The Money Market Funds Regulation provides a clear framework that covers collective investment schemes focusing on money market instruments. The rationale behind the regulation is to stabilize the MFF industry and minimize the potential effect of an event in the MMF industry on the economy. It lays down rules concerning mandatory conditions on portfolio structure, establishing a capital buffer, clear labeling of MMFs and customer profiling policies (know your customer).
The proposal would impact MMFs set up as UCITS, and those that qualify as AIFs, and would apply in addition to the existing UCITS and AIFMD frameworks.
The proposed regulation lays down rules concerning the financial instruments eligible for investment by a MMF, which include money market instruments, deposits with credit institutions, financial derivative instruments for hedging interest rate and currency risk. Operations such as entering into securities lending/borrowing agreements, repurchase agreements, short selling and borrowing/lending cash would be prohibited.
A new element of the draft regulation, agreed upon on behalf of the Council on 15 June 2016, is the introduction of ‘low volatility net asset value’ (LVNAV) MFFs. These LVNAV MFFs will replace most of the existing CNAV MFFs within 24 months of entry into force of the regulation. Only two types of CNAV MFFs would be allowed to continue to operate under the draft regulation: those that invest 99,5% of their assets in public debt instruments and those with a specific investor base solely outside the EU. Reactions of the stakeholders have been mixed, so far. While many stakeholders welcome the intention to establish a framework at the EU level, a few also have concerns regarding its impact on the CNAV industry, which is severely limited under the draft.
Author: Reinold Slagter, consultant