12 Financial services: money market
funds
(35298)
13449/13
+ ADDs 1-2
COM(13) 615
| Draft Regulation on Money Market Funds
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Legal base | Article 114 TFEU; co-decision; QMV
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Document originated | 4 September 2013
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Deposited in Parliament | 11 September 2013
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Department | HM Treasury
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Basis of consideration | EM of 30 September 2013
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Previous Committee Report | None
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Discussion in Council | Not known
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Committee's assessment | Politically important
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Committee's decision | Not cleared; further information requested
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Background
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;
CNAV MMFs
· 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.
Conclusion
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.
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