New regulation on money market funds

In December 2016, after several years of negotiations, the European institutions agreed on a compromise text on how the money market fund landscape should be structured in Europe through a Regulation following the financial crisis. Further to the approval of the compromise text by the European Parliament on 5 April 2017, the adoption by the Council should come very soon.

The Regulation will apply to all UCITS and AIFs (and their sub-funds) investing in short-term assets and the investment objective of which is to (i) offer return in line with money market rates and/or (ii) preserve the value of their investment. It is worth noting that the scope is broader than the current CESR guidelines (ESMA predecessor) on money market funds CESR/10-049 which is only applicable to funds which label or market themselves as money market funds.

Only three types of money market funds will be allowed, each subject to a strict corpus of rules:

  • public debt constant net asset value funds;
  • low volatility net asset value funds; and
  • variable net asset value funds (VNAV) (which can be short-term VNAV and standard VNAV).

For the three types of funds, no sponsor support will be permitted in the future but on the other hand, the industry has avoided the implementation of a capital buffer to be maintained at the level of the fund.

Conceptually, the idea is to permit constant net asset value funds only for public debt investments (and to a limited extent to low volatility net asset value funds). As a default option, if liquidity features are not met, these funds may need to be moved to a variable net asset value fund structure.

The Regulation will come into force 20 days after its publication in the Official Journal of the EU which is expected for Q2 2017. It will be directly applicable in the Member States 12 months following its entry into force (i.e. expected to be Q2 2018). Existing money market funds in scope at the time of entry into force of the Regulation will have to provide the CSSF with satisfactory evidence (prospectus, amended articles of incorporation etc. …) that they comply with the Regulation within 18 months from its entry into force (i.e. expected to be Q4 2018).

The new regime will be monitored at European level and may be subject to a review by the European authorities after five years.