Almost three years after the European Commission (“Commission”) proposed new rules to regulate money market funds (“MMFs”), and just over a year after the European Parliament agreed its position on the Commission’s proposals, the Council of the EU (“Council”) has now agreed its negotiating position on the proposed regulation on money market funds ("MMF Regulation"), paving the way for trilogue negotiations between the European Parliament, the Council and the Commission to commence. Depending on the progress of the negotiations, this could lead to the finalisation of the text of the MMF Regulation before the end of 2016.
The debates to date in the European Parliament and the Council have led to a number of significant changes to the Commission’s original proposals. One of the more controversial aspects of the Commission’s text was the requirement for constant net asset value (“CNAV”) MMFs to put in place a 3% capital buffer to absorb day-to-day fluctuations in the value of a CNAV MMF’s assets and to ensure that sponsors were prepared should their MMFs require external support. CNAV MMFs would only be able to receive external support through this capital buffer. Neither the European Parliament nor the Council support the requirement for a capital buffer. Both institutions voted to prohibit all sponsor support for MMFs.
Both the European Parliament and the Council also propose the introduction of a new low volatility net asset value (“LVNAV”) MMF and new types of CNAV MMFs that would be restricted in terms of eligible assets and eligible investors. The proposed rules would introduce new requirements relating to permissible investment policies, with rules on eligible assets, diversification, liquidity management and eligible securitisations. The rules will apply to both UCITS and alternative investment funds (“AIFs”) structured as MMFs.
Next Steps and Comment
Trilogue negotiations will now commence, with the majority of the negotiations expected to take place in September. We have prepared a useful table analysing the differences between the positions adopted by the Commission, European Parliament and Council.
The proposed reforms of MMFs are of particular interest to the Irish funds industry, as MMFs represented 24% of the assets of all Irish domiciled funds (or €434 billion) as at March 2016. MMFs are an important product for investors seeking low risk, liquid and well diversified means of holding cash. The amendments introduced during the debates in the European Parliament and the Council, in particular the removal of the requirement for a capital buffer, are welcome and it is hoped that the negotiations will lead to a result that will ensure the ongoing viability of MMFs and recognise the important role these funds play in the European financial system.