ELTIF 2.0 RTS – the ping pong continues as ESMA publishes its Opinion

As we reported at the time, in March the European Commission (the Commission) wrote to ESMA asking it to make changes to the draft Level 2 RTS under the revised ELTIF Regulation, which it had submitted in December 2023.

In this relatively unusual move, ESMA was given six weeks to put forward amended proposals which would address the Commission’s concerns, not least the need to provide ELTIF managers with greater flexibility in terms of liquidity management.

On 22 April 2024, ESMA published its Opinion, in which it sets out a number of changes to the amendments proposed by the Commission.

ESMA acknowledges that “an appropriate balance should be found between, on the one hand, the protection of retail investors and financial stability related objectives, and on the other hand, the fact that ELTIFs should make an important contribution to the capital market union objectives”, but proposes to strike that balance “slightly differently from the [Commission]”.

ESMA’s suggested amended draft RTS are set out in the Appendix to the Opinion.

Helpfully, ESMA includes, at page 20 onwards, a redline of the changes between the original and new RTS.

• Tracked changes show amendments to the original RTS proposed by the Commission.
• Changes highlighted in yellow are where ESMA in turn amends the Commission’s proposals.

Among the key changes to the Commission’s amendments that ESMA has responded with are:

• the Commission proposed that Article 4(2) of the draft RTS should be deleted as it felt it could be construed as requiring the ELTIF managers to inform the relevant NCA of material changes only after the event and that this would limit the NCA's ability to receive updated information before the ELTIF implements changes. ESMA has, instead, proposed to amend the text to ensure that it does not appear to limit the competences of NCAs

• while the Commission proposed that the maximum percentage of assets that can be redeemed should be determined by the redemption frequency, ESMA proposes focussing it, instead, on the notice period and sets out a new table to determine the maximum percentage of redemptions based on the notice period.

• Annex 1, which the Commission proposed, is deleted by ESMA on the grounds that this option

  • does not make it mandatory for the ELTIF manager to hold minimum percentages of liquid assets and
  • implies that, in certain circumstances, the maximum amount that can be redeemed is less than 2% - ESMA feels that this “does not seem compatible with the fact that retail investors may invest in ELTIF given they may not be aware nor understand that redemptions could be limited to that extent”.

• the Commission’s proposals allowed a manager of an ELTIF to choose to establish (or not establish) a minimum holding period. ESMA, though, remains of the view that setting a minimum holding period “is one of the key aspects of the redemption policy of the ELTIF” and suggests retaining the formulation included in the draft RTS which it submitted in December 2023.

• while the Commission proposed deleting all references to redemption gates from the draft RTS, ESMA perseveres and Article 5(5) of the draft contained in the Opinion explicitly indicates that, while it is not an obligation for them to do so, ELTIF managers may use gates.

• the Commission sought amendment of the liquidity related requirements (which, in Article 5(6) of the original draft RTS, were linked to notice periods) so these specifically take into account the principle of proportionality, existing market practices for retail long-term funds and the individual situation of the ELTIF. ESMA has considered this argument and the Opinion suggests an amended version of the Commission’s proposal which would both (a) retain the key investor protection related aspects of the requirements included in the original draft RTS and (b) take into account the Commission’s concerns - in particular, the need to take into account the variety of ELTIFs.

• the Commission proposed the deletion of the obligatory requirement for the ELTIF manager to select and implement at least one anti-dilution liquidity management tool, among anti-dilution levies, swing pricing and redemption fees, leaving it to the manager’s discretion, along with the ability to use other liquidity management tools. ESMA’s view is that the Commission’s solution “might not be the only way of interpreting the ELTIF provisions” – nevertheless, to move the process forward, it has decided to submit an amended version of its original draft RTS for the EC’s consideration which takes into account the Commission’s proposals on LMTs.

• the Commission wished to see Article 5(8) of the draft RTS amended to ensure that the implementation and activation of redemption gates is not limited to “exceptional” circumstances or exclusively contingent on the notice period set out in the calibration table proposed by the draft RTS” – ESMA’s original draft RTS allowed for the use of gates, but not merely in ‘exceptional’ situations.

  Again, “in order to move the process forward”, ESMA has conceded the main point to the Commission – however, However, rather than deleting all references to gates in the draft RTS (as the Commission suggested), Article 5(9) of ESMA’s new draft refers explicitly to gates, allowing (but not obliging) an ELTIF manager to use them, “in particular if the amount of liquid assets is not sufficient to cover a reasonable expected redemption at the redemption dates.”

Next steps

The Commission will now review ESMA’s Opinion and will either adopt the changes proposed by ESMA and then seek the views of the Council of the EU (the Council) and the European Parliament (the EP) on these, or reject them.

In the latter case, it would be open to the Commission to draft its own RTS and submit those to the Council and the EP for scrutiny.