Existing MMFs in the EU are predominantly UCITS, but the MMF Regulation covers both UCITS and AIF. The European Parliament’s compromise text introduces various amendments to the Commission’s original proposal. In particular, it requires CNAVs to be one of only three types:
They proposed that all three types of CNAV should apply 'liquidity fees' and 'redemption gates' to prevent significant redemptions in times of market stress and to prevent other investors being unfairly exposed to prevailing market conditions.
The five-year 'sunset clause' for LVNAVs will perpetuate the industry’s and investors’ uncertainty about the future of these CNAVs and make them singularly unattractive as a new form of fund. Within the trilogue discussions, we expect to see a hard negotiation between the retention of the sunset clause and the margin of volatility (which some officials wish to see reduced to 20 basis points).
Other amendments by the EP include the ability for an MMF to borrow or enter into repurchase agreements provided that certain conditions are fulfilled e.g. the repurchase agreement is temporary, the sum of the repurchase agreements do not exceed 10% of the assets of the MMF and shall not be invested in eligible assets, and the cash collateral received shall follow prudential investment guidelines.
The requirement for managers not to rely on external credit ratings but to have their own credit rating process has been replaced with the need for a prudent and rigorous internal assessment procedure for determining the credit quality of the money market instruments in which the MMF intends to invest.In addition to performing due diligence to identify the number of investors and their behavioural biases, where the investment in the MMF is via an intermediary, the MMF manager shall seek, and the intermediary shall provide, data allowing the manager to manage appropriately the liquidity and investor concentration of the MMF.MMFs shall report, on a weekly basis, all of the following information to their investors:
The EP has removed the Commission’s proposal to allow VNAV MMFs to receive external support in exceptional circumstances.