Scrutiny of delegated acts and implementing measures

Exchange of views on the Commission Delegated Regulation supplementing Regulation (EU) 2015/760 of the European Parliament and of the Council with regard to regulatory technical standards specifying when derivatives will be used solely for hedging the risks inherent to other investments of the European long-term investment fund (ELTIF), the requirements for an ELTIF’s redemption policy and liquidity management tools, the circumstances for the matching of transfer requests of units or shares of the ELTIF, certain criteria for the disposal of ELTIF assets, and certain elements of the costs disclosure

Chair Aurore Lalucq (S&D, France)

The scrutiny period of the regulatory technical standards (RTS) on ELTIF would conclude in October;
The European Securities and Markets Authority (ESMA) and the Commission had diverging views on the item.

Expert from the European Securities and Markets Authority (ESMA)

The revised ELTIF regulation published in 2023 provided that ESMA should draft RTS for a number of important areas, including on the key features of the redemption policy of the ELTIF;
ESMA published a consultation on 23 May 2023, and received 23 responses. Based on the feedback, ESMA developed a final report, that was published on 19 December 2023;
- ESMA then submitted the report to the Commission for adoption;
On 8 March 2024, ESMA received a letter from the Commission explaining that ESMA's draft RTS did not sufficiently cater for the individual characteristics of the different ELTIFs, and that it was necessary to take a more proportional approach to the drafting of the RTS, in particular with regard to the calibration of the requirements related to the redemptions and liquidity management tools;
The Commission informed ESMA that it intended to adopt the proposed RTS with amendments, which were submitted to ESMA in the annex of a letter, and invited ESMA to submit a new draft RTS to the Commission that reflected the amendments;
ESMA then amended the draft RTS and resubmitted it to the Commission in the form of a formal opinion;
- In this opinion, ESMA suggested only a limited number of changes to the amendments proposed by the Commission;
- ESMA acknowledged that an appropriate balance should be found between the protection of retail investors, financial stability related objectives, and the contribution that ELTFIs should make to the Capital Markets Union (CMU) objectives;
- However, in view of the Commission's comments, ESMA proposed striking that balance in a slight different way compared to the Commission;
On 19 July 2024, the Commission formally adopted the delegated regulation;
- ESMA took note that the ELTIF RTS adopted by the Commission departed from ESMA's proposal on liquidity related requirements included in ESMA's opinion;
- - In particular, the key proposal made by ESMA on the determination of the notice period by the manager of the ELTIF was not retained by the Commission;
ESMA referred to the reasons that explained why a certain level of prescriptiveness was needed in relation to the notice period of an ELFIT;
- Liquid nature of certain assets in which ELTIF may invest;
- The fact that ELTIF could be marketed to retail investors;
- More prescriptive approach would be in line with international work on liquidity management, in particular work at the FSB and IOSCO;
The suggestions proposed by ESMA on the liquidity of ELTIF should also provide safeguards so that the ELTIF was not put in danger;
ESMA's proposal on liquidity requirements still allowed to take into account the specificities of different ELTIFs while at the same time ensuring that investors were adequately protected;
- the assessment of the Commission was that this point would not be compatible with the requirements of level 1 regulation.
- Based on that assumption, ESMA considered that any future ELTIF revision could consider allowing that such proposal at a later stage was included in the delegated regulation.

Hélène Bussières, Head of the Asset Management Unit in the Directorate General on Financial Markets, Financial Stability and Capital Markets Union (FISMA), European Commission

The ELTIF reform was part of the Commission's CMU Action Plan;
ELTIF had the capacity to channel funding to Europe's energy, transport, social infrastructure, and economy;
There were over 130 ELTIFs and several dozens were in the pipeline for authorisation;
The Commission had worked hard with ESMA and national regulators to ensure the correct specifications of the RTS in level 2;
The Commission adopted the RTS in July 2024, and the entry into application of the technical standards would pave the way to completing the ELTIF legislative reform;
After receiving the draft RTS in December 2023, the Commission's legal services, in line with standard practices, conducted an in depth assessment of the draft;
- They indicated that some elements of the draft were not in line with the level 1 mandate;
- Concerns were raised on the calibration of the liquidity management tools;
- The Commission provided detailed legal explanations in its decision of 6 March 2024, highlighting the need to give ELTIF managers the flexibility needed to operate different types of investment strategies, and to serve a wide range of potential investors with different investment objectives;
After the submission of the revised RTS in April, the Commission decided to introduce a final set of minor adjustments:
- The Commission decided to first maintain Annex 1 of the technical standards that determined the liquidity calibration methodology for ELTIF. This Annex 1 was structured in a way that allowed investors in ELTIFs to redeem only a certain percentage of the liquid assets present in the fund, depending on the redemption frequency and notice period set by the manager;
- - This mechanism was aligned with the spirit of level 1 reform, agreed by co-legislators;
- From a legal standpoint, level 1 mandate did not foresee the imposition of minimum liquidity buffers for ELTIFs, nor did it impose a set of liquidity management tools;
- Another change compared to the resubmitted RTS concerned Annex 2, where the reference to notice period was replaced with redemption frequency;
- - The reference to notice period could imply that ELTIF managers had to sell off the funds core assets to meet the redemption request. This could put the fund in jeopardy, and for that reason, that approach would contradict the focus of the ELTIF reform of investing in long-term projects;
- The Parliament and the Council had discussed investor protection extensively during negotiations;
- - Given that ELTIF liquidity may be limited for funds that wanted to operate open ended, co-legislators had intentionally embedded additional investor safeguards on top of the ones that already existed under MiFID and others;
The ELTIF regulation in its level 1 did not foresee the additional investor protection measures that should be set at level 2. For that reason, the Commission removed that provision from the final RTS;
The final version of the RTS, now under scrutiny of the co-legislators, was sufficiently prescriptive while at the same time allowed the industry to develop the much needed long term investment products that would serve the objective of supporting the EU economy;
The ELTIF reform had the potential to be a game changer for the CMU.

Stephen Nikola Bartulica (ECR, Croatia) on behalf of Johan Van Overtveldt (ECR, Belgium)

The reforms showed the EU's readiness to support financial innovation and enhance the CMU;
In late 2021, there were around 50 long term investment fund. After the Parliament's vote on level 1 text, nearly 80 new ELTIFs had been approved;
- This increase signaled a strong market confidence, expecting further growth in the coming years;
The process of finalising ELTIFs technical standards had taken considerable time;
- The standards proposed by the Commission aligned with level 1 regulation, while those from ESMA did not.

Thomas Bajada (S&D, Malta)

He referred to the calibration of the standards related to redemption policy and liquidity management tools in the new RTS;
The Commission had introduced several changes to the RTS, as originally proposed by ESMA, providing more flexibility to ELTIF fund managers when it came to redemption policy issues and the selection of liquidity management tools;
He asked how ESMA observed the changes proposed by the Commission in that regard;
Given that ELTIF investment funds often invested in liquid investment assets while being marketed to ordinary retail investments, he asked whether more prescriptive rules when it came to redemption and liquidity management tools be justified under the new ELTIF framework;
He asked whether the final RTS proposed by the Commission maintained a balance between promoting ELTIFs as an investment vehicle, and the goal of maintaining a sufficient level of investor protection and financial stability.

Expert from the European Securities and Markets Authority (ESMA)

ESMA tried to strike the balance between investment and investor protection differently compared to the Commission;
The ESMA board decided to provide more safeguards for investor protection;
The biggest difference of opinion between ESMA and the Commission was whether there was a requirement for minimum liquid assets per se;
- The ESMA board acknowledged the fact that in other funds there had been difficulties with long term assets and short term liabilities, creating problems for retail investors;
ESMA would only choose the option of Annex 2, as they were afraid of investor detriment and a potential issue of financial stability.

Hélène Bussières, Head of the Asset Management Unit in the Directorate General on Financial Markets, Financial Stability and Capital Markets Union (FISMA), European Commission

She made clear that the way the ELTIF product had been conceived was not as a standard mainstream retail product;
The regulation included the provision that on top of the standard safeguards, investors had to be aware of the risks and the rather limited liquidity they could achieve when investing in ELTIF;
- ELTIF would provide good return and performance, but they could not have immediate liquidity;
ELTIF was not designed for an average retail investor;
Level 1 legislation did not foresee the obligation for the fund manager to maintain liquidity buffers in the fund;
- For that reason, the Commission designed the redemption policy as output of the notice period and the redemption frequency;
- Nevertheless, the fund should maintain a minimum liquidity, and the output of the redemption frequency, combined with the notice period, would give the indication of how much of the liquid assets could be distributed when investors wished;
The way the calibration of liquidity parameters was set up in ELTIF differed from the way this would be framed under UCITS.

Ľudovít Ódor (RE, Slovakia)

He considered that there were different conceptions of the goal of ELTIFs;
He asked whether there were any international benchmarks for those types of products regarding rules on redemption;
He asked about the scope of the competition and other international players for these types of products.

Hélène Bussières, Head of the Asset Management Unit in the Directorate General on Financial Markets, Financial Stability and Capital Markets Union (FISMA), European Commission

There were a number of different initiatives taken in other jurisdictions, precisely to channel savings into long term investments;
There were other initiatives in the UK, Switzerland and the UK, but their frameworks differed significantly from that in the EU, so comparing them was complex;
The Commission did outreach activities during the past months with third-country jurisdictions, and in Asia and Africa there was the intention to get to know the details of ELTIFs in order to replicate them.

Expert from the European Securities and Markets Authority (ESMA)

Clarified that ESMA was not against channeling capital to long term investments;
There was a tendency of international regulation going into the direction of more prescriptive redemption rules, trying to protect investors;
Safeguarding retail investors was key.

Damian Boeselager (Greens/EFA, Germany)

He asked about impact investing ELTIFs, and whether there was a growing interest on it;
He asked how ELTIF aligned with CMU targets.

Expert from the European Securities and Markets Authority (ESMA)

Impact investing was complex, as it was not clearly defined in regulation;
ESMA recognised that the more flexible the regulation was, the easier it would be to apply;
Nevertheless, ESMA was afraid that when there were stress conditions, ELTIFs could be locked up for investors to redeem.

Hélène Bussières, Head of the Asset Management Unit in the Directorate General on Financial Markets, Financial Stability and Capital Markets Union (FISMA), European Commission

There was a strong appetite for green and sustainable ELTIFs;
On market growth, investors were increasingly interested in ELTIFs;
She flagged that ELTIF was not a new product. The only difference was that the EU introduced additional safeguards;
It was important to advertise and promote ELTIF model;
It was time to complete the level 2 work as soon as possible.

Expert from the European Securities and Markets Authority (ESMA)

Called for advancing fast on level 2;
ELTIFs had a promising future;
Noted that it was important to be aware of the architecture problem that was part of the ELTIF regulation, which could have consequences under stress conditions.

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