EUROPEAN UNION: Agreement reached on Money Market Funds Regulation

Tuesday December 13 2016

The European Council and European Parliament have reached agreement on the content of a draft Regulation on money market funds (MMFs). The draft regulation is aimed at making these funds more robust, ensuring the smooth operation of the short-term funding market. It sets out to maintain the essential role that money market funds play in financing the real economy.  It follows efforts by the G20 and the Financial Stability Board to strengthen the oversight and regulation of the ‘shadow banking’ system.

The draft regulation lays down rules for MMFs, including:

• the composition of their portfolios and the valuation of their assets, to ensure the stability of their structure and to guarantee that they invest in well-diversified assets of a good credit quality.
• common standards to increase the liquidity of MMFs, to ensure that they can face sudden redemption requests.
• common rules to ensure that the fund manager has a good understanding of investor behaviour, and to provide investors and supervisors with adequate information; and
• the prohibition of sponsor support from third parties, including banks.

An important new element of the regulation is the introduction of a permanent category of “low volatility net asset value” (LVNAV) MMFs. This new category has been made available as a viable alternative to existing “constant net asset value” (CNAV) MMFs.

Proposed liquidity rules

• for LVNAVs and CNAVs, a minimum 10% portfolio investment in daily maturing assets and minimum 30% portfolio investment in weekly maturing assets. Of the minimum liquidity required in weekly maturing assets, up to 17.5% may be held in public debt instruments;
• for VNAVs, a minimum 7.5% portfolio investment in daily maturing assets and minimum 15% portfolio investment in weekly maturing assets. Of the minimum liquidity required in weekly maturing assets, up to 7.5% may be held in money market instruments or units/shares of other MMFs.

Proposed diversification requirements

• a 17.5% limit on investments in other MMFs, with a safeguard to prevent ‘circular’ investments;
• a 15% limit on reverse repurchase agreements;
• specified limits for covered bonds and for deposits in the same credit institution; and
• a targeted exemption from diversification rules for employee saving schemes.

Provisional agreement with the European Parliament was reached on 14 November 2016. The regulation is expected to be approved by the Parliament at first reading. It will then be submitted to the Council for adoption.

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