Tuesday March 27 2018

News Source: Fund Regulation

Focus: Other

Type: General

Country: European Union




On 23rd March 2018, the European Commission published a regulation regarding longterm ivestment funds. With respect to the circumstances in which the use of financial derivative instruments solely serves the purpose of hedging the risks inherent to the investments of an European Long-Term Investment Fund (ELTIF), it is necessary to take into account financial derivative instruments whose underlying corresponds to the assets in which the ELTIF has invested and whose exposures are intended to be hedged, as well as trades in assets that, albeit not being the same in which the ELTIF has invested, relate to the same asset class. This is the case, in particular, where a financial derivative instrument to hedge an exposure to a specific item is not available as a dedicated type of derivative, but rather as an item among other items included in an index which is the underlying of a financial derivative instrument. In addition, the use of financial derivative instruments might in some cases constitute a hedging strategy only if it is pursued in combination with trades in some assets, whereby that type of strategy should not be prohibited.

In order to ensure that the use of financial derivative instruments solely serves the purpose of hedging the risks inherent to the investments of an ELTIF, the manager of the ELTIF should take all reasonable steps to ensure that the financial derivative instruments used effectively reduce the relevant risk at the ELTIF level and are also efficient in stressed market conditions. The reduction of risk should be verifiable through the use of adequate risk management systems identifying the risk intended to be mitigated and the way in which the derivative would mitigate such risk.

In situations where an ELTIF invests in assets that have different maturity profiles, the life of an ELTIF should be set with reference to the individual asset within the ELTIF portfolio which has the longest investment horizon having regard to the liquidity of that asset.

In order to allow competent authorities and managers of the ELTIFs authorised under Regulation (EU) 2015/760 before the entry into force of this Regulation to adapt to the new requirements contained in this Regulation, the date of application of this Regulation should be 1 year after its entry into force. The requirement on the sufficient length of the life of the ELTIF is deemed to be fulfilled under this Regulation by the ELTIFs already authorised under Regulation (EU) 2015/760 before the entry into force of this Regulation.

All relevant subjects addressed within the regulation are:

  • Sufficient length of the life of the ELTIF
  • Hedging derivatives
  • Criteria for the assessment of the market for potential buyers
  • Criteria for the valuation of the assets to be divested
  • Specifications on the facilities available to retail investors
  • Transitional provisions
  • Entry into force

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