The European Commission wishes to abandon plans for a mandatory, 12-month redemption notice period for the second generation of European Long-Term Investment Funds, Eltifs. This notice period was proposed before Christmas by the European Securities and Markets Authority, Esma.
Instead, the Commission has informed Esma that it favours a more flexible approach. The Esma proposal «could lead to a misleading interpretation that a minimum holding period is mandatory,» the Commission wrote to Esma. «This conclusion would be at odds with the flexibility enshrined in» the actual Eltif regulation.
The Commission also recommends removing a disputed table that outlines how funds should balance illiquid private market investments with more liquid public investments in cases where the funds’ managers wished to apply shorter redemption notice periods.
These recommendations are mentioned in a draft EU document which outlines the Commission’s response to the draft regulatory technical standards, known as the ‘Level 2 RTS’ for the new Eltif regime as proposed by Esma on 19 December.
The Commission is due to finalise its reaction before 19 March, three months after Esma proposed the RTS. The draft response circulated on Monday aims to gauge the market’s feedback on the amendments to the Esma proposal.
Final RTS keenly awaited
A final RTS is keenly awaited in private equity markets across Europe, given that a considerable number of issuers are ready to launch new Eltif funds after the new regime came into force on 10 January.
In its response, the Commission expressed concerns that Esma did not adequately consider the individual characteristics and diversity of Eltifs, particularly in terms of investment strategies and portfolio compositions. The Commission also critiqued the draft RTS for potentially introducing a cost disclosure methodology that diverges from existing frameworks, such as the Priips Regulation, MiFID II, and AIFMD. The Commission argued for consistency in cost disclosures across regulations, ensuring clarity and reducing operational burdens for Eltif managers.
The main amendments to the draft RTS focused on ensuring flexibility and appropriateness for different Eltifs. The Commission suggests modifying the requirement to notify competent authorities of material changes to the redemption policy only on an ex post basis. Furthermore, it proposes adjusting liquidity requirements linked to notice periods and redemption gates, ensuring they are proportionate and take into account the diversity of Eltif.
Redemption gates
The Commission proposes to revise the approach to liquidity management tools, allowing Eltif managers to implement suitable tools beyond anti-dilution levies, swing pricing, and redemption fees. This also means clarifying the use and criteria of so-called ‘redemption gates’, ensuring they are not restricted to «specific circumstances» only.
Redemption gates are increasingly used as a liquidity tool in markets where liquidity tends to be lower. Previously, such provisions were used only selectively in collective investment schemes or funds with more illiquid investments. The trend is now moving toward using them in the case of liquid investments as well.