PwC Ireland's most recent asset management regulatory newsletter, "Regulatory Times" features an update on Money Market Funds (see page 7). It tells us, "The European Commission (EC) tabled [unveiled] its proposed Regulation on money market funds (MMFs) on 4 September 2013. Caught in the headlights of pan-EU regulations for the first time, the new regime introduces a host of requirements for MMFs from risk management to data collection. Essentially, the proposed Regulation is designed to ensure that MMFs can better withstand redemption pressure in stressed market conditions, by enhancing their liquidity profile and stability. The idea is that this should help to secure their important financing role for the economy. MMFs would be obliged to hold at least 10% of their assets in instruments that mature on a daily basis and an additional 20% of their assets in instruments that mature within a week."
The PwC piece continues, "The EC is concerned about the interconnectedness of MMFs and the banking sector. According to the EC, nine out of the 10 largest MMF managers are sponsored by commercial banks. The EC also worries about the concentration of MMF assets. It says that the 200 largest MMFs account for more than 86% of the aggregate assets MMFs hold. The EC's proposal addresses concerns raised by a European Systemic Risk Board (ESRB) recommendation issued on 20 December 2012. The ESRB recommended moving to a mandatory variable net asset value (NAV) which it believes would reduce shareholders' incentive to withdraw funds when a fund experiences a modest loss. The ESRB also recommended imposing explicit minimum amounts of daily and weekly maturing liquid assets."
It adds, "The EC has responded explicitly to the majority of the ESRB's recommendations, although it hasn't adopted a mandatory variable NAV. But arguably the same policy objective will be achieved through the specific capital requirements placed on constant NAV (CNAV) funds. Key proposals in the Money Market Fund Regulation (MMFR): CNAV MMFs must hold a capital buffer of at least 3% of total assets, composed only of cash. MMFs must hold at least 10% of their portfolio in assets that mature within one day and another 20% that mature within one week. MMFs can only invest in four categories of financial assets: money market instruments, deposits with credit institutions, financial derivatives (largely only for hedging purposes and provided strict conditions are met) and reverse repurchase agreements. MMFs must abide by new 'know your customer' requirements, to equip them for better anticipation of redemption cycles. MMFs must comply with detailed rules on the diversification of assets, such as upper limits on how much a single issuer can represent as the MMF's assets." (See the "Link to EU proposed regulation.)
PwC tells us, "The number of MMFs in Europe and the US has radically reduced in the past couple of years, and the market is likely to shrink further if the EU's proposed regulatory requirements are adopted. While the EC's proposals may change, the current proposals would have a significant impact on the MMF industry, particularly on CNAV funds. The MMF industry believes the proposal will effectively kill off CNAV MMFs. The International Money Market Funds association suggests that a requirement to hold a capital buffer of 3% is "simply uneconomic" so, if the proposals were implemented, CNAV providers would convert their fund to variable NAV. The proposals have already come under heavy criticism from the European asset management industry."
They explain, "The European Parliament's Committee on Economic and Monetary Affairs ("ECON") issued a report dated 15 November 2013 (the "ECON Report") which proposes amendments to the Draft Regulation. The most significant proposal is that five years after the Draft Regulation enters into force, all MMFs that operate with a constant net asset value ("CNAV") established, managed or marketed in the EU must be converted into variable net asset value ("VNAV") MMFs." (See the Link to ECON report here.)
Finally, PwC writes, "A committee of the European Parliament is scheduled to undertake the first reading of the Draft Regulation and the ECON Report (and vote thereon) on 12 February 2014. Under the EU's ordinary legislative procedure the proposal will then be considered by the full European Parliament at its plenary session on 15 April 2014. These dates may change."
