Money Market Funds Regulation has been saved
Money Market Funds Regulation
On November 16, 2016, the EU Council and European Parliament agreed a draft text of the Money Market Funds (“MMF”) Regulation ("MMFR"). MMFR rules will apply to UCITS or Alternative Investment Funds MMFs. The text is not final and there may be technical changes to the draft before MMFR is passed. However the text establishes that there will be 3 types of authorised MMFs 1) Low Volatility Money Market Fund (“LVNAV MMF”), Public Debt Constant Net Asset Value Money Market Fund ( “CNAV MMF”) and Variable Net Asset Value Money Market Fund (“VNAV MMF”).
Public debt CNAV MMF
Public debt CNAV MMFs are similar to the current CNAV MMF and are defined as investing at the least 99.5% of their assets in EU or non-EU government securities and securities issued by central banks and other international financial institutions. At least 10% of the funds’ assets must be comprised of daily maturing assets, reverse repurchase agreements that can be within one business day terminated or cash which can be withdrawn. At least 30% of the assets must be comprised of weekly maturing assets. Public debt CNAV can use amortised cost accounting and the mark to market / mark to model method.
An operational model has been agreed for the new LVNAV MMF.
LVNAV MMFs must have at least 10% of the funds’ assets comprised of daily maturing assets, reverse repurchase agreements that can be terminated or cashed within one business day. At least 30% of the assets must be comprised of weekly maturing assets. LVNAV MMFs are able to use amortised cost accounting to value assets but only in relation to assets that have a residual maturity of up to 75 days. Individual assets must be marked to market if the mark to market price of the asset deviates from the price that is calculated using amortised cost accounting by more than 10 basis points.
LVNAV MMF and Public Debt CNAV MMF
Question: How is the Weekly Maturing Assets Calculated ?
Answer: The assets must be government-issued securities that are highly liquid and can be redeemed and settled within one business day ( if they have a residual maturity of up to 190 days they may be included in the calculation, but only up to a maximum threshold of 17.5% of the MMF’s assets )
The Public Debt CNAV MMF and the LVNAV MMF will not be subject to an automatic sunset clause.
One of the main concerns was that MMF’s were not resilient enough to a market crisis. The draft text introduces comprehensive new requirements for permissible investment policies, eligible assets and liquidity and other new requirements including valuation and redemption fees/gates.
Question: What happens if the proportion of weekly maturing assets falls below 30% or where the net daily redemptions on a single business day exceed 10% of the total assets ?
Answer: The MMF manager must immediately inform the MMF’s board. The board will have to complete an assessment and decide whether or not to apply liquidity fees on redemptions, redemption gates or suspension of redemptions for any period up to 15 working days.
If the proportion of weekly maturing assets falls below 10%, the board has to apply either liquidity fees on redemptions or a suspension of redemptions. Within a period of 90 days if the aggregated suspensions exceed 15 days, a LVNAV or public debt CNAV MMF will automatically cease to be a LVNAV or CNAV MMF.
MMF’s will have to diversify their portfolios and invest in higher quality assets. There will be specific rules on liquidity management to meet potential redemption requests and there will also be rules on fees to be applied on redemption. MMF’s will be required to carry out sound stress testing. Assets of the MMF’s will have to be valued and published daily. MMF’s will it seems not be allowed to receive external support including from their own sponsors and they will not have to maintain a capital buffer.
The 3 EU institutions are now working on the draft text before it goes to a plenary vote.