Money Market Funds - Update

On June 17th 2016 the European Council agreed the text of the draft regulation on Money Market Funds (the “MMF Regulation”).

As previously mentioned in our newsletter of March 2015, on March 4th 2015, ECON issued its report on the draft MMF Regulation. The text of the proposal has been negotiated since then. Following the Council’s approval the next step is for the European Parliament to vote the text.

"The draft MMF Regulation intends to make those MMFs safer."

Taking into account that money market funds (“MMFs”) are an important source of short term funding for banks, corporates and governments, the draft MMF Regulation intends to make those MMFs safer as well as secure their viability and stability in the future.

The draft MMF Regulation regulates the composition of the MMFs’ portfolios and the valuation of their assets, to ensure the stability of their structure and to guarantee that they invest in well-diversified assets of good credit quality.

There are currently two types of MMFs:

  1. variable net asset value MMFs (“VNAV MMF”); and
  2. constant net asset value MMFs (“CNAV MMF”) that offer share purchases and redemptions for a fixed price.

As previously explained in our newsletter of April 2016, the MMF Regulation will create a third category of MMF: the low volatility net asset value MMFs (“LVNAV MMFs”). The LVNAV MMFs may display a constant net asset value under certain conditions. It is intended that the LVNAV MMFs replace the majority of the existing CNAV MMFs, within 24 months of entry into force of the MMF Regulation.

The draft MMF Regulation prohibits external support for all MMFs to avoid the risk of contagion. The draft MMF Regulation provides certain rules to ensure that the fund manager has a good understanding of his/her investors, and provides investors and supervisors with adequate and transparent information.

The draft MMF Regulation also obliges MMFs to diversify their portfolio assets and provides for redemption gates and liquidity and concentration requirements to ensure that they can face sudden redemption requests when market conditions are stressed. With the aim of discouraging investor runs, liquidity fees will be introduced. MMFs will have to invest in higher quality assets and assess internally the credit quality of money market instruments.