On 19 February 2013, the European Systemic Risk Board (the “ESRB”) published its recommendations on money market funds (“MMFs”) (the “Recommendations”).
The ESRB considers MMFs to comprise a key component of the shadow banking system and that investors may view them as safe alternatives to bank deposits. Given their key role in the banking sphere, as such, they may pose a systemic risk. As a result, the ESRB has issued its Recommendations to propose regulatory reform in respect of MMFs. The Recommendations are aimed at providing guidance to the European Commission (the “Commission”) as it considers if it is appropriate to have more detailed and harmonised regulation of MMFs.
The Recommendations look at 4 key areas, each of which are disclosed below.
- Mandatory move to variable net asset value
The ESRB has recommended that MMFs have fluctuating net asset values and that fair valuation should be made use of. It is also recommended that amortised cost accounting be limited to specific predetermined circumstances.
- Liquidity requirements
The ESRB also recommends that the following be incorporated into the relevant legislation:
- an explicit minimum amount of daily and weekly liquid assets that MMFs must hold;
- a requirement for fund managers to adopt additional responsibility regarding the monitoring of liquidity risk;
- a provision that the competent authorities of Member States and fund managers alike must have the necessary processes to deal with liquidity constraints during times of stress that may result due to fund-specific and/or market-wide developments.
- Public disclosure
The ESRB’s recommendations in respect of public disclosure suggest that the lack of any capital guarantee be highlighted to potential investors so that they are fully informed of the possibility of the loss of the principal they commit. Any possible support from a sponsor is also recommended as a disclosure in any marketing material of the MMF made available. The Recommendations also suggest that the valuation practices adopted by the MMF be disclosed as well as any information pertaining to the redemption procedures to be adopted in times of stress.
- Reporting and information sharing
With respect to reporting, the ESRB suggests the following:
- that any sponsor support that may impact the price of the MMF, be disclosed to the competent authorities responsible for the supervision of the MMF together with a full description of the nature and size of the support;
- that MMFs be required to make regular reports: and
- that the competent authorities of Member States be required to share the information outlined in (i) and (ii) above.
The Commission is also encouraged to develop a harmonised reporting and information sharing system for MMFs.
The Commission is expected to deliver a report to the ESRB by 30 June 2013 to outline its initial assessment of the Recommendations with its final report expected by 30 June 2014.