EUROPE: CESR consults on common definition for Money Market Funds

Tuesday October 20 2009

CESR has published a Consultation Paper for a harmonised definition of European money market funds which will enhance investor protection.

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. The Credit Crunch saw premium rated securities held by money market funds downgraded with low levels of liquidity thus making withdrawal very difficult.

While pointing out differences between the money market fund and bank deposits, CESR has proposed a two-tiered approach for a common definition: Short-Term money market funds and Longer-term 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 longer-term money market funds, which operate with a longer duration and weighted average life.

The definitions will apply to harmonised (UCITS) European money market funds. CESR recommends that the same approach is followed at national level for non-UCITS money market funds which are authorised by the Member States.

In July 2009, The European Fund and Asset Management Association (EFAMA) and the Institutional Money Market Funds Association (IMMFA) published a report on European classification and definition of money market funds.

The report classified money market funds based on a single category of money market funds composed of two types- short-term and regular – defined in a way that limit the main risks to which money market funds are exposed, i.e. interest rate risk, credit/credit spread risk and liquidity risk.

The consultation will close on 31st December 2009, and the common definition will take the form of Level 3 CESR Guidelines. Member states will enforce the definition on money market funds sold after the guidelines take effect. Existing European money market funds will have a transitional period of 12 months after the introduction of the guidelines to comply with criteria set out in the agreed definition .