The proposed Regulation on money market funds (MMFs) introduces a new framework of requirements to enhance their liquidity and stability.
What is the MMF Regulation?
In September 2013, the EU Commission published a legislative proposal for MMF regulation. This proposal came about after a number of concerns with MMFs were identified:
- 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 Commission have stated the proposed regulations are intended to establish only 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.
What does the proposed regulation do?
The proposed Regulation aims to ensure 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 will the Regulation apply to?
It will apply 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.
The MMF Regulation will not amend either the UCITS Directive or the AIFMD, but will create an additional layer of product rules over and above both Directives.
The MMF Regulation was published in the Official Journal on 30th June 2017 and will apply from 21 June 2018. ESMA are now consulting on draft technical advice, implementing technical standards and guidelines under the Regulation.