The European Commission has finally published the regulatory technical standards (RTS) for the regulation on European long-term investment funds (Eltifs) on 19 July 2024. These RTS provide much-needed clarity on various aspects of the Eltif framework, particularly in areas such as liquidity management and redemption policies. Stefan Staedter, a partner at Arendt & Medernach and head of their New York office, provides his insights on the implications of these RTS.
Addressing Market Concerns
The RTS cover a range of topics, including the use of derivatives, cost disclosures, transfer request matching, and the requirements for an Eltif's redemption policy and liquidity management tools. The details regarding redemption features, in particular, have been the subject of lengthy discussions between the European Commission and the European Securities and Markets Authority (ESMA).
"After carefully reviewing the RTS for Eltifs, it is clear that the concerns of the industry have been taken into account," states Staedter. "While not perfect, the outcome is very positive, and I am confident that market practice will adapt to the guidance."
One key feature of the RTS is the flexibility offered to managers in calibrating the maximum percentage for redemptions. They can choose to apply the requirements set out in Annex I, which focuses on redemption frequency and notice period, or Annex II, which emphasizes redemption frequency with a minimum liquidity. Managers opting for Annex I can further select from three different options, offering a tailored approach to liquidity management.
Flexibility and Anti-Dilution Measures
The RTS also grant managers flexibility in choosing anti-dilution liquidity management tools. They can either select from the tools detailed in the RTS or implement other tools at their discretion.
"The RTS provide managers with a solid framework for managing liquidity and ensuring the long-term sustainability of Eltifs," explains Staedter.
Potential Challenges
While the RTS offer significant benefits, there are some potential challenges. The level of detail required for disclosure about the redemption policy could create a significant administrative burden for asset managers, requiring sophisticated data analysis and monitoring by regulators.
The cost provisions, intended to provide clarity, could also lead to questions, particularly regarding the overall cost ratio.
Impact on Retail Investment
Staedter believes the RTS will have a significant impact on retail investment. "As retail investments inevitably drive demand for liquidity, the RTS's detailed provisions on liquidity management will be crucial," he says.
The clarity provided by the RTS is expected to encourage more asset managers to launch Eltif projects, especially those who have been waiting for regulatory clarity.
Next Steps and Timeline
The RTS are now subject to a three-month scrutiny period by the European Parliament and the Council, with the possibility of a further three-month extension. If no objections are raised, the text will be published in the Official Journal of the EU and come into effect.
"We expect the scrutiny period to conclude by 19 October, allowing the RTS to enter into force by the end of the year," states Staedter.
The publication of these RTS marks a significant step forward for the Eltif framework, addressing key concerns and paving the way for further growth in the European long-term investment market. The flexibility offered by the RTS should encourage greater innovation and provide a more attractive alternative for investors seeking long-term, sustainable investment solutions.
