ELTIF – Draft regulatory technical standards

Regulation 2015/760 (the “Regulation”) on the European Long-Term Investment Fund (“ELTIF”) entered into force on June 9th 2015.

Following the entry into force of the Regulation, the European Securities and Markets Authority (“ESMA”) released on July 31st 2015 a consultation paper (the “Consultation Paper”) on draft regulatory technical standards (“RTS”).

"The RTS shall regulate various aspects which are “critical for the functioning of the Regulation”.

Such various aspects can be summarised as follows:

1 .The criteria for establishing the circumstances in which the use of financial derivatives serves hedging purposes

Pursuant to Article 9(2) and 9(3) of the Regulation, the use of financial derivatives by an ELTIF is only permitted for hedging purposes.
In considering the term “hedging” ESMA considers a number of pieces of existing legislation and regulation and proposes that a financial derivative instrument shall be considered as serving the purpose of hedging if two cumulative criteria are met (i) it qualifies as a hedging instrument that is eligible for hedge accounting purposes pursuant to IFRS standards; and (ii) it mitigates the risks arising from the potential impact on the value of the other investments of the ELTIF resulting from fluctuation of hedged items.
Risks to be covered not only include currency, inflation and interest rate risks but should also take into account the nature of the long-term and real estate investments.

2. The criteria for establishing the circumstances in which the life of an ELTIF is considered sufficient in length

Basically the life of an ELTIF should be set in a way that takes into account each and all of the individual assets of the ELTIF portfolio, as stated in Article 18(3) of the ELTIF Regulation. Therefore, ESMA proposes to determine the life of the ELTIF in accordance with the life of the asset which has the longest life-cycle.
In addition, ESMA further proposes that ELTIFs should not invest in assets which have a life-cycle which exceeds the residual time of the ELTIF.

3. Orderly disposal of the ELTIF assets

The draft RTS includes criteria on the valuation of the assets to be divested in order to ensure the orderly disposal of the ELTIF assets at the end of the life-cycle of the ELTIF.

4. Costs disclosure

Pursuant to Article 25 of the ELTIF Regulation, the prospectus of an ELTIF shall prominently inform investors of the level of the different costs borne directly or indirectly by them. Pursuant to the Regulation ESMA should take into account certain regulatory technical standards under the PRIIPs regulation. However those standards are not yet available so ESMA sought inspiration from the existing legislation and regulation concerning the Key Investor Information Document.  For the most part ESMA are proposing that costs be expressed as a percentage of the capital of the ELTIF (called and uncalled). The RTS set out how the overall ratio of the costs is to be calculated and provides that such ratio shall be calculated at least once a year.

5. The facilities available to retail investors

The draft RTS further specify the facilities that have to be available to retail investors for making subscriptions, making payments to unit - or shareholders, repurchasing or redeeming units or shares and making available the regulatory information.

Comments should be sent to ESMA on or before October 14th 2015.