What is the MMF Regulation?
The regulation addresses a number of identified concerns with money market funds (MMFs):
- MMFs are systemically relevant due to the total size and concentrations of assets under management;
- MMFs are subject to inherent market risks and investor runs; and
- The banking sector and the money markets are systemically interconnected.
The regulation establishes a general framework within which European MMFs have to operate. Investors will still have to bear the risks inherent in investment in money market instruments, but new transparency requirements will aim to ensure that all MMF investors are aware of these risks.
The aim of the regulation is to ensure that MMFs can better withstand redemption pressure in stressed market conditions, by enhancing their liquidity profile and stability. Some of the key provisions are:
- Prescribed levels of daily and weekly liquidity: These are designed to enable an MMF to satisfy investor redemptions. MMFs will have to hold at least 10% of their assets in instruments that mature on a daily basis and an additional 20% in instruments that mature within a week.
- Clear labelling: An MMF should clearly indicate whether it is a short-term MMF or a standard MMF. Short-term MMFs hold assets with a residual maturity not exceeding 397 days. Standard MMFs have a maturity limit of two years.
- A capital buffer of 3% for constant net asset value (CNAV) funds: This would be activated to support stable redemptions in circumstances where an MMF’s investment assets are decreasing in value.
- Customer profiling policies: To help anticipate large-scale redemptions.
- The need for some internal credit risk assessment to be carried out by the MMF manager: Designed to avoid an over-reliance on external credit ratings.
Who does the regulation apply to?
It applies to all MMFs that invest in money market instruments, regardless of whether the MMF is governed by the UCITS framework or whether the MMF operates as an alternative investment fund in line with the definition in the AIFMD.
It does not amend either the UCITS Directive or the AIFMD, but creates an additional layer of product rules over and above both Directives.
The MMF Regulation will apply from 21 July 2018. ESMA has published a final report on their technical advice, draft implementing technical standards (ITS) and draft guidelines. Although the Regulation is directly applicable, the FCA has also consulted on the changes it needs to make so the Regulation can work properly in the UK. They aim to publish comments and final rules shortly and make the forms for authorisation of new MMFs available in early May.