Money Market Funds (MMFs) are an important source of short-term financing for financial institutions, corporates and governments. MMFs are one of the five workstreams identified by the FSB (Financial Stability Board) in 2012 in relation to the Shadow Banking System.
About the MMFs regulation
On 30 June 2017, the MMFs regulation was published in the Official Journal of the EU. This regulation has two key objectives:
- Enhance financial stability within European markets by preventing the risk of contagion potentially transmitted by the “run” of MMFs to money markets and to their sponsors (mainly financial institutions)
- Increase investor protection by reducing the disadvantages for late redeemers in stressed market conditions
This regulation introduces:
- New risk management requirements which impose stress testing and internal processes to determine credit quality for money market instruments, and “Know Your Customer” policies and procedures
- New liquidity management requirements for Public Debt Constant Net Asset Value (CNAV) and Low Volatility Net Asset Value (LVNAV) MMFs. External support to guarantee the liquidity of an MMF or to stabilise its NAV are prohibited
- New transparency requirements to investors and competent authorities
Level 2 and level 3 texts have completed the MMF regulation as regards:
- Cross-reference to criteria identifying simple, transparent and standardised securitisation and, ABCPs in the provisions of the STS securitisation regulation, stress-test scenarios
- Reporting to competent authorities
Scope
The MMFs regulation is applicable to all MMF products, whether UCITS or AIFs.
The text classifies MMFs based on their weighted average maturity and life: short term MMFs and standard MMFs.
Moreover, there are three types of MMFs:
- Variable Net Asset Value (VNAV): MMFs which offer unit/share purchases and redemptions at a variable price
- Two types of MMFs which offer unit/share purchases at a fixed price (Constant NAV per unit/share):
- CNAV MMFs, which invest at least 99,5% of their assets in public debt
- LVNAV MMFs, whose CNAV per unit/share must not deviate from the NAV per unit/share by more than 20 basis points
The use of the share cancellation mechanism is no longer allowed, as confirmed by the European Commission in its letters dated January 2018 and October 2018 addressed to ESMA.
The regulation expands on the current CESR (Committee of European Securities Regulators) money market fund guidelines published in May 2010 with:
- New investment requirements to:
- Expand minimum daily and weekly liquidity allocations
- Limit eligible assets, and in particular prohibit the use of short-selling, securities lending, borrowing
- Limit maximum allocations by non-public issuer counterparty and asset type
- New valuation rules which limit the use of amortised cost methods to the calculation of the constant NAV per unit/share
Industry implications
All MMFs have been affected by more complex risk management and transparency requirements. In this respect, LVNAV MMFs which publish a CNAV, but do not invest all their assets in public debt, are most impacted by the new constraints as they have to comply with specific liquidity management and reporting requirements.
Securities Services’ view
EU MMFs are highly regulated and transparent products.
According to EFAMA, total assets of EU MMFs represented €1,275 billion end 2019:
- €586 billion were managed as low volatility NAV (LVNAV) MMFs
- €101 billion as public debt constant NAV (CNAV) MMFs
- €588 billion were managed as variable NAV (VNAV) funds
Despite the strains in the MMF sector seen during March 2020 due to the Covid-19 crisis, investors were able ask for redemptions at all times, Market and supervisory intelligence suggests that central bank action and the build-up of sufficient liquidity buffers by MMFs have helped to avoid a crisis of confidence.
The MMF regulation has significantly strengthened the requirements imposed on money market funds, as compared to other products, in areas such as:
- Know your customer
- Credit risk monitoring
- Liquidity risk monitoring
New investment requirements could be introduced after 21 July 2022, with the review by the Commission of the regulation and the publication of a report.
Key dates
September 2013 – Publication of the draft MMFs regulation by the European Commission, alongside the EC’s communication on Shadow Banking
July 2014 – Adoption of SEC revised rules in the US
June 2017 – Publication of level 1 text in the Official Journal
November 2017 – Publication of the ESMA report on level 2 texts and level 3 texts
July 2018 – Entry into application for new funds
January 2019 – Entry into application for existing funds
October 2019 – Asset managers send their report to their national competent authority
Q1 2020 – Start of the obligation for MMF managers to send quarterly reports to national competent authorities – Due to the Covid-19 crisis, first reports by MMF managers were postponed until September 2020, instead of the original date of end-March 2020.
