ECON Report on the EU Money Market Fund Regulation: CNAV under threat
On 4 September 2013 the draft "Proposal for a Regulation of the European Parliament and of the Council on Money Market Funds" (the "Draft Regulation") was officially released by the European Commission (the "Commission"). The Draft Regulation contains radical new regulatory measures that will apply to European money market funds ("MMFs"), both in the context of UCITS and funds within the scope of the Alternative Investment Fund Management Directive 2011/61/EU ("AIFMD"). For an initial assessment of the Draft Regulation please refer to our September 2013 update: "Draft EU Money Market Fund Regulation: Initial Assessment".
The European Parliament's Committee on Economic and Monetary Affairs ("ECON") issued a report dated 15 November 2013 (the "ECON Report") which proposes amendments to the Draft Regulation. The most significant proposal is that five years after the Draft Regulation enters into force, all MMFs that operate with a constant net asset value ("CNAV") established, managed or marketed in the EU must be converted into variable net asset value MMFs.
(a) Eligible assets
The ECON Report includes units or shares of other MMFs in the list of eligible assets to join money market instruments, deposits with eligible credit institutions, financial derivative instruments and reverse repurchase agreements.
(b) Credit rating restriction
The ECON Report permits MMFs to solicit or finance an external credit rating which was prohibited in the Draft Regulation.
The ECON Report proposes some restrictions on the use of the amortised cost method for CNAV MMFs:
- amortised cost accounting shall be applied only where it is deemed to allow for an appropriate approximation of the price of the instrument;
- as the risk of mispricing increases with longer term underlying assets, the use of amortisation shall be restricted to instruments with low residual maturity; and
- in the absence of any particular sensitivity of the instruments to market factors, a residual maturity of 90 days shall be considered to be the maximum.
Materiality thresholds and escalation procedures must be in place to ensure that corrective actions are promptly taken when the amortised cost no longer provides a reliable approximation of the price of the instruments: at the level of the overall portfolio, thresholds of 10 basis points shall be deemed to be appropriate.
(d) Specific CNAV requirements
As well as the mandatory conversion of all CNAV MMFs to variable net asset value MMFs as set out above, the ECON Report also removes the thee year ramp-up period for existing CNAV MMFs in relation to the NAV buffer previously contained in the Draft Regulation.
Instead of a three year period within which to achieve the 3% buffer, the ECON Report proposes that each CNAV MMF must establish and maintain this buffer by 31 December 2014.
The ECON Report also states that CNAV MMFs must not be offered to retail investors.
(e) External support
Under the Draft Regulation, CNAV MMFs may only receive support through a specific NAV buffer and all other MMFs shall be prohibited from receiving external support other than in exceptional circumstances. The ECON Report adds that external support shall not be given by any sovereign, regional or local public authority.
(f) Remuneration policy
The ECON Report states that MMFs must establish and apply remuneration policies and practices that are consistent with and that promote sound and effective risk management and do not encourage risk-taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the MMF they manage.
The remuneration policies and practices must cover fixed and variable components of salaries and discretionary pension benefits.
The ECON Report proposes that all MMFs with more than €10 billion of assets under management shall be supervised directly by ESMA with all other MMFs falling under the supervision of their relevant competent authorities.
Implementation and transition
A committee of the European Parliament is scheduled to undertake the first reading of the Draft Regulation and the ECON Report (and vote thereon) on 12 February 2014. Under the EU's ordinary legislative procedure the proposal will then be considered by the full European Parliament at its plenary session on 15 April 2014. Note that these dates may change.
We should mention this remains a legislative proposal and we certainly expect a strong lobbying effort to emerge against the proposal to force all CNAV MMFs to convert to operating with a variable net asset value.
As the Draft Regulation is being presented as a regulation (as opposed to a directive), once finalised, it will be directly effective in EU Member States 20 days after its publication in the Official Journal.
If you would like further information on the above or would like to receive a copy (prepared by Maples) of the Draft Regulation as amended by the ECON Report, please contact your usual Maples and Calder contact.