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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
EMEA | Publication | January 2024
On 19 December 2023, the European Securities and Markets Authority (ESMA) unveiled its final draft regulatory technical standards (RTS) on Regulation (EU) 2023/606 (the ELTIF 2 Regulation), covering critical aspects such as minimum holding periods, notice periods, thresholds for liquid assets, and maximum redemption limits. This final RTS has not yet been formally adopted, and the European Commission may amend or reject the proposed standards.
The draft RTS cover a number of topics, including hedging restrictions, the life cycle of investments of the European long-term investment fund (ELTIF), matching mechanism conditions and disclosures on costs. We have highlighted below a few of the items that we consider key takeaways for the market.
The report delineates significant provisions and modifications to the RTS, addressing critical aspects of redemption and liquidity management tools:
1. The redemption notice period:
2. Maximum Redemption frequency:
The table below provides a clear overview of the minimum percentage of liquid assets, the maximum percentage of assets for redemptions, and the specific conditions related to the notice period for different ranges.
Notice Period Range | Minimum Percentage of Liquid Assets | Maximum Percentage of Assets for Redemptions (Redemption Gates) | Justification Requirement for Notice Period < 3 Months |
Less than 1 year to 9 months | -13% | 50% | Not Applicable |
Less than 9 months to 6 months | 27% | 45% | Not Applicable |
Less than 6 months to 3 months | 40% | 40% | Not Applicable |
Less than 3 months to 1 month | 40% | 35% | Required, justification to relevant NCA |
Less than 1 month | 40% | 20% | Required, justification to relevant NCA |
3. Flexibility on Minimum Holding Period:
There is a proposal to eliminate the time-based requirement for a set minimum holding period, granting ELTIF managers the flexibility to choose the most suitable holding period based on outlined criteria in the RTS.
4. Choice of liquidity management tools:
ELTIF managers must choose and apply at least one liquidity management tool (e.g., anti-dilution levies, swing pricing, redemption fees). Exceptions and justifications can be presented to the NCA, with possible exemptions for ELTIFs exclusively targeting professional investors.
One of the main concerns of the market relates to the liquidity requirements for partly open-ended ELTIFs. This would make these semi-liquid ELTIFs unworkable in practice due to the required notice periods coupled with the mandatory liquidity allocations. The current version of the RTS would makes these ELTIFs rather unattractive for both market players and ultimate investors.
The draft RTS has not been adopted yet, The European Commission has a three-month window, extendable by another month, to adopt the draft RTS. It may amend and return the draft to ESMA for further consideration. If it is adopted, the draft RTS will enter into force on the day following its publication in the Official Journal of the European Union.
Publication
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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