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23 October 2015

ALFI response to ESMA’s consultation on the draft regulatory technical standards under the ELTIF Regulation

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ALFI agrees that – to the extent possible - it would be preferable to rely on existing standards and definitions rather than to create another definition for the specific purpose of the ELTIF Regulation.

ALFI takes the view that relying on accounting standards such as IFRS 9 does not seem to us as being the appropriate approach. Indeed, IFRS are accounting standards that pursue a different (i.e., accounting) purpose than the regulatory objectives pursued by the ELTIF Regulation and the present consultation. Also, the hedge accounting rules under IFRS 9 are not mandatory but are an optional accounting method. Derivatives may actually be used for hedging purposes without applying these hedging rules. ALFI is concerned that Alternative Investment Fund (AIF) managers, in particular ELTIF managers, may not be familiar with the sophisticated IFRS hedge accounting rules even when their companies are applying IFRS.

ALFI is of the view that – depending on the focus, investment strategy and concrete assets held by an ELTIF - various other risks may be relevant for a specific ELTIF. It is in our view impossible to define and predict ex ante all risks that may be (or become) relevant for all ELTIFs over time. From the legislative process of the ELTIF Regulation and the various draft versions of the Regulation it appears to us that this had actually been recognised by the European legislators. Indeed, unlike certain of the previous drafts, the final wording of the Regulation allows the hedging of all (undefined and hence, unlimited) types of risks inherent to the investments of an ELTIF.

ALFI agrees with ESMA’s proposal that the life-cycle of the ELTIF should be determined with reference to the life-cycle of the assets in which the ELTIF intends to invest, it comes with some constraints and may need some nuances. For instance, certain eligible assets (such as SME equities) may not have a defined maturity. In such events, ALFI suggests that the end of life be determined in view of the anticipated (regular or irregular) exit possibilities for such assets. In the event that an ELTIF manager would wish to select certain eligible investments that would mismatch in their life-cycles with the ELTIF end of life initially set, or if the life-cycles of the assets held by an ELTIF change in the course of its life, adjustments to the end of life of the ELTIF should be possible in a sufficiently flexible manner. In particular, a reduction or extension of the end of life should not be subject to high administrative or regulatory hurdles that would, de facto, make any adjustment impossible.

Full response

© ALFI - Association of the Luxembourg Fund Industry

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