ELTIF Delegated Regulation Amendments

On March 26, 2024, the European Commission announced a significant update to the regulatory framework for European Long-Term Investment Funds (ELTIFs) through a proposal to amend Commission Delegated Regulation (EU) 2015/760. This revision, influenced by a draft from the European Securities and Markets Authority (ESMA) submitted on December 19, 2023, targets enhancing key operational areas such as derivatives hedging, redemption policies, liquidity management, trading, issuance of ELTIF units or shares, and transparency measures.

Key Elements of the Proposal:

• Endorsement of ESMA's Revised Draft: The Commission plans to approve the modifications suggested by ESMA to elevate regulatory standards for ELTIFs.

• Structured Amendment Process: Leveraging Regulation (EU) No 1095/2010, the proposal outlines a systematic approach for ESMA and the Commission to collaborate on regulatory changes, ensuring consistency across the board.

• Focus on Regulatory Excellence: The initiative underscores the Commission's commitment to refining the quality and adaptability of regulatory practices within the European financial market, aiming for enhanced regulatory clarity and investor protection.

Source

[1]

ELTIF RTS: what changes may we expect?

On 6 March 2024, the European Commission published a communication proposing some amendments and informing its intention to adopt the draft RTS once these amendments are made by ESMA. According to the Commission, the draft RTS does not sufficiently cater for the individual characteristics of the different ELTIFs and, for this reason, it considers the draft RTS should be amended in order to take a more proportionate approach, in particular regarding redemptions and liquidity management tools.

EYDeep Ghumman

[2]

ELTIF Regulation: Framework Flexibility

The European Long-Term Investment Funds (ELTIF) regime is undergoing a pivotal shift. With ESMA refining its technical rules, ELTIF numbers have surged, indicating a positive regulatory reform impact.

GrandAlessandro Micagni

ELTIF Regulatory Framework for Investment Oversight

On March 26, 2024, the European Commission unveiled a strategic overhaul of the Commission Delegated Regulation (EU) 2015/760, significantly impacting the governance of European Long-Term Investment Funds (ELTIFs). This initiative is set to redefine the regulatory landscape, driving operational excellence and enhanced oversight in a key sector of the European investment framework.

Highlights of the Initiative:

• Strategic Revamp: Aiming to revolutionize the foundational regulation that governs ELTIFs, marking a new chapter in operational and regulatory standards.

• Comprehensive Enhancements: The initiative targets a broad array of operational domains to strengthen the core functions of ELTIFs.

Targeted Areas for Enhancement:

• Hedging Derivative Management: Implementing refined strategies to mitigate investment risks tied to currency and interest rate fluctuations.

• Refinement of Redemption Policies: Aligning policies with investor expectations and the liquidity profiles of the funds to facilitate smoother redemptions.

• Liquidity Management Strategies: Introducing practices that enable ELTIFs to meet redemption requests without undermining their long-term investment objectives.

• Trading Practices Reform: Aiming to boost market efficiency and transparency, thereby making ELTIFs more appealing to a diverse investor base.

• Streamlining Issuance Processes: Simplifying the issuance of ELTIF units or shares to facilitate capital raising and investor participation.

Regulatory Changes:

• Repeal of Previous Regulation: The initiative includes the repeal of the previous Delegated Regulation (EU) 2018/480, setting new benchmarks for operational standards and regulatory oversight of ELTIFs.

The European Commission's Commitment:

• This initiative demonstrates the Commission's proactive stance on adapting regulatory measures to meet the evolving demands of the investment landscape.

• By introducing these enhancements, the Commission aims to solidify the integrity, stability, and performance of ELTIFs, ensuring their continued contribution to the growth and innovation sectors of the European economy.

The Broader Impact:

• This regulatory evolution positions ELTIFs to play an even more significant role in supporting sustainable growth and long-term investment strategies across Europe.

• The initiative underscores the Commission's dedication to fostering a robust, transparent, and efficient market for European Long-Term Investment Funds, enhancing their contribution to the European economy's sustainable development.

ESMA ELTIF Regulatory Reform

The substantial regulatory overhaul of European Long-Term Investment Funds (ELTIFs) was initiated by a comprehensive draft from the European Securities and Markets Authority (ESMA), submitted on December 19, 2023. This draft, acting under the directives of Article 10(1) of Regulation (EU) No 1095/2010, signifies a critical advancement in refining ELTIF governance and operational frameworks.

ESMA's Submission:

• Submission Date: December 19, 2023, marking a pivotal step towards enhancing ELTIF standards.

• Guiding Regulation: Operates under the directive of Article 10(1) of Regulation (EU) No 1095/2010.

• Objective: To meticulously outline managerial responsibilities and operational protocols vital for ELTIFs' effective administration and oversight.

Core Areas Addressed in the Draft RTS:

• Hedging Derivatives Management: Proposes enhanced strategies to protect ELTIF investments from market volatility and financial risks, equipping ELTIF managers with essential tools for effective risk mitigation.

• Liquidity and Redemption Policies: Sets the foundation for resilient and investor-friendly practices, emphasizing the importance of robust liquidity management strategies to fulfill redemption requests without hindering long-term investment goals.

• Transparency in Trading and Issuance: Advocates for clearer and more transparent processes in the trading and issuance of ELTIF units or shares, aimed at improving market perception and making ELTIFs more appealing to investors.

Impact of the Draft RTS:

• Enhanced Transparency and Compliance: A dedicated effort to boost transparency and ensure regulatory compliance, reinforcing investor confidence and market stability.

• Investor Protection and Market Stability: Demonstrates ESMA's commitment to safeguarding investor interests and maintaining a stable investment environment conducive to long-term growth.

European Commission and ESMA's Collaborative Vision:

This strategic initiative, driven by ESMA's draft RTS, is set to fortify the foundations of ELTIFs, promoting a more robust, transparent, and efficient market. The European Commission, in partnership with ESMA, aims to leverage these proposed enhancements to solidify ELTIFs' role as essential instruments in financing the European economy's growth and innovation sectors. This comprehensive approach to regulatory reform is designed to benefit investors and the broader European financial ecosystem, aligning with the long-term investment strategies crucial for sustainable development across the continent.

ELTIF Regulatory Standards to Reflect Diverse Investment Sectors

The European Commission's detailed review of the draft Regulatory Technical Standards (RTS) from the European Securities and Markets Authority (ESMA) reveals critical insights into the alignment of proposed regulations with the complex nature of European Long-Term Investment Funds (ELTIFs). This scrutiny is part of the Commission's broader mission to refine the ELTIF framework, emphasizing the need for regulations that fully embrace the diverse investment landscapes within ELTIFs, including sectors like real estate, infrastructure, and private equity.

Observations from the Commission's Review:

• Diverse Investment Realms: Acknowledgment of ELTIFs' operation across varied sectors, necessitating a regulatory approach that accounts for the distinct characteristics of each domain.

• Concerns with Specific Provisions: Identification of issues within Articles 5(6), 5(7), and 5(8) of the draft RTS, concerning anti-dilution tools, redemption notice periods, and liquidity management strategies, which are crucial for ELTIFs' integrity and efficiency.

Challenges Highlighted by the Commission:

• One-Size-Fits-All Approach Limitations: The draft RTS's generalised strategy may limit ELTIF managers' operational flexibility and strategic agility, especially in sectors with unique investment horizons, liquidity profiles, and market dynamics.

• Need for Customisation: Recognition of the necessity for regulations that allow customisation to meet the specific needs of different ELTIF sectors, ensuring that regulatory standards support rather than impede fund performance and resilience.

Commission's Advocated Adjustments:

• Recalibration of the RTS: Proposal for a refined regulatory approach that enables tailored anti-dilution measures, flexible redemption notice periods, and adaptable liquidity management frameworks.

• Balance between Oversight and Flexibility: Aiming to strike a balance between robust regulatory oversight and the flexibility needed by ELTIF managers to navigate their specific investment landscapes effectively.

Objective and Commitment:

• Enhancing the Regulatory Environment: The Commission's adjustments aim to create a regulatory environment conducive to the growth and success of ELTIFs, aligning with the EU's goals of fostering long-term investment and economic development.

• Promotion of Transparency and Protection: This initiative is underscored by the Commission's commitment to improving transparency, protecting investors, and ensuring market stability, while keeping ELTIFs as attractive options for long-term capital investment in Europe's vital sectors.

ELTIF Cost Disclosure Practices

The European Commission has embarked on a crucial initiative to bolster transparency and build investor confidence in European Long-Term Investment Funds (ELTIFs), focusing on a significant enhancement in cost disclosure practices as outlined in Article 12 of the draft Regulatory Technical Standards (RTS). This move aims to address and reconcile discrepancies with existing regulatory frameworks, thereby streamlining cost disclosure across the ELTIF landscape.

Initiative Summary:

• Introduction of a New Cost Disclosure Approach: Article 12 introduces an innovative methodology for ELTIF-associated cost disclosures, diverging from practices under the PRIIPs Regulation, MiFID II, and AIFMD.

• Focus on Cost Representation: The proposed method emphasizes representing costs as a percentage of ELTIF capital and calculating these over a one-year period, identifying gaps with the ELTIF Regulation’s cost disclosure guidelines.

• Need for Enhanced Cost Disclosure Practice: The Commission identifies the essential need for a refined cost disclosure practice that aligns with both new proposals and established regulatory standards.

Proactive Steps for Refinement:

• Advocating for Precise Adjustments: The Commission proposes specific modifications to the draft RTS to better reflect ELTIFs' diverse operational environments and investment strategies.

• Tailoring Liquidity Requirements and Redemption Notice Periods: Modifications are aimed at ELTIFs dedicated to long-term investment strategies, especially in sectors like real estate, infrastructure, and private equity, acknowledging their unique market conditions and investment horizons.

• Clear Guidelines on Redemption Gates: Emphasis on detailed guidelines for ELTIF managers on deploying redemption gates, ensuring alignment with the ELTIF Regulation’s provisions for fair investor treatment and safeguarding the fund’s long-term objectives.

Revision of Cost Disclosure Methodology:

• Aim for Harmonization: The Commission seeks to align the newly proposed cost disclosure methodology with the foundational principles of the ELTIF Regulation and related directives, ensuring clarity and consistency.

• Transparent and Adaptable Framework: The envisioned cost disclosure methodology aims to support transparent, consistent, and comprehensive disclosures, enhancing investor understanding and confidence.