EU Money Market Funds will face an overhaul in their legal and regulatory framework in 2015, when the newly proposed EU Regulation on Money Market Funds is likely to come into effect.
The European Commission issued a proposal on 4 September 2013 for a new Regulation on Money Market Funds (MMF) domiciled in the EU within the scope of its Shadow Banking initiative. This Regulation if adopted as it is currently drafted will, I believe, herald a substantial reform of this sub-sector of asset management. The EU rules will apply to all UCITS and AIF that have the objective of offering returns in line with money market rates or preserving the value of the investment. The proposal takes certain principles in existing CESR/ESMA guidelines and makes them into law, but also announces a raft of supplementary rules that will have a considerable impact on the business model and operations of Money Market Fund managers.
What are the main changes?
- As expected the sponsors of ‘Constant NAV’ MMFs will be hit with a capital buffer of 3%, with existing funds having 3 years to progressively build this buffer. Sponsor support for ‘Variable NAV’ MMFs will only be permitted in extreme circumstances.
- MMFs set up as UCITS will be subject to rules on eligible assets, efficient portfolio management, issuer diversification and portfolio concentration set out in the Regulation only, which will supersede the general UCITS regime.
- The scope of eligible assets and investment strategies will be narrowed to money market instruments, deposits with credit institutions, reverse repurchase agreements and financial derivative instruments for hedging interest rate and currency risk.
- Investments in Asset Backed Commercial Papers will be limited to those that have short-term corporate debt as underlying assets. Financial underlying assets such as mortgages and car loans will no longer be permissible.
- The use of repos and the borrowing and lending of cash and securities will be prohibited.
- No exposure to equities or commodities will be allowed.
- Managers will need to establish an internal assessment system to determine the credit quality of issuers.
- Limits for daily (10%) and weekly (20%) maturing assets are set out, as well as the requirement for the MMFs to have a detailed understanding of their investors, their needs and behaviors, in order to anticipate massive redemptions.
- ‘Constant NAV’ MMFs will need to compare the CNAV and VNAV calculations on a daily basis for variations and escalate significant variation to the authorities.
- New quarterly reporting obligations to competent authorities are introduced as well as a new authorisation procedure for AIFs mirrored on the UCITS approach which when taken together will give the authorities the additional information needed to monitor the sector for systemic risk.
What are the next steps?
The proposal is now in the hands of the EU Parliament and Council for negotiation and is likely to be agreed in 2014. Existing MMFs would have six months after the entry into force of the Regulation to submit an application to their local authority demonstrating their compliance with the Regulation.
- The proposal and related documents are available on kpmgregulapedia.lu