ELTIF Regulation: ESMA's view on RTS Amendments

An opinion on the regulatory technical standards (RTS) related to the amended European Long Term Investment Fund (ELTIF) Regulation was released by the European Securities and Markets Authority (ESMA) on April 22, 2024. This happened after ESMA published its final report on the draft RTS in December 2023 and sent it to the European Commission for approval. On the other hand, the Commission stated on March 26, 2024, that it intended to adopt the draft RTS with modifications, stressing the requirement for a more reasonable method of handling each ELTIF's unique characteristics. The text contains ESMA's opinion, which suggests changes to the Commission's modifications in an effort to reconcile investor protection with the goals of the Capital Market Union.

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[1]

ELTIFs Delegated Regulation Amendments

The European Commission aims to refine ELTIF regulations, enhancing derivatives hedging, liquidity management, and transparency based on ESMA’s draft.

GrandAlessandro Micagni

[2]

ESMA finalises technical standards under the revised ELTIF regulation

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ESMA's Feedback on Public Consultation Responses for ELTIF Regulation RTS Amendments

The European Securities and Markets Authority (ESMA) received insightful comments on the proposed draft regulatory technical standards (RTS) under the updated European Long Term Investment Fund (ELTIF) Regulation in response to a public consultation that took place between May 23, 2023, and August 24, 2023. This feedback shed light on important areas of the proposed RTS, such as how regulatory standards and cost disclosure are handled. After carefully examining stakeholder feedback and addressing major issues, ESMA has ensured that regulatory standards are applied in a way that promotes transparency and investor protection.

ESMA's Responses to Key Concerns:

• Approach to RTS under Articles 9(3), 21, and 26(2) of the ELTIF Regulation:

• The majority of responders approved of ESMA's strategy.
• Clarity in Article 9(3)'s rules for financial derivatives and Article 21's 6-month asset valuation timeframe have drawn criticism.
• After taking note of the comments, ESMA simplified the relevant RTS articles to improve compliance with the ELTIF Regulation.

• Relevance of Legislative and Regulatory Material for RTS on Article 25(3) of the ELTIF Regulation:

• The majority of respondents agreed that the stated legislative and regulatory pieces were relevant.
• ESMA reaffirmed its strategy, taking investment fund specifics into account while maintaining consistency with PRIIPs expense disclosure.

• ELTIF Cost Disclosure and Types of Costs:

• Diverse opinions were voiced on the extent and manner in which costs were presented, particularly with relation to the alignment of PRIIPs cost disclosure.
• ESMA allowed for narrative explanations to improve transparency while acknowledging different points of view and upholding PRIIPs disclosure uniformity.

• Fixed Costs and Acquisition Costs:

• While most respondents agreed with ESMA's fixed cost methodology, several expressed disapproval with the way purchase expenses were classified.
• In light of the varied characteristics of ELTIFs and the assets that underpin them, ESMA modified its methodology to permit a more flexible classification of acquisition expenses.

ESMA's commitment to promoting regulatory standards that strike a compromise between investor protection and market efficiency is demonstrated by its careful evaluation of public feedback. In order to facilitate informed investment decisions and support the stability and integrity of the financial market, ESMA seeks to enhance transparency and clarity in ELTIF operations by resolving stakeholder concerns and improving the proposed RTS.

Developing Technical Standards in ELTIF Regulation: Mandates and Implications

The European Securities and Markets Authority (ESMA) is tasked with major duties in developing regulatory technical standards (RTS) to oversee many facets of ELTIF operations under the European Long Term Investment Fund (ELTIF) Regulation. In order to offer regulatory clarity and guarantee compliance within the ELTIF framework, ESMA is required to prepare draft RTS in certain areas, as stated in Articles 18(6), 19(5), 21(3), and 25(3) of the ELTIF Regulation.

Article 18(6): Crafting Regulatory Standards for ELTIF Operations

Article 18(6) requires ESMA to develop RTS concerning minimum holding period requirements, information disclosure to relevant authorities, redemption policy requirements, liquidity management tool requirements, criteria for evaluating percentages, and compatibility of ELTIF life cycles with individual asset life cycles. These guidelines seek to provide a structure that strikes a compromise between investor protection, regulatory monitoring, and the long-term nature of ELTIF investments. By January 10, 2024, ESMA must deliver these draft RTS to the Commission.

Article 19(5): Setting Guidelines for Matching Activities and Investor Disclosures in ELTIFs

ESMA is required by Article 19(5) to produce RTS regarding the conditions for matching within ELTIFs and the investor disclosure requirements. These standards establish transparent disclosure requirements and unambiguous criteria for matching activities, which in turn promote investor trust and market integrity. By the same date, ESMA must deliver these draft RTS to the Commission.

Article 21(3): ESMA's Role in Specifying Assessment Criteria and Valuation Methods for ELTIFs

Article 21(3) mandates ESMA to create Regulatory Technical Standards (RTS) for assessing ELTIFs and defining valuation methods. These standards ensure consistency and accuracy in evaluating ELTIF assets, fostering investor confidence and market integrity. ESMA's role in developing RTS reflects its commitment to enhancing ELTIF market stability and regulatory oversight.

Article 25(3): Harmonizing ELTIF Cost Reporting through ESMA's RTS

Article 25(3) assigns ESMA the duty of creating a draft RTS that establishes standard cost definitions, computation techniques, and display styles. These guidelines improve investor awareness and enable comparability by standardizing expense reporting throughout ELTIFs.

The significance of ESMA's involvement in establishing the regulatory framework for ELTIFs is highlighted by these mandates, which are in line with the wider goals of encouraging long-term asset investments and preserving investor interests. The growth and integrity of the European capital markets are facilitated by adherence to these RTS, which guarantee uniformity and openness in ELTIF activities.

Cost-Benefit Analysis of RTS Provisions under ELTIF Regulation

The proposed Regulatory Technical Standards (RTS) under Articles 18(6), 19(5), and 25(3) of the European Long-Term Investment Funds (ELTIF) Regulation are thoroughly examined in the cost-benefit analysis (CBA). It describes the qualitative evaluation of technological possibilities with reference to the ELTIFs' cost disclosures, redemption policy, and matching system.

In order to improve market integrity, investor protection, and transparency, the paper discusses the necessity of harmonization and standards throughout Member States. It assesses the possible advantages of the suggested RTS, including the reduction of regulatory arbitrage, standardization of operational and regulatory procedures, and facilitation of cross-border marketing. It also takes into account the related expenses for ELTIF managers, authorities, and compliance requirements.

By providing clarity on assessment criteria, valuation methodologies, and cost definitions, the proposed RTS aim to establish a level playing field, minimize regulatory uncertainties, and promote investor confidence in ELTIFs. The analysis emphasizes the importance of aligning with existing regulatory frameworks, such as PRIIPs and UCITS, to ensure consistency and comparability in cost disclosures.

Overall, the CBA underscores the balance between regulatory oversight and facilitating the efficient operation of ELTIFs, thereby contributing to the broader objectives of the Capital Markets Union (CMU) and fostering a robust investment environment within the European Union.

Understanding Key Regulatory Changes for European Long-Term Investment Funds (ELTIFs)

Through the Commission Delegated Regulation (EU) supplementing Regulation (EU) 2015/760 of the European Parliament and the Council, the European Commission has implemented major regulatory amendments. The purpose of these modifications is to improve investor protection, liquidity management, and transparency in the context of European Long-Term Investment Funds (ELTIFs). Now let's examine the primary regulatory changes:

• Financial Derivative Instrument Use: The rule lays out the circumstances in which financial derivatives may be utilized only to offset the risks associated with ELTIF investments. It highlights how important efficacy and verifiability are to risk reduction.

• Compatibility of ELTIF Life with Asset Lifecycles: Taking into account variables like redemption rules, acquisition/disposal timing, and liquidity profiles, managers must determine if the ELTIF's life is compatible with the lifecycles of each of its constituent assets.

• Minimum Holding Period Criteria: The minimum holding period is determined by taking into account liquidity profiles and valuation processes, as well as conformity with investment strategies, asset classes, and investor bases.

• Enhanced Information Disclosure: Managers must give investors and relevant authorities complete information about liquidity management methods, valuation techniques, redemption policies, and liquidity stress tests.

• Tools for Liquidity Management and Redemption Policy: ELTIFs are required to uphold reasonable redemption policy, which should include notice periods and valuation protocols. In order to safeguard investors and preserve financial stability, managers are also required to put redemption gates and anti-dilution liquidity management instruments into place.

The objective of these regulatory modifications is to create a more transparent, robust, and investor-friendly atmosphere in the ELTIF industry. This is in line with the larger goals of the European Union, which include encouraging sustainable investment and stability in the financial markets.

Enhancing Regulatory Framework for ELTIFs: A Step Towards Investor Protection and Financial Stability

Finally, it should be noted that the European Commission has made a significant effort to improve the legal framework controlling European Long-Term Investment Funds (ELTIFs) with the Commission Delegated Regulation (EU). These legislative amendments aim to strengthen investor protection, ensure financial stability, and promote the long-term survival of ELTIFs by specific rules on obligations regarding hedging derivatives, redemption policies, liquidity management tools, and transparency requirements. Through these revisions, Regulation (EU) 2015/760 is applied more coherently and clearly, giving ELTIF managers clear recommendations on how to handle intricate market conditions while protecting investors' interests. These regulations set the stage for a more stable and resilient investment environment in the European Union by focusing on matching investor interests with ELTIF objectives.