Luxembourg: MMF Regulation - ECON Report

On February 26th 2015, the Economic and Monetary Affairs Committee of the European Parliament ("ECON") voted on the draft report on the proposed draft regulation on Money Market Funds (the "MMF Regulation"). The text adopted by ECON on March 4th 2015 (the "Report"), will be voted by the European Parliament on April 28th 2015. Thereafter it will be negotiated with the Council of the European Union.

Taking into account that money market funds ("MMF") are an important source of short term funding for banks, corporates and governments, the aim of the changes introduced by ECON on the MMF Regulation has been to balance the rules addressed to protect investors with the viability of MMFs.

Both the European Commission and ECON were concerned about the feasibility to deliver a constant net asset value in today's low interest rate environment. While the European Commission solution to mitigate said risk was to maintain a constant NAV buffer of at least 3% of the total value of the CNAV MMF's assets, ECON believed that it would be a better solution to create a new category of MMF, the "Public Debt CNAV MMF".

The draft MMF Regulation now divides the CNAV MMFs into 3 categories:

• Public Debt CNAV MMF which shall invest 99.5% of its assets in public debt instruments and, by 2020, at least 80% of its assets in EU public debt instruments;
• Retail CNAV MMF, available for subscription only to charities, non-profit organisations, public authorities and public foundations; and
• Low Volatility Net Asset Value MMF (LVNAV MMF), which may display a constant NAV if the following rules for the valuation of its assets are met:
  
  
  • use of the amortised cost method for the valuation of the assets with a residual maturity below 90 days and all assets with a residual maturity exceeding 90 days shall be priced using mark-to-market or mark-to-model prices;
  • rounding to two decimal places the valuation of its assets provided that the constant NAV per unit or share does not deviate from its actual NAV by more than 20 basis points and to four decimal places thereafter;
  • redemptions or subscriptions at the constant NAV per unit or share provided that the constant NAV per unit or share does not deviate from its actual NAV by more than 20 basis points;
  • redemptions or subscriptions at the actual NAV per unit or share which shall be rounded to four decimal places, or less where the constant NAV deviates from the actual NAV by more than 20 basis points;
  • potential investors are 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;
  • the difference between the constant NAV per unit or share and the actual NAV per unit or share is continuously monitored and published daily on the website of the MMF.

The draft MMF Regulation prohibits external support for all MMFs and sets out transparency requirements such as daily disclosures, quarterly stress tests, etc.

The draft MMF Regulation also obliges MMFs to diversify their portfolio assets and provides for redemption gates and liquidity and concentration requirements. MMFs will have to invest in higher quality assets and assess internally the credit quality of money market instruments.

Links

The Report consolidates the previous position of ECON and is available here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.