The European Commission on 19 July 2024 the regulatory technical standards (RTS) for the regulation on European long-term investment funds (Eltifs), to which the Luxembourg market . Three months later, the European Commission delegated regulation was on 25 October and entered into force on 26 October. Following a to the publication, experts from Loyens & Loeff went into the details with Paperjam.
What was your overall reaction to the final RTS?
“In our view, the Eltif 2.0 RTS address most pain points raised by the industry, in particular, with respect to liquidity management tools (LMTs) and redemption mechanisms for open-ended Eltifs,” said Sebastiaan Hooghiemstra, senior associate in Loyens & Loeff’s investment management practice, and , partner and head of the firm’s investment management practice.
What do the final RTS say about minimum holding periods and how do these differ from earlier versions?
“Unlike earlier iterations published, the final RTS do not contain any strict requirements with respect to the duration of the minimum holding period of an Eltif. To enable Eltif managers to complete the investments of its capital contributions, the RTS determine certain criteria on the basis of which managers are required to determine the length of the minimum holding period. A justification with respect to the appropriateness of the duration of the minimum period has to be given by the Eltif manager upon an explicit request by the competent authority of the Eltif.”
Can you share some details on minimum notice periods, redemption frequencies/gates and liquidity pockets?
“The final RTS allow for a proportional approach with discretion for Eltif managers in terms of (a combination of) (i) minimum notice periods, (ii) redemption frequencies/gates and (iii) liquidity pockets. Although the tables provided under both Annex I and II of the RTS with respect to liquidity pockets, notice periods, redemption gates and frequencies are really complex, it is clear that the European Commission has made an effort to implement the comments made by the industry in the final RTS.”
“In our view, Annex I of the RTS allows for redemption gate percentages which are high enough to cover the liquidity management set-ups of most types of semi-liquid funds that are being set-up in Luxembourg. This is less the case with respect to Annex II RTS. Both the required liquidity pocket percentages with respect to monthly and quarterly redemptions are slightly higher than Luxembourg market practice. However, Eltif managers may choose to apply either Annex I or Annex II of the RTS. Albeit complex, Eltif managers may choose for either one of the options under Annex I, as redemption gates are easier to apply and have no impact on risk/return profile and, thus, the returns of an Eltif, whereas liquidity pockets do. In any case, an Eltif manager would choose a combination from both anyway and Luxembourg market practice seems, at the face of it, to fit into this table.”
It will be interesting to see if, as is currently expected, indeed the adoption of the RTS will accelerate the uptake of Eltif 2.0 semi-liquid products
“Although we expect that the tables under both Annex I and II of the RTS will be considered to be reasonably workable by industry practitioners, it will be interesting to see if, as is currently expected, indeed the adoption of the RTS will accelerate the uptake of Eltif 2.0 semi-liquid products. In any case, several competent authorities have already helpfully indicated to be willing to apply the definitive RTS ahead of the official application date.”
How about liquidity management tools and redemption gates?
“In relation to LMTs, the final RTS, contrary to earlier iterations of the RTS, do not require anti-dilution LMTs to be adopted by ‘default’ for which a derogation request for the use of any other LMT would need to be made to a competent authority. Instead, the RTS mentions that Eltif managers ‘may’ select and implement, at least, on anti-dilution LMT, including anti-dilution levies, swing pricing and redemption fees.”
“In addition, the RTS also mention that other LMTs ‘may’ be selected, if appropriately justified to the competent authority. Again, Eltif managers may request their competent authority with respect to their ‘professional Eltifs’ to be exempted from this requirement.”