Money market funds (“MMFs”) provide short-term finance to financial institutions, corporations, and governments.
The (non-binding) Guidelines on a common definition of European money market funds” (“Guidelines”), which were adopted by the Committee of European Securities Regulators (CESR) on 19 May 2010, were applied by 12 Member States only.
In view of this, the Council of the European Union (“Council”) adopted the Regulation on money market funds (“MMF Regulation” or “MMFR”) on 16 May 2017, which will apply directly in all Member States.
What is the scope of the MMFR?
The MMFR applies to collective investment undertakings that (a) are established, managed, or marketed in the European Union, (b) are undertakings for collective investment in transferable securities (“UCITS”) under the Directive 2009/65/EC on UCITS (“UCITS Directive”) or are AIFs under the Directive 2011/61/EU on alternative investment fund managers (“AIFM Directive”); and (c) invest in short-term assets (being financial assets with a residual maturity not exceeding two years); and (d) have distinct or cumulative objectives that offer returns in line with money market rates or that preserve the value of the investment.
What is the relationship between the MMFR, UCITS, and AIFM Directive?
The new rules on MMFs add a layer on top of the existing UCITS and AIFM framework (as implemented into the national legislations). In addition to these new rules, an MMF will have to continue to apply either the UCITS or AIFM framework depending on whether it is a UCITS or an AIF.
What does the additional layer entail?
The additional layer consists mainly of the provisions as described hereunder.
An MMF may only invest in “eligible” financial assets: eligible money market instruments, eligible securitizations, and asset-backed commercial paper (“ABCPs”), eligible deposits with credit institutions, eligible financial derivative instruments, eligible repurchase agreements, eligible reverse repurchase agreements, and eligible units or shares of other MMFs. In addition to those eligibility criteria, there are provisions on the credit quality of money market instruments, securitizations, and ABCPs.
The MMF is also prohibited from engaging in certain activities such as entering into securities lending agreements or securities borrowing agreements, or any other agreement that would encumber the assets of the MMF and from borrowing and lending cash.
The investment policy of the MMF is also specifically regulated in terms of diversification and concentration of the assets held in the MMF’s portfolio. In terms of risk management, there are rules on holding the portfolios, credit ratings, stress tests, and know-your-customer policy. The MMFR also imposes valuation rules and specific requirements for public debt funds.
It also introduces a permanent category of low volatility net asset value MMFs (“LVNAV MMFs”) as an alternative to existing (as defined in the Guidelines), constant net asset value MMFs (“CNAV MMFs”) (the latter always being a public debt MMF). In terms of net asset value, there are now three types of MMFs that can be either short-term or standard MMFs, and either UCITS or AIFs:
(a) the VNAV MMF (being the already existing variable net asset value MMF);
(b) the public debt CNAV MMF;
(c) the LVNAV MMF.
The MMFR prohibits and defines external sponsor support such as cash injections from third parties. The Regulation also prescribes the transparency requirements that the MMF manager must comply with, being the requirements on information for (prospective) investors and the reporting requirements for the competent authority.
Finally, the MMFR stipulates that the Member Stat must lay down rules on effective, proportionate, and dissuasive penalties and other measures applicable to infringements of the MMF Regulation. Although the MMFs are now regulated by way of a European “regulation”, which in itself is a tool for maximum harmonization, the sanctioning of it is subject to national, potentially divergent, measures.
What is the authorization procedure?
The MMFs must be authorized (additionally) in order to be established, marketed, or managed in the EU. The authorization is valid throughout all Member States (as we understand without any additional notification requirements to the general notification requirements under the UCITS or AIFM framework).
The competent authority that grants the MMF authorization is in principle the competent authority of the UCITS/AIF home Member State. For non-EU AIFs, this will be any of the following:
- the competent authority of the Member State where the non-EU AIF is marketed without a passport in the EU;
- the competent authority of the EU AIFM managing the non-EU AIF where the non-EU AIF is marketed with a passport in the EU or is not marketed in the EU;
- the competent authority of the Member State of reference if the non-EU AIF is not managed by an EU AIFM and is marketed with a passport in the EU.
For the purposes of authorization an MMF will have to submit to its competent authority all of the following documents:
- the fund rules or instruments of incorporation , including an indication of which type of MMF it is from those set out in Article 3(1) of the MMF Regulation (as described below);
- identification of its manager;
- identification of its depositary;
- a description of, or any information on, the MMF available to investors;
- a description of, or any information on, the arrangements and procedures needed to comply with the requirements of the MMF Regulation ;
- any other information or document requested by the competent authority of the MMF to verify compliance.
A collective investment undertaking that requires authorization as a UCITS and as an MMF (a “UCITS-MMF”) for the first time will be authorized as an MMF as part of the UCITS authorization procedure pursuant to the UCITS Directive.
The MMFR states that an already authorized UCITS “may” apply for authorization as an MMF in accordance with the MMFR-procedure set out above. From the fact that this undertaking already went through the UCITS-procedure and will only be authorized to operate as an MMF if the competent authority of the MMF is satisfied that the MMF will be able to meet all the requirements of this Regulation, it can however be inferred that the existing UCITS qualifying as an MMF will rather “have to” apply for an authorization the MMFR-procedure.
In addition for AIFs, as they are not subject to harmonized authorization and supervision procedures under Directive 2011/61/EU as is the case for UCITS, the MMFR provides for common basic rules on authorization that mirror the existing harmonized rules for UCITS. When applying for managing an MMF that is an AIF, the authorized AIFM must provide the competent authority of the MMF with:
- the written agreement with the depositary;
- information on delegation arrangements regarding portfolio and risk management and administration with regard to the AIF;
- information about the investment strategies, the risk profile, and other characteristics of AIF-MMFs that the AIFM manages or intends to manage.
An AIF will be authorized as an MMF only if the competent authority of the MMF approves the application submitted by an AIFM that has already been authorized under the AIFM Directive to manage an AIF-MMF, and also approves the fund rules and the choice of the depositary.
As part of the regulated access to the MMF market, the MMF Regulation establishes a monopoly on the use of designation as “MMF”. A UCITS or an AIF can use the designation “money market fund” or “MMF” in relation to itself or the units or shares it issues only if it has been authorized in accordance with the MMF Regulation.
All existing UCITS and AIFs must −within 18 months− submit an MMF application to the national competent authority. The competent authority must assess the application within two months after it has received the complete application.
On May 24, 2017, ESMA published its Consultation Paper containing proposals on draft technical advice, draft implementing standards, and guidelines under the MMF Regulation, mainly relating to asset liquidity, credit quality, the establishment of a reporting template, and stress-test scenarios.
Publication, entry into force, and applicability
The adopted MMF Regulation has been sent for publication in the Official Journal of the European Union. It will enter into force 20 days following its publication. Most of its provisions will apply 12 months after the date of entry into force.