We have outlined in this article the latest developments in the progress of the Commission’s proposal for a Regulation on Money Market Funds through the EU legislative process.
Draft Report of the Rapporteur responsible for the Commission’s proposal for a Regulation on Money Market Funds (the “draft Regulation”)
On 15 November 2013 the Rapporteur who is responsible for the passage of the draft Regulation through the EU legislative process issued his draft report. This draft report will be considered by the ECON Committee of the European Parliament at its meeting on 2nd December 2013.
The draft report proposes a number of amendments to the draft Regulation which are set out below, some of which go beyond the draft Regulation:
Each constant net asset value money market fund (CNAV MMF) should establish and maintain by 31 December 2014 a NAV buffer amounting at all times to at least 3% of the total value of the CNAV MMF's assets (the proposal in the draft Regulation was that it would be introduced on a staged basis). The total value of the CNAV MMF's assets should be calculated as the sum of the values of each asset of the MMF.
Conversion of CNAV MMFs
By the end of 2019 all CNAV MMFs should be converted to variable net asset value money market funds (VNAV MMFs). This requirement for mandatory conversion of CNAV MMFs did not appear in the draft Regulations.
CNAV MMFs should not be offered to retail investors.
External support of CNAV MMFs should be limited to the building up of the capital buffer by the sponsor. Member States should ensure that external support is not given by any sovereign, regional or local public authority. In addition, ESMA should issue detailed guidelines on sponsor support by 31 July 2015 concerning such matters as the maximum amount that sponsors may grant and the applicable conditions.
Amortised cost accounting
Amortised cost accounting should be applied only where it is deemed to allow for an appropriate approximation of the price of the instrument. As the risk of mispricing increases with longer term underlying assets, the use of amortisation should be restricted to instruments with low residual maturity and in the absence of any particular sensitivity of the instruments to market factors. A residual maturity of 90 days should generally be considered to be the maximum. Materiality thresholds and escalation procedures should be in place to ensure that corrective actions are promptly taken when the amortised cost no longer provides a reliable approximation of the price of the instruments. At the level of the overall portfolio, thresholds of 10 basis points would generally be deemed to be appropriate.
The ban on the rating of a MMF by a credit rating agency should be removed.
Investment in over the counter derivatives should be prohibited.
Each MMF should put in place a remuneration policy in respect of the MMF’s portfolio managers, directors, risk takers and personnel in control functions.
Direct supervision by ESMA
MMFs with more than EUR 10 billion of assets under management shall be supervised by ESMA on their compliance with the Regulation on an on-going basis.
The EU legislative process is a drawn out process and the views, and role, of the European Parliament, are only one aspect of the process – the Council of Ministers also has a role and the Irish Government has indicated that it does not agree with many of the key provisions of the draft Regulations, in particular the introduction of a NAV buffer.
Two key dates have recently been announced. They are as follows:
- A vote in the ECON Committee on the draft EC MMF Regulation has been scheduled for 12 February 2014 – this vote will be in respect of the draft Regulation and any amendments as put forward by or on behalf of the ECON Committee.
- The EU Parliamentary debate on the draft Regulation is scheduled for 15 April 2014 – at which the entire EU Parliament will be able to discuss the proposal.