Wednesday April 1 2015

News Source: Fund Regulation

Focus: Money Market Funds

Type: General

Country: European Union




The European Parliament`s Committee on Economic and Monetary Affairs (ECON) has published its proposal for a regulation of the European Parliament and of the Council on Money Market Funds.

The Regulation lays down rules concerning the financial instruments eligible for investment by a money market fund (MMF), its portfolio and valuation, and the reporting requirements in relation to a MMF established, managed or marketed in the Union.

The Regulation will apply to collective investment undertakings that:

  1. require authorisation as UCITS under Directive 2009/65/EC or are AIFs under Directive 2011/61/EU;
  2. invest in short term assets;
  3. have distinct or cumulative objectives offering returns in line with money market rates or preserving the value of the investment.

Constant Net Asset Value MMFs (CNAV MMFs) will, from the date of the entry into force of the Regulation, only operate in the Union as a Public debt CNAV MMF, as a Retail CNAV MMF or as a Low Volatility NAV MMF (LNAV MMF). Existing CNAV MMFs will be able to choose to operate as variable net asset value MMFs (VNAV MMFs) instead.

For UCITS and AIFs that invest in short term assets such as money market instruments or deposits, or enter reverse repurchase agreements, or certain derivative contracts with the only purpose of hedging risks inherent to other investments of the fund, and that have the objective of offering returns in line with money market rates or of preserving the value of the investment, compliance with the new rules on MMFs should be mandatory.

The Regulation details:

Authorisation of money market funds

Applicable rules – to include UCITS and AIF rules unless otherwise stated

Provisions on eligible assets:

  • Assets regarded as eligible – this is money market instruments, short-term public debt instruments, deposits with credit institutions, eligible derivative instruments used exclusively for hedging purposes, and reverse repurchase agreements or repurchase agreements (subject to certain conditions)
  • Prohibited activities – short selling money market instruments; exposure to ETFs, equities or commodities by any means; securities/cash borrowing and lending; and investing in other MMFs.
  • Eligible money market instruments
  • Eligible securitisations
  • Eligible deposits with credit institutions
  • Eligible financial derivative instruments
  • Eligible reverse repurchase agreements

Provisions on investment policies:

  • Diversification – including requirements that a MMF shall invest no more than 5% of its assets in money market instruments issued by the same body or deposits made with the same credit institution; the aggregate of all exposures to securitisations shall not exceed 10% of the assets of a MMF; the aggregate risk exposure to the same counterparty of the MMF stemming from derivative transactions shall not exceed 5% of its assets; the aggregate amount of cash provided to the same counterparty of a MMF in reverse repurchase agreements shall not exceed 10% of its assets;
  • Concentration – A MMF may not hold more than 5% of the money market instruments issued by a single body.

Provisions on credit quality of money market instruments

Risk management provisions:

  • Portfolio rules for short-term MMFs – its portfolio shall have a weighted average maturity of no more than 60 days and a weighted average life of no more than 120 days; at least 10% of its assets shall be comprised of daily maturing assets; and at least 20% of its assets shall be comprised of weekly maturing assets.
  • Portfolio rules for standard MMFs – its portfolio shall have at all times a weighted average maturity of no more than 6 months and a weighted average life of no more than 12 months; at least 10% of its assets shall be comprised of daily maturing assets; at least 20% of its assets shall be comprised of weekly maturing assets; it may invest up to 10% of its assets in money market instruments issued by a single body. Note that a standard MMF shall not take the form of a CNAV MMF.

Credit ratings

KYC policy

Stress testing

Valuation rules and accounting treatment – the assets of a MMF shall be valued at least on a daily basis and valued by using mark-to-market whenever possible.

Prohibition on external support

Transparency requirements

The EU Parliament is scheduled to consider the legislative proposal on 27 to 30 April 2015.

Click on the above link for the draft Regulation.