The European Systemic Risk Board (“ESRB”) published its Recommendations on Money Market Funds dated 20 December 2012, on 18 February 2013. The ESRB recommendations are intended to complement the MMF reforms advocated by the Financial Stability Board and IOSCO.

Background – ESRB Role

The ESRB is a body created following the collapse of Lehman Brothers to monitor risks in the EU’s financial system. It is a panel comprising central bank governors and regulators from across the EU, and its role is to provide recommendations to the European Commission with a view to developing robust EU legislation in the relevant areas. The ESRB recommendations are also intended to support global progress and initiatives such as those advocated by the Financial Stability Board and IOSCO.

ESRB Recommendations

The ESRB recommendations are set out below:

• Mandatory move to variable net asset value – MMFs should be required to have a fluctuating net asset value. In addition, MMFs should make general use of market-based valuations and restrict the use of amortised cost accounting to a limited number of predefined circumstances.

The ESRB is of the opinion that the conversion of a constant net asset value (“CNAV”) MMF to a variable net asset value MMF might reduce a shareholder’s incentive to redeem when the MMF has experienced a modest loss and might further increase price transparency. It may also help to address the systemic risks associated with the interconnectedness of MMFs with sponsor companies and reduce the need for and importance of sponsor support.

The ESRB considers that a general use by MMFs of fair value accounting and, in limited circumstances only, the use of amortised cost accounting, will provide price transparency to investors, improve investors’ understanding of the risks inherent to these MMFs, and make the difference between MMFs and bank deposits clearer.

• Impose additional liquidity requirements – Explicit minimum amounts should be imposed on the daily and weekly liquid assets to be held by MMFs. There should be enhanced monitoring of liquidity risk by MMF managers. In addition, national supervisory authorities and fund managers should be authorised to employ tools, for example temporary suspensions of redemptions, to deal with liquidity constraints in times of stress resulting from both fund-specific and market-wide developments.

The ESRB’s rationale for the imposition of minimum amounts of daily and weekly liquid assets is that this measure will ensure that MMFs are able to meet potentially large redemption requests from investors and weather periods of market volatility. 

• Require public disclosure – MMFs should be required to:
  • Draw the attention of investors to the absence of a capital guarantee and the possibility of principal loss
  • Inform investors of possible sponsor support, capacity for support or protection only if such support or protection is a firm commitment by the sponsor, in which case it must be recognised in that sponsor’s accounts and prudential requirements
  • Disclose their valuation practices, particularly regarding the use of amortised cost accounting, as well as to provide appropriate information to investors regarding applicable redemption procedures in times of stress

The ESRB states in its Recommendations that the measures outlined above will ensure that investors are clearly aware of risks arising from investment in MMFs.

• Require reporting and information sharing – The Recommendations call for enhanced reporting by MMFs and their managers to competent national supervisory authorities and improved information sharing among such authorities. In particular, any instances of sponsor support that may have an impact on the price of the MMF should be reported by the manager of the MMF and its sponsor to the competent national supervisory authority, together with a full description of the nature and size of such support.

The ESRB recommends that such enhanced reporting by MMFs should also focus on the composition of their assets and liabilities and the use of amortised cost accounting.

EU MMF Reform – Timeframe

The European Commission’s 2013 work programme had previously indicated that some form of draft MMF regulation would be forthcoming in March 2013. However, it is now more likely that MMF reform will form part of the UCITS VI regulation that will be issued by the European Commission in late 2013 (possibly October).