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17 February 2016

EPRS: Money Market Funds: Measures to improve stability and liquidity

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The reaction of MMF stakeholders to the Commission proposed regulation has been mixed: many welcomed the intention to establish a harmonised and transparent MMF framework at EU level but there have also been considerable concerns raised regarding the impacts, including of the capital buffer.

Money Market Funds are a type of collective fund that invest in short-term debt and provide financing for financial institutions, corporations and governments. During the financial crisis their liquidity and stability were challenged which prompted discussion on how to make them more shock-resistant. In 2013 the Commission proposed a regulation on MMFs aiming to improve their ability to weather stressed market conditions, mainly through establishing a capital buffer, introducing conditions on portfolio structure, addressing over-reliance on external credit rating agencies and improving their internal risk management, transparency and reporting. In April 2015 the European Parliament adopted amendments in which it proposed the creation of new kinds of MMFs and chose not to retain the capital buffer. The Council has yet to reach a general approach.

The changes the proposal would bring

On 4 September 2013, the European Commission adopted a proposal for new rules on MMFs. The proposed regulation aims to improve the ability of MMFs to weather possible redemption pressure by boosting their liquidity profile as well as stability, to be achieved through five initiatives:

  • introducing mandatory conditions on portfolio structure – MFFs would need to hold at least 10% of assets that mature (have to be repaid by the issuer) within a day, and a further 20% that mature within a week;
  • establishing a capital buffer (3% of the assets) for 'constant net asset value' (CNAV) MMFs, which seek to maintain a stable share/unit price (unlike variable NAV MMFs) – this buffer would be used to help ensure stable redemption prices;5
  • clear labelling of MMFs, differentiating between short-term and standard kinds; short-term MMFs, which may be either VNAV or CNAV, have residual maturity of less than 397 days; standard MMFs are allowed to invest in longer-term instruments than short-term MMFs. Their residual maturity may not exceed two years. Standard MMFs cannot be CNAV;
  • customer profiling policies to help predict substantial redemptions;
  • internal credit risk assessment by MMF managers, to prevent excessive dependence on external ratings.

The regulation would apply to all MMFs established, managed and/or marketed in the EU and intends to be exhaustive (leaving no room for additional gold-plating6 at Member State level). MMFs are defined as either UCITS or AIFs that invest in short-term financial instruments and have specific objectives (such as offering returns and preserving the value of investments). Consequently, the proposed regulation is intended to supplement present rules. The existing authorisation procedures for UCITS as specified in the UCITS Directive are still valid. The MMF regulation would introduce a harmonised authorisation procedure for AIF MMFs, currently left to the discretion of national authorities (mirroring the authorisation procedure for UCITS). Managers and funds falling under the scope of the new regulation will have to comply with this supplementary layer of MMF-specific requirements as well as either the UCITS or AIFM Directive. 

Full briefing


© EPRS - European Parliamentary Research Service

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