EUROPE: CESR publishes common definition of Money Market Funds

Wednesday May 19 2010

Against the Backdrop of the Financial Crisis and the Collapse of Lehman Brothers which led to money market funds experiencing difficulties due to their holdings of certain highly rated asset-backed securities followed by high levels of redemptions, CESR has published guidelines on a common definition of European money market funds which includes detailed guidelines regarding the management and operation of a money market fund.

The guidelines which have been very well received by industry bodies aim to improve investor protection by setting out criteria to be applied by any fund that wishes to market itself as a money market fund. The criteria reflect the fact that investors in money market funds expect the capital value of their investment to be maintained while retaining the ability to withdraw their capital on a daily basis.

CESR says a common definition will also help provide a more detailed understanding of the distinction between funds which operate in a very restricted fashion and those which follow a more “enhanced ` approach.

The new guidelines set out two categories of money market funds: Short-Term Money Market Funds and Money Market Funds. This approach recognises the distinction between short-term money market funds, which operate a very short weighted average maturity and weighted average life; and money market funds which operate with a longer weighted average maturity and weighted average life.

For both categories of the Money Market Funds, CESR expects that there should be specific disclosure to explain clearly the implications of investing in the type of money market fund involved. For Money Market Funds, for example, this will mean taking account of the longer weighted average maturity and weighted average life of such funds. For both types of money market funds, this should reflect any investment in new asset classes, financial instruments or investment strategies with unusual risk and reward profiles.

The guidelines will enter into force in line with the transposition deadline for the revised UCITS Directive (1 July 2011). However, money market funds that existed before that date will be granted an additional six months to comply with the guidelines as a whole.

Each Member state will now be required to implement the common characterisation of European money market funds in its domestic financial services legislation. A harmonised definition will then enable investors to compare money market funds across Europe based on equivalence.

The European Funds and Asset Management Association (EFAMA) and the Institutional Money Market Funds Association (IMMFA) have welcomed this new definition of a European money market fund.

Commenting Peter de Proft, Director General of EFAMA, said:

“We truly welcome the definition of money market funds and commend CESR on their excellent work. Creating the first pan-European definition of a money market fund will provide investors with much needed guidance regarding money market funds. The two categories will allow investors to choose between funds with differing objectives, whilst also specifying what may be included in a money market fund. We look forward to continuing to work closely with CESR.”

Commenting Gail Le Coz, Chief Executive of IMMFA said:

“These guidelines seek to improve investor protection. IMMFA fully supports and shares that goal, as evidenced by the amendments which we made to our Code of Practice in December 2009. This set of best practice standards for the management and operations of triple-A rated money market funds includes provisions to limit interest rate, credit and liquidity risk and imposes additional disclosure obligations on funds. In many ways, the short-term category reflects the practices that our members have employed for some time.”