On 31 July 2015, ESMA released a consultation paper on draft Regulatory Technical Standards (RTS) under the ELTIF Regulation. ELTIFs are designed to boost non-bank investment in the real economy across Europe. They will help pension funds, insurance companies, professional and even retail investors (if they are willing to invest at least €10,000 for the long term, whether in one or more ELTIFs) to put money into projects in their own countries, elsewhere in the EU and outside it, provided that these benefit the EU economy.
The draft RTS aim to determine the following:
- Circumstances in which the use of financial derivative instruments (FDIs) solely serves hedging purposes
- Circumstances in which the life of an ELTIF is considered sufficient in length
- Criteria to be used for certain elements of the itemised schedule for the orderly disposal of the ELTIF assets
- Costs disclosure
- Facilities available to retail investors
Circumstances in which ELTIFs use FDIs for hedging purposes
An FDI shall serve the purpose of hedging the risks inherent to other investments of the ELTIF when it:
- Is considered a hedging instrument eligible for hedge accounting purposes under IFRS
- Mitigates the risks arising from the potential impact on the value of investments resulting from fluctuation of hedged items
Length of ELTIF’s life
The ELTIF’s life will be considered sufficient in length to cover the life-cycle of each individual asset of the ELTIF where:
- It is set with reference to the asset within the portfolio with the longest life-cycle
- The investment objective of the ELTIF takes into account that no investment may be made which could exceed the time remaining before the end of the ELTIF’s life
Disposal of assets
The schedule for the orderly disposal of the ELTIF assets must assess:
- Whether one or several potential buyers are present in the market
- Whether the potential buyers are dependent on external financing
- If there are no potential buyers for all or any of the eligible investment assets, the length of time necessary to find one or several buyers for those assets
- The different maturity profiles of the investments
- Whether there is any risk associated with legislative changes that could affect the market for potential buyers
- Whether there is any political risk that could affect the market for potential buyers
- The impact that market conditions may have on whether there are buyers in the market and whether they are dependent on external financing
Criteria for the valuation of assets to be divested
The criteria to be used for the valuation of the assets to be divested are as follows:
- The valuation must take place no more than 6 months before the schedule is disclosed to the competent authority of the ELTIF
- The valuation must be based on the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date
The draft RTS outlines common definitions, calculation methodologies and presentation formats of costs. Costs covered include costs of establishment, asset acquisitions, management fees, distributions costs and payments to delegates. Costs should be expressed as a percentage of the ELTIF’s capital. The costs section of the prospectus of the ELTIF should contain a presentation of costs in the prescribed form.
Facilities available to retail investors
The draft RTS outline the services that should be provided to retail investors when receiving subscription, repurchase and redemption orders and information that should be made available to retail investors.
This is the first step in the development of the draft RTS and ESMA invites the views of external stakeholders on its proposals until 14 October 2015. Stakeholders responses will help ESMA to finalise draft RTS to be submitted to the European Commission for endorsement.