European Parliament votes its position on Money Market Funds

European Parliament votes its position...

Existing MMFs in the EU are predominantly UCITS, but the MMF Regulation covers both UCITS and AIF.


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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:

  • a Retail CNAV, available for subscription only for charities and non-profit organizations, public authorities and public foundations;
  • a Public Debt CNAV, which invests at least 99.5% of its assets in public debt instruments; or
  • a Low Volatility Net Asset, the EP has siValue MMF (LVNAV MMF), which must operate under strict conditions, including: the deviation of the actual NAV from one Euro to be within 50 basis points; use of amortised cost method to value assets with a residual maturity below 90 days; and potential investors to be clearly warned in writing prior to the conclusion of the contract of the circumstances in which the fund will no longer redeem or subscribe at a constant NAV. Critically, LVNAVs will cease after five years unless the Commission decides otherwise.

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:

  1. The liquidity profile
  2. The credit profile and portfolio composition
  3. Weighted average maturity (WAM) of the portfolio
  4. Weighted average life (WAL) of the portfolio
  5. The cumulative concentration of the top five investors in the MMF

The EP has removed the Commission’s proposal to allow VNAV MMFs to receive external support in exceptional circumstances.

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