EUROPEAN UNION: Money Market Fund Rules Adopted

Thursday May 18 2017

On 16^th May 2017, the European Council adopted a regulation to ensure the smooth operation of the short-term financing market. This follows initiatives by the G20 and the Financial Stability Board.

The regulation lays down rules and common standards to:

• ensure stability in the structure of money market funds;
• guarantee that they invest in well-diversifiedassets of a good credit quality
• increase the liquidity of money market funds, to ensure that they can face sudden redemption requests.

The regulation lays down rules for Mooney Market Funds (MMFs), in particular 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.

It also introduces common standards to increase the liquidity of MMFs, to ensure that they can face sudden redemption requests.

The regulation additionally establishes common rules to ensure that the fund manager has a good understanding of investor behaviour, and to provide investors and supervisors with adequate information.

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 CNAV MMFs.

Under the new regulation, money market funds will be subject to new and strengthened liquidity requirements as well as other safeguards. In the case of CNAV and LVNAV MMFs, there are also additional safeguards such as ‘liquidity fees and redemption gates’. These will be designed to prevent and limit the effects of sudden investor runs.

The European Parliament approved the text on 5 April 2017, following an agreement between Council and Parliament representatives on 7 December 2016.

Most provisions will apply 12 months after entry into force.

Click on the link above for further details.