletion of additional ELTIF-specific requirements in the RTS for selecting and implementing liquidity management tools.

ESMA has until 17 April 2024 to amend the draft RTS and resubmit them to the Commission for adoption; failing this, the Commission can adopt the RTS with the amendments it considers relevant, or reject them.

In the table below, we set out the key features of the liquidity provisions in the RTS and the proposed changes highlighted in the Commission’s Communication.

In addition, the Commission also seeks better alignment of the requirements on cost disclosures (both methodology and presentation) with the PRIIPs Regulation, MiFID, and AIFMD.

Conclusion

As mentioned in the European Parliament’s Capital Markets Union: Ten Years Later report, the hope is that ELTIF 2.0, available since 10 January 2024, will be “more powerful” than the “disappointing impact” of the first ELTIF legislation in 2015. These proposed amendments to the liquidity provisions would certainly help to try to move the dial in terms of more take-up of the revised ELTIF framework.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.