Updated European rules for long-term investment funds known as Eltifs will enter into force on 10 January 2024, but managers looking to actually launch new Eltif 2.0 funds may have to wait until the end of February because European financial supervisors still have to agree on the technical standards for supervising these products.
Luxembourg’s financial supervisor CSSF since September has received “significant numbers” of applications for Eltif 2.0 funds, said a person familiar with the Eltif market. CSSF director Marco Zwick, in charge of supervising the fund sector, did not mention actual numbers when addressing a Luxembourg private assets conference on Tuesday, but said the CSSF is ready and set to approve the funds per 10 January “almost automatically”.
“There is a huge market to be exploited in this respect,” Zwick said. “We really believe it will be a very successful product.”
These new kinds of funds have been designed with the needs of broader capital markets and private investors in mind, especially high net worth individuals and more experienced retail investors. European private investment funds, many of which are domiciled in Luxembourg, so far are mainly targeted at professional and institutional investors such as pension funds and insurance companies. Research by Scope projects Eltifs to become a 35 to 50 billion euro market by 2028.
Eltif funds launched after 2016 under the first version of the EU regulation were not the success that the European Commission had hoped for. Still, for Luxembourg Eltif has become a relatively successful new market. Out of the 90-some Eltif funds currently available, about 60 percent is domiciled in Luxembourg.
Level 2 RTS
Much of the success of the new Eltif 2.0 regime will depend on the outcome of ongoing discussions of the supervisory standards, known as the Level 2 RTS talks. These standards are currently being drafted by European supervisory authorities at the table of Esma, the EU supervisory authority in Paris. In these discussions, a major rift has emerged between national supervisors over how much flexibility needs to be applied in supervising the new Eltif funds.
Different viewpoints between the French supervisor AMF, which advocates a strict, uniform application, and its Luxembourg counterpart CSSF, which calls for a flexible approach, are at the heart of the conflict. Speaking on Tuesday, Zwick reiterated that CSSF advocates a principle-based approach that also takes account of the experience that Luxembourg-based firms have in private markets.
“The RTS is very important. We need a principle-based regulation. Not one that sets limits,” said Zwick. “Also from a European perspective the intention is that it will really be a successful product.
That European perspective - making private financing and investments available to a broad array of investors across the European Union and boosting the Capital Markets Union - is exactly what is encouraging, said a person familiar with the RTS discussions. The European Commission, which needs to approve the RTS after Esma has submitted it, is said the be on track to support an RTS that respects the need for at least a bit of flexibility.
December
Speaking at the sidelines of the private assets conference, David Zackenfels, senior legal advisor at the Association of the Luxembourg Fund Industry Alfi, said he expects that an updated draft RTS will be published in December.
“The commission has until Christmas to review this and to endorse this, which is not going to happen before then,” said Zackenfels, adding that formal endorsement will only come next year. The draft RTS, however, once agreed as Esma level, could also serve as a basis for national regulators to start approving Eltif 2.0 funds, even as the Commission has yet to take its time to translate the RTS into all EU languages, something that needs to be done before it can be formally published.
“They would come at the earliest at the end of February,” he said. “However, NCAs know what is in there. They could deploy them already. End of next year would not be good, that would make us lose faith in the European legislature.”
Esma has previously told Investment Officer that it expects to have published the RTS by 10 January.
In terms of technical aspects of the RTS discussions, the current proposal, put on the Esma table last summer, outlines very narrow cost specifications. Zackenfels said he is “confident or hopeful’ that these concerns are taken into account.
Proposed stringent measures for mandatory quarterly redemptions and for 12-month redemption notices are also considered “too strict,” he said, as are the limited possibilities to derogate. The current text of the RTS only allows supervisors to deviate from these standards under exceptional circumstances.
“We are hoping that this is going to be a non-issue,” said Zackenfels.