EUROPEAN UNION: Roadmap Delegated Act on Money Market Funds Regulation

Thursday January 18 2018

The European Commission has published a roadmap on the Delegated Act on Money Market Funds Regulation specifying quantitative and qualitative liquidity requirements applicable to assets received as part of a reverse repurchase agreement and on credit quality assessment.

On the 30 June 2017, after 4 years of negotiation, the Regulation on Money Market Funds (MMF) was published in the Official Journal. This Regulation was one of the last reforms to complete the post-financial crisis regulatory efforts to reduce financial stability risks posed by shadow-banking activities. The key objectives of the Regulation are to reduce systemic risks in future and to limit assets-liabilities mismatches (i.e. run on the funds) to foster the stability of the financial markets. The MMF Regulation empowers the Commission to adopt three delegated acts, following the technical advices to be delivered by European Securities and Markets Authority (ESMA). In particular:

• two empowerments for delegated acts are foreseen to ensure that every MMF manager invests in assets that received a favourable credit risk assessment. One of them refers to the assets the manager invests directly; the other delegated act refers to the received collateral from a reverse repo agreement that must also receive a favourable assessment. The credit risk assessment is one of the core tasks of every MMF manager in order to ensure the quality of the MMFs. The Commission decided to bundle the empowerments of these two delegated acts as the analysis for the credit risk assessment is the same. ESMA has been asked to provide technical advices for these delegated acts;
• a third empowerment for delegated act is foreseen to ensure full compliance of the provisions in the MMF Regulation with criteria for Simple Transparent Standardised Securitisation (STS) and Assets Back Commercial Papers (ABCP) under the STS Regulation. The STS Regulation was not finalised before the adoption of the MMF Regulation, therefore the Commission is empowered to introduce a cross-reference to the criteria identifying STS securitisations and ABCPs.

The co-legislators introduced the first two empowerments with the aim of specifying the conditions for granting a favourable credit risk assessment by the MMF manager before investing in an asset or before receiving collateral as part of a reverse repo agreement. Those two empowerments are important for MMFs and for the financial market stability and its financing. MMFs are short term investment funds with requirements to invest in assets expected to be highly liquid and of high quality. To ensure the high level of liquidity and quality of those assets, MMF managers should properly perform a credit risk assessment of the assets. In particular, the Commission has been empowered to specify the criteria for the validation of the credit quality assessment methodology and the liquidity and credit requirements (both quantitative and qualitative) for the assets the MMFs invested into and the assets received from a reverse repo agreement applicable to EU and non-EU public authorities/entities.

The third empowerment is limited to the establishment of a cross-reference for MMF manager to use the criteria to invest into securitisation transactions identified for STS securitisations and ABCPs in the corresponding provisions of the STS Regulation.

To ensure coherence between those provisions, which should enter into force at the same time, and to facilitate a comprehensive view and compact access to them by persons subject to those obligations, it is desirable to Ref. Ares(2018)245681 – 15/01/2018 2 include these delegated acts in a single Regulation. In addition the provisions of this Regulation are closely linked in terms of substance since they all deal with investment requirements applicable to MMF.

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