Key Takeaways:
- The European Commission’s (EC) proposed amendments to the ELTIF 2.0 rules provide the increased flexibility industry has been calling for.
- Changes aim to improve liquidity requirements, notice periods, and cost disclosures.
- The EC acknowledges there is no one size fits all approach to ELTIF liquidity management and looks to align ELTIF 2.0 with AIFMD 2.0 liquidity rules.
The European Commission (EC) has published its proposed amendments to the ELTIF 2.0 rules, advocating for the flexibility needed to make the funds a success.
The EC suggests the amendments are “more proportionate” than the European Securities and Markets Authority’s (ESMA) draft regulatory technical standards (RTS) published in 2023. Industry’s initial sentiment is that the amendments make the ELTIF 2.0 more commercially viable. ESMA must now decide if increasing flexibility in one of the cornerstone regulatory reforms within the EU Capital Markets Union1 is appropriate.
The Primary Revisions Requested by the EC Include:
- Removal of the minimum notice period of 12 months for investors for fund redemptions.
- Option of alternative liquidity management tools, such as redemption gates, as opposed to single option of fixed percentage “liquidity pockets” linked to length of the notice periods. The implementation and activation of redemption gates is not limited to “certain specific circumstances” or exclusively contingent on the notice period set out in the calibration table previously proposed by ESMA’s draft RTS.
- Principles based approach to match the situation and characteristics of the specific ELTIF. They favor rules which consider the principle of proportionality, the market practices, and the individual situations of ELTIFs.
- Possibility to use other liquidity management tools aligned to AIFMD 2.0 rather than the narrow list in the draft RTS, and no restrictions on general gating provisions.
- Request for common definitions, calculation methodology, and presentation formats of costs to align with existing regulations such as MIFID 2, PRIIPs, and AIFMD.
The revisions address a strong industry desire, as we flagged in our last ELTIF 2.0 blog, for increased flexibility so that the potential of ELTIF 2.0 could be fully captured. BBH recently explored this potential in our 2024 Fund Distribution Outlook, which reveals that nearly 50% of managers we surveyed are looking to go to market with ELTIFs in the next three years.
The proposed changes are very welcome in that they aim to improve liquidity requirements, notice periods, and cost disclosures very much aligned with prior industry advocacy submissions. Some of the original proposals created practical and operational challenges for ELTIF 2.0 manufacturers but the EC appears to remove some of the most challenging requirements and offer more choice, particularly around redemption terms. For example, the proposal for 40% minimum liquid assets to be held for any ELTIF with a notice period of less than six months made such funds unviable in the market.
As such, it is most welcome to see the EC acknowledge that there should not be a one size fits all approach to ELTIF liquidity management and look to align ELTIF 2.0 with AIFMD 2.0 liquidity rules.
More Good News!
The positive ELTIF vibes continued when the Central Bank of Ireland published its ELTIF Chapter to its AIF Rulebook on March 11, 2024. In essence, the Irish ELTIF 2.0 regime is now live and ELTIF 2.0 application forms can now be submitted for Irish ELTIFs.
What’s Next?
ESMA must respond to the EC’s request by April 17, 2024, with revised RTS taking into consideration the EC’s comments, failing which the EC may adopt RTS with the amendments it considers relevant, or reject it.
With the direction of ELTIF 2.0 policy now trending in a positive fashion, managers who had previously assessed launching semi-liquid or open-ended ELTIFs may revisit those ideas.
With ESMA expected to follow the EC suggestions, the ELTIF 2.0 final rules will be concluded shortly, and it looks like the ruleset will be attractive for fund manufacturers. An attractive ELTIF 2.0 product will stimulate more launches which in turn brings natural competition between asset managers. This, in turn, is good for investors since it usually results in price competition and makes the products more cost efficient.
1A package of regulatory reforms to promote Europe’s growth by channeling individuals’ savings into investment products.
Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. Pursuant to information regarding the provision of applicable services or products by BBH, please note the following: Brown Brothers Harriman Fund Administration Services (Ireland) Limited and Brown Brothers Harriman Trustee Services (Ireland) Limited are regulated by the Central Bank of Ireland, Brown Brothers Harriman Investor Services Limited is authorised and regulated by the Financial Conduct Authority, Brown Brothers Harriman (Luxembourg) S.C.A is regulated by the Commission de Surveillance du Secteur Financier. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2024. All rights reserved. IS-09788-2024-03-15
