The European Parliament has voted in favour of amendments, proposed by its Committee on Economic and Monetary Affairs (ECON), to the Commission proposal for a Regulation on Money Market Funds.

The Parliament has approved ECON’s proposal that there will be two types of constant net asset value (CNAV) MMFs, namely:

• A Retail CNAV MMF, which will only be available for subscription by charities, non-profit organisations, public authorities and public foundations
• A Public Debt CNAV MMF, which will be required to invest 99.5% of its assets in public debt instruments and, by 2020, at least 80 % of its assets in EU public debt instruments

The Parliament has also approved the proposed introduction of a new type of MMF namely a Low Volatility Net Asset Value MMF (LVNAV MMF), which will, under strict conditions, be able to display a constant net asset value. A sunset clause has been proposed for this type of fund such that its authorisation would lapse 5 years after the MMF Regulation comes into force.

NAV buffer

Importantly, the draft approved by Parliament does not include the controversial proposal that CNAV MMFs be required to have a 3% capital buffer in place.

Ban on external support

The Parliament voted in favour of an explicit ban on external support by a third party with a view to maintaining the liquidity and stability of the MMF. The Parliament’s reasoning behind this is that the discretionary nature of external support increases the contagion risk between the MMF sector and the rest of the financial sector. Because these third parties do not commit explicitly to providing or guaranteeing the support, there is uncertainty about who will bear the losses of the MMF when they do occur. Authorisation of a MMF will be withdrawn in the event of a breach of the ban on sponsor support.

Redemption gates and liquidity fees

Liquidity fees and/or redemption gates and/or the suspension of redemptions should be imposed whenever the proportion of weekly maturing assets falls below 30% of the total assets (in the case of Public Debt CNAV MMFs, Retail CNAV MMFs and LVNAV MMFs) and 10% in the case of all MMFs.

The liquidity fee should be equivalent to the actual cost of liquidating assets to meet redemptions and not a penalty charge over and above what would offset losses imposed on other investors by the redemption.

Adequate internal assessment procedures for determining the weekly liquidity thresholds applicable to the MMF should be implemented and consistently applied.

Eligible assets

MMFs may only invest in high quality eligible assets and must establish, implement and apply a prudent internal assessment procedure for determining the credit quality of money market instruments.

Conditions applicable to the use of reverse repos

A MMF may invest in reverse repurchase agreements provided that the position is backed by high-quality collateral. They will also be subject to collateral diversification requirements set out in the draft Regulation (these collateral diversification requirements mirror the collateral diversification requirements set out in ESMA’s Guidelines on ETFs and Other UCITS Issues). Securitisations may not be received by the MMF as part of a reverse repurchase agreement.

WAM and WAL

A short-term MMF portfolio must have a Weighted Average Maturity (WAM) of no more than 60 days and a Weighted Average Life (WAL) of no more than 120 days.

Compliance

The manager of the MMF is responsible for ensuring compliance with the Regulation and will be liable for any loss or damage resulting from non-compliance.

Transparency

There are a number of requirements around the disclosure of information to investors, including that investors in a MMF must receive the following information, at least weekly:

• The liquidity profile
• The credit profile and portfolio composition
• The WAM and WAL of the MMF
• The cumulative concentration of the top five investors in the MMF

Reporting

The manager of the MMF must report to the Central Bank on a quarterly basis information on

• The results of stress tests identifying events that could have unfavourable effects on the MMF
• Information on the assets held in the portfolio of the MMF
• Information on the liabilities of the MMF

Deadline for compliance

Existing MMFs will have nine months from when the Regulation enters into force to comply.

Next steps
The agreement reached on the proposed Regulation by the Parliament as a whole paves the way for three-way (trilogue) negotiations between the Parliament, the Council and the Commission. If political agreement is reached as a result of these negotiations, the Parliament will endorse the agreed position at a future plenary session. The Council must also formally approve the draft Regulation before it has the force of law.

Contributed by Niall Crowley