Documents considered by the Committee on 23 October 2013 - European Scrutiny Committee Contents

12 Financial services: money market funds



+ ADDs 1-2

COM(13) 615

Draft Regulation on Money Market Funds
Legal baseArticle 114 TFEU; co-decision; QMV
Document originated4 September 2013
Deposited in Parliament11 September 2013
DepartmentHM Treasury
Basis of considerationEM of 30 September 2013
Previous Committee ReportNone
Discussion in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested


12.1 Money market funds (MMFs) are open-ended funds that invest in short-term debt securities such as treasury bills and commercial paper. Through these investments MMFs provide short term finance to financial institutions, corporations and governments. For investors they represent highly liquid, stable, short term cash management tools. They provide a safe place to invest in easily accessible cash-equivalent assets characterised as low-risk, low-return investments.

12.2 MMFs take one of two forms:

·  constant net asset value (CNAV) MMFs seek to maintain a fixed value of units in the fund so that the redemption values of investors' holdings do not change — they achieve this in part by rounding the net asset value per unit to the nearest percentage point; and

·  variable net asset value (VNAV) MMFs have a floating unit value that fluctuates with changes in the value of the underlying assets.

12.3 MMFs are currently regulated either under the Undertakings for Collective Investment in Transferable Securities Directive (UCITS) or, for some MMFs, indirectly under the Alternative Investment Fund Manager Directive. The Committee of European Securities Regulators (CESR) also issued guidelines on MMFs in 2010, which were fully implemented by the Financial Services Authority.

The document

12.4 This draft Regulation would introduce rules specific to MMFs. It would deal with investment policies, risk management, valuation rules, CNAV MMFs and external support, as follows:

Investment policies of MMFs

·  Articles 7-20 set out what would be the permissible investment policies of MMFs;

·  the provisions include stipulations as to the types of assets that could be held, requirements for diversification of investments and rules on the portion of an MMF that could be held by a single client;

·  the rules are designed to ensure that MMFs are suitably diversified and invest only in assets of high credit quality;

·  they would also limit the amount of exposure MMFs could have to a single issuer of money market instruments or to a single counter-party;

·  they would require MMFs to develop internal assessments of the credit quality of investments held, so reducing reliance on external ratings agencies;

Risk management of MMFs

·  Articles 21-25 set out requirements to ensure that MMFs would have sufficient liquidity and would be able to plan for and accommodate investor redemption requests;

·  rules include enhanced liquidity requirements, stress testing and "know your customer" requirements;

·  MMFs would be precluded from soliciting or paying an external ratings agency to rate their products;

·  different rules would be introduced for short-term and standard MMFs;

·  the former would be required to hold more liquid assets with shorter maturity limits and greater diversification;

·  standard MMFs would face somewhat looser requirements, but would only be able to operate under the VNAV model;

Valuation rules

·  Articles 26-28 set out how MMFs net asset value per share should be calculated and how their investment assets should be valued;


·  Articles 29-34 set out detailed requirements for MMFs that operating under the CNAV model;

·  they would be required to hold a cash capital buffer equal to 3% of the total value of their assets;

·  this buffer would be solely to compensate for deviations between the fixed unit value offered to investors and the value of the underlying assets held by the fund;

·  additional rules on the authorisation of CNAV MMFs and how the buffer would have to be used and operated are included in this section; and

External support

·  historically, sponsors of MMFs have provided discretionary support to MMFs that have faced difficulty — Articles 35-26 would prohibit such support, save for the mandatory 3% buffer for CNAVs, in most scenarios.

12.5 The draft Regulation is accompanied by the Commission' impact assessment and an executive summary of that assessment.

The Government's view

12.6 The former Economic Secretary to the Treasury (Sajid Javid), commenting that the draft Regulation would provide additional protections that would benefit investors and would help improve competitiveness by providing a level playing field across the EU, says that, therefore, the Government welcomes many of the proposals including enhanced liquidity requirements, new "know your customer" rules and improved transparency. The Minister then comments in more detail on three matters, as follows.

Capital buffer

12.7 The Minister says that:

·  the Government recognises that MMFs provide an important function to businesses, investors and the wider economy;

·  their important role gives rise to prudential concerns that under stressed market conditions money market funds could pose a source of systemic risk;

·  the Government acknowledges that further safeguards need to be put in place with regard to MMFs to address prudential concerns;

·  however, the suggested capital buffer and the mandatory conversion of CNAV MMFs to VNAV MMFs is unduly burdensome on business, especially considering new EU measures that already exist, that is, the CESR Guidelines on MMFs, and existing market dynamics;

·  imposition of a capital buffer is more suited to the banking sector and should not be imposed upon investment funds, given the fundamental differences between the banking sector and collective investment schemes; and

·  MMFs are highly regulated and unleveraged by nature, making them safer, more liquid and more transparent than banks.

Repurchase agreements and eligible securitisations

12.8 The Minister commenting that it is appropriate that MMFs' exposure to inappropriate asset classes and excessive risk be controlled:

·  says that the Government therefore welcomes the Commission's general aim of restricting the types of investments that MMFs may make;

·  the proposals go further, however, than is necessary to meet this aim and underestimate the wider economic impact of preventing MMFs from making certain investments;

·  in particular, the draft Regulation provides strict rules as to what assets may be provided as collateral under a reverse repurchase agreement — under such agreements MMFs will purchase securities with an agreement that they will be repurchased by the seller at an agreed time and price and as part of this agreement the seller may put up collateral to reduce risk in the event of a counter-party default;

·  the draft Regulation seeks to limit the types of collateral that may be provided by the seller under such agreements to Government debt and assets which could otherwise be ordinarily held by an MMF — so called money market instruments or MMIs, which are subject to strict maturity requirements designed to ensure they are sufficiently liquid;

·  the Government believes that since collateral provided under a reverse repurchase is only realised in the event of a default, in which case it would be sold, the liquidity requirements are unnecessary;

·  the draft Regulation also seeks to limit the types of securitised assets which MMFs may hold — in particular, Article 10a states that MMFs would only be able to hold securitisations where the underlying asset is corporate debt;

·  securitisation of assets is an important way by which companies can enhance their liquidity and as such securitisation plays a significant role in financing economic growth in the real economy;

·  however, the majority of securitisations include exposures to both corporate and consumer debt;

·  MMFs are significant investors in this asset class and as written the proposals would prevent them holding such assets; and

·  given that the draft Regulation already requires the debt underlying securitisations to be both high quality and liquid for an MMF to invest, the additional limitation to corporate debt is unnecessary and likely to remove an important source of funding to the economy.

Credit ratings agencies

12.9 In relation to the rules that would prevent MMFs from financing or soliciting a rating by a third party credit ratings agency the Minister says that, given the important role such agencies play in the investment guidelines used by investors, this is unwarranted and might prove damaging.

Other matters

12.10 The Minister says that:

·  the proposal has no direct costs for the UK;

·  the Government is, however, working with stakeholders to establish an estimate of the costs of the proposal as this was not fully developed in the Commission's impact assessment;

·  in July-October 2012 the Commission carried out a consultation on UCITS, including questions on MMFs;

·  the Government has been consulting informally with industry since the consultation was announced; and

·  it is unlikely that there will be any Council working group discussion of the draft Regulation this year.


12.11 Given the Government's reservations about aspects of this draft Regulation related to capital buffers, repurchase agreements and eligible securitisations and credit rating agencies, we will not consider this proposal further until we hear about progress in Council working group discussion (which we recognise will not be for some time) on these issues. We should like also to hear about the Government's estimate of the costs of the proposal, once established.

12.12 Meanwhile the document remains under scrutiny.

previous page contents next page

© Parliamentary copyright 2013
Prepared 30 October 2013