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MMFR: Introducing a New EU Framework for Money Market Funds

2017年 7月 13日

The Money Market Funds Regulation (EU) 2017/1131 ("MMFR") was published in the Official Journal of the EU on 30 June 2017 and comes into force on 20 July 2017. It will apply from 21 July 2018 (with the exception of Article 11(4), Article 15(7), Article 22 and Article 37(4)) which shall apply from 20 July 2017 and is a broad set of new regulatory measures that apply to money market funds ("MMFs") established, managed or marketed in the EU.

In light of the perceived systemic risk presented by MMFs, the MMFR aims to make these investment products more resilient and resistant to contagion risks. It does this by imposing rules on eligible assets, portfolio diversification, portfolio maturity and valuation of assets and introduces new categories of MMFs that can offer a constant net asset value ("NAV") per share if they meet certain requirements.

WHAT ARE THE KEY FEATURES OF THE MMFR?

1. In scope funds

Both UCITS and AIFs that invest in short term assets (assets with a maturity not exceeding two years) and have an objective of offering returns in line with money market rates and/or preserving the value of the investment will be in scope of the MMFR.

The MMFR will also impact non-EU MMFs as they will not be permitted to be marketed in the EU as a MMF.

2. Types of MMFs

A MMF may be established as a:

MMF TypeStandard MMFShort Term MMF
Variable NAV MMF ("VNAV MMF")  X  √
Low volatility NAV MMF ("LVNAV MMF")  X
  √
Public debt constant NAV  MMF ("Public Debt CNAV MMF")  X √

The key differences between the three types of MMFs are set out below.

3. Use of "money market fund", "MMF" designation and labelling

Only UCITS and AIFs authorised under the MMFR will be permitted to use the designation "money market fund" or "MMF" in any documents, prospectus, advertisements or communications.

A MMF must clearly indicate whether it is a short term MMF or standard MMF in any external document, written communication or advertisement distributed to investors.
 
4. Eligible investments

MMFs will be permitted in the below categories of investments:

(a) Money market instruments;
(b) Deposits (on demand or less than 12 month maturity) with eligible credit institutions;
(c) Eligible securitisations and asset backed commercial paper ("ABCPs");
(d) Reverse repurchase agreement ("reverse repos") (with the ability to close out the agreement on no more than two working days' notice);
(e) Repurchase agreements (for liquidity management purposes, with the ability to close out the agreement on no more than two working days' notice);
(f) Financial derivative instruments (to hedge interest rate or exchange rate risks only); and
(g) Units of other MMFs (subject to short term MMFs only investing in units of other short term MMFs).

As discussed below, Public Debt CNAV MMFs are subject to further restrictions.

4. Investment restrictions

MMFs will be prohibited from:

(a) Shortselling money market instruments, securitisations, ABCPs and units of other MMFs;
(b) Entering into securities lending agreements or securities borrowing agreements;
(c) Taking direct or indirect exposure to equities or commodities; and
(d) Borrowing or lending cash.

5. Diversification and concentration

MMFs will be subject to detailed rules on the diversification of eligible investments, including issuer concentration limits, limits on exposure to credit institutions and counterparties and investment in other MMFs.

6. Portfolio maturity

To reduce portfolio risk, strengthen MMFs ability to face redemptions, and prevent MMFs assets from being liquidated at heavily discounted prices, MMFs will be subject to portfolio maturity limitations.

MMF typeWeighted average maturity ("WAM")Weighted average life ("WAL")
Short-term MMFs (Public Debt CNAV, LVNAV and VNAV MMFs)≤ 60 days≤ 120 days
Standard MMFs (VNAV MMFs)≤ 6 months≤ 12 months

MMFs will also be required to hold a minimum amount of liquid assets that mature daily and weekly.

MMF typeDaily maturing assetsWeekly dealing assets
Public Debt CNAV and LVNAV MMFs≥ 10% of NAV≥ 30% of NAV
VNAV MMFs≥ 7.5% of NAV≥ 15% of NAV

Daily maturing assets include reverse repos (capable of being terminated within one working day) or cash (capable of being withdrawn within one working day).

Weekly maturing assets include reverse repos (capable of being terminated within five working days) or cash (capable of being withdrawn within five working days).

7. Credit assessment

The manager of a MMF will be required to apply an internal credit quality assessment procedure to determine the credit quality of investments taking into account the issuer and the characteristics of the investment itself. Regard to credit ratings of an instrument will be permitted, provided the manager does not solely or mechanically rely on such ratings.

8. Valuation

MMFs will be required to value assets on a daily basis using mark to market whenever possible and otherwise mark to model (the "Market Valuation"). In addition to valuing assets on a Market Valuation basis, Public Debt CNAV MMFs and LVNAV MMFs will also be permitted to value assets on the amortised basis (the "Amortised Valuation").

9. External support

In order to mitigate contagion risks, MMFs are prohibited from receiving external support from any third party, including the sponsor of the MMF. 

10. Reporting to regulators

In addition to reporting already required for UCITS and AIFs under the UCITS Directive1 /AIFMD2, the manager of a MMF will be required to report a detailed list of information on the MMF, including the type and characteristics of the MMF, portfolio indicators and information on the assets held in the portfolio to its competent authority. This information helps ensure that competent authorities are able to detect, monitor and respond to risks in the MMF market.

WHAT ARE THE KEY DIFFERENCES BETWEEN THE THREE TYPES OF MMF?

The VNAV MMF will be the most flexible type of MMF. It will be capable of being established as a short term MMF or a standard MMF and will issue and repurchase shares at a variable NAV using the Market Valuation.

The LVNAV MMF will also be a flexible type of MMF. Unlike the VNAV MMF it will only be capable of being established as a short term MMF. It will have the ability to issue and repurchase shares at a constant NAV per share and to use the Amortised Valuation. As LVNAV MMFs will not be subject to further restrictions on eligible investments, their ability to offer a constant NAV and use the Amortised Valuation will be subject to certain conditions. The Amortised Valuation will only be permitted if the assets of the LVNAV MMF have a residual maturity up to 75 days. Also, if the Amortised Valuation of the assets deviates from the Market Valuation by more than ten basis points, the Amortised Valuation will not be permitted to be used. Further, shares will be capable of being issued and redeemed at a constant NAV per share only as long as the constant NAV per share does not deviate from the Market Valuation by more than 20 basis points.

The Public Debt CNAV MMF will be the most restrictive type of MMF. Similar to the LVNAV MMF it will only be capable of being established as a short term MMF. It will also be permitted to issue and repurchase shares at a constant NAV per share and use the Amortised Valuation. Unlike LVNAV MMFs, it will be subject to further rules in respect of eligible investments and it will be required to invest at least 99.5% of its assets in certain public debt securities3,  reverse repos secured by eligible public debt securities and cash. Due to these restrictions on eligible investments, Public Debt CNAV MMFs are not subject to further conditions relating to offering a constant NAV per share and use of the Amortised Valuation.

LVNAV MMFs and Public Debt CNAV MMFs are also subject to procedures to be followed where the proportion of daily and/or weekly maturing assets fall below certain thresholds, including escalation procedures, application of gates and suspension of redemptions. When, within a period of 90 days, the total duration of suspensions exceeds 15 days a Public Debt CNAV MMF or LVNAV MMF will be required to automatically cease to be a Public Debt CNAV MMF or a LVNAV MMF. VNAV MMFs are not subject to corresponding requirements.

The appendix to this update includes a further summary of the key differences between the three types of MMF.

HOW WILL THE MMFR INTERACT WITH EXISTING OBLIGATIONS UNDER THE UCITS DIRECTIVE AND AIFMD?

The MMFR builds on the existing regulatory regime operating under the UCITS Directive, AIFMD and the 2010 ESMA "Guidelines on a common definition of European money market funds".4  This means that funds in scope of the MMFR will have to comply with obligations under the UCITS Directive/AIFMD (as applicable) and an additional layer of specific MMF rules under the MMFR. Once the MMFR applies, this will be factored into the authorisation process/existing regulatory regime for new UCITS/AIF MMFs, rather than introducing an additional layer of authorisation.

WHEN WILL THE MMFR APPLY?

The MMFR will apply from 21 July 2018, 12 months after coming into effect. As noted above, existing MMFs can avail of a further six month transition period to submit an application to the competent authority demonstrating compliance with the MMFR.

WILL IT BE POSSIBLE TO DESIGNATE INDIVIDUAL SUB-FUNDS WITHIN AN UMBRELLA AS DIFFERENT TYPES OF MMFS?

Yes. MMFR provides that where a MMF comprises more than one investment compartment, each compartment shall be regarded as a separate MMF for the purposes of certain provisions of MMFR.

WE SPONSOR AN EXISTING MMF - WHAT DO WE NEED TO DO NOW?

(a) Consider which of the new model MMFs is most suitable for your fund to operate as going forward;
(b) Assess the key characteristics of your fund that will need to be adapted;
(c) Consider all operational as well as legal and regulatory implications of making necessary changes;
(d) Initiate a project to convert your MMF, capturing all operational and legal aspects and factoring shareholder approval into the timing where appropriate; and
(e) Manage timing to ensure the project's completion precedes Q1 2019.

Further Information

If you would like to discuss the MMFR in more detail, and get our insight and perspective, please contact your usual Maples and Calder contact.


[1] Directive 2009/65/EC.

[2] Directive 2011/61/EU.

[3] Money market instruments issued or guaranteed by the European Union, national, regional and local administrations of EU member states or their central banks, certain EU and international institutions and central authorities or central banks of third countries.

[4]CESR/10-049.


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