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15 June 2016

Money market funds: Council agrees its negotiating stance

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The Permanent Representatives Committee (Coreper) agreed, on behalf of the Council, a negotiating stance on a draft regulation on money market funds, aimed at making such products more robust.

The draft regulation is intended to ensure the smooth operation of the short-term funding market, maintaining the essential role that money market funds play in the financing of the economy.

The Council will confirm Coreper's agreement at a meeting on 17 June 2016, and will ask the presidency to start talks with the European Parliament. The Parliament's ECON committee approved its negotiating stance in March 2015.

The draft regulation lays down rules for MMFs, in particular the composition of their portfolios and the valuation of their assets, to ensure the stability of their structure and to guarantee that they invest in well-diversified assets of good credit quality.

It also introduces common standards to increase the liquidity of MMFs, to ensure that they can face sudden redemption requests when market conditions are stressed. In addition, the text provides for common rules to ensure that the fund manager has a good understanding of his/her investors, and provides investors and supervisors with adequate and transparent information.

In order to further mitigate 'contagion risk', an MMF would not be allowed to receive external support from a third party, including from its sponsor, as the discretionary nature of external support might contribute to uncertainty in times of instability. 

An important new element of the draft regulation is the introduction of a permanent category of "low volatility net asset value" (LVNAV) MMFs. These LVNAV MMFs will gradually replace most of the existing CNAV MMFs, which would be required to convert into LVNAV MMFs within 24 months of entry into force of the regulation. LNAV MMFs would be allowed - to a limited extent and under strict conditions - to offer a constant net asset value.

Only two types of CNAV MMFs would be allowed to continue to operate under the draft regulation, namely:

  • those that invest 99,5% of their assets in public debt instruments;
  • those with a specific investor base solely outside the EU.

Both categories of CNAV and LVNAV MMFs would be subject to reinforced liquidity requirements as well as safeguards such as "liquidity fees and redemption gates". These would be designed to prevent and/or limit the effects of sudden investor runs.

Press release

© European Council

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