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CESR consultation on a common definition of European money market funds

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Farrer & Co LLP
European Union
October 31 2009

On 20th October 2009, CESR issued a consultation paper containing its proposals for a common definition of European money market funds. The key purpose behind this is improved investor protection.    

Money market funds invest in short-term high quality money market instruments and are used by investors as an alternative to bank deposits. However, money market funds are an investment product and subject to risks not associated with bank deposits.

As a result of difficulties experienced by some money market funds during the financial crisis, CESR members agreed in December 2008 that there is a need for better understanding of the categorisation of money market funds as there is no harmonised definition. This was followed by the de Larosiere report in February 2009 which considered that there is a need for a common EU definition of money market funds and a stricter codification of the assets in which they can invest in order to limit exposure to credit, market and liquidity risks. In July 2009, the European Fund and Asset Management Association ("EFAMA") and the Institutional Money Market Funds Association ("MMFA") issued an industry recommendation for a European classification and definition of money market funds.

In this paper, CESR proposes a two-tiered approach to the definition of European money market funds which is broadly in line with the EFAMA and IMMFA recommendations. This recognises the distinction between short-term money market funds, which operate a very short weighted average maturity and weighted average life, and longer-term money market funds, which operate with a longer duration and weighted average life. The proposed definitions are set out in the paper.

The definitions will apply to harmonised (ie UCITS) European money market funds. CESR also recommends that the same approach is followed at national level for non-UCITS money market funds authorised by EU member states. In both cases specific disclosure should be required to draw attention to the difference between the money market fund and investment in a bank deposit.

The definition of money market funds will take the form of Level 3 CESR Guidelines and CESR invites responses to its paper by 31st December 2009.

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