In the eye of the storm

Debate on money market funds rages on

The controversy surrounding the future regulation of money market funds shows no signs of abating following the release of a draft report in the European Parliament on 15 November 2013. The draft report goes further than the original Commission proposal in many respects and sets the scene for more intense discussion on the future viability of money market funds in Europe. Most notably, the draft report would impose a 3% capital buffer on constant NAV money market funds by the end of 2014, leading up to an outright ban of such funds by 2019.

New measures proposed

Proposed amendments to the controversial Commission text include:

  • A phasing out of all CNAV MMFs, which are required to switch to a variable NAV (VNAV) by 2019
  • The 3% capital buffer for CNAV MMFs should be established by the end of 2014 rather than over 3 years as proposed by the Commission
  • The biggest MMFs (>€10 billion in AuM) should be placed under the direct supervision of the European Securities and Markets Authority (ESMA) rather than local EU regulators
  • MMFs should not be established in offshore “tax havens” where there are no or nominal taxes and a lack of transparency and local substance requirements
  • CNAV MMFs should not be offered to retail investors
  • MMFs should be subject to remuneration rules
  • External sovereign support should not be given for MMFs
  • Additional requirements should be placed on the use of amortised cost accounting

The draft report has rowed back on two of the Commission’s measures:

  • Credit rating agencies should not be banned from providing ratings on MMFs
  • The rules on eligible assets should be relaxed so that MMFs can invest partly in other MMFs and in OTC derivatives

Key concerns

Money market funds are a vital source of short term financing but have been identified as a possible source of systemic risk by regulators globally, due to their susceptibility to investor ‘runs’ in stressed market conditions. Concerns have focussed in particular on CNAV MMFs, which regulators regard as giving a misleading impression of a stable NAV. The changes proposed to address these concerns could see the MMF industry shrink significantly in size and result in the concentration of assets in a few very large funds that can sustain the additional costs.

The regulatory response is more hardline in Europe than in the US, where the focus has shifted to imposing redemption restrictions rather than capital buffers or outright bans on CNAV MMFs. The industry has stressed that typically low margin MMFs cannot sustain the capital requirements proposed and will need to close or will choose to move out of Europe to remain competitive. EU restrictions on amortised cost accounting also present very significant and costly operational challenges. The proposals are particularly concerning for the Irish funds industry, where over 30% of Europe’s MMFs with assets of €276 Bn are domiciled.

Next steps

The Economic and Monetary Affairs Committee of the European Parliament must first adopt the proposed report, which will then be submitted for a wider plenary vote, currently scheduled for 15 April 2014. The Council of Ministers has yet to adopt its position for inter-institutional negotiations although several member states, including Ireland, have voiced concerns. The final text would need to be agreed before European elections take place in May 2014 if it is to be adopted in the current EU legislative cycle. The timeframe is therefore considerably tight and given the controversy surrounding the proposals, the final outcome of the proposed Regulation remains uncertain.

Deloitte’s EMEA Centre for Regulatory Strategy is actively involved in industry level discussions on the MMF proposals and can assist you in analysing their impact. For more information read our briefing on the draft Commission MMF Regulation or contact your Deloitte representative.

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