9 Financial services: money market funds
Committee's assessment
| Politically important |
Committee's decision | Not cleared from scrutiny; further information requested
|
Document details | European Central Bank Opinion on draft Regulation concerning money market funds
|
Legal base |
|
Department | HM Treasury
|
Document numbers | (36321), 12713/14,
|
Summary and Committee's conclusions
9.1 Money market funds (MMFs) are open-ended funds
that invest in short-term debt securities such as treasury bills
and commercial paper. In September 2013 the Commission presented
a draft Regulation, which we are holding under scrutiny, to introduce
rules specific to MMFs.
9.2 With this Opinion the European Central Bank seeks
to influence and inform negotiation of the draft Regulation. The
Bank supports the proposals. It outlines alternative drafting
in some technical areas and makes additional points from a policy
perspective.
9.3 We should like the Government, when it reports
back to us with the information we have asked for in relation
to the draft Regulation, to tell us how the Opinion is playing
into negotiation of that proposal. Meanwhile this document also
remains under scrutiny.
Full details of the documents:
European Central Bank Opinion on a draft Regulation on money market
funds: (36321), 12713/14, .
Background
9.4 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.
9.5 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.
9.6 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 Managers Directive. The Committee of European
Securities Regulators (CESR) also issued guidelines on MMFs in
2010.
9.7 In September 2013 the Commission presented a
draft Regulation, which would introduce rules specific to MMFs.
It would deal with investment policies, risk management, valuation
rules, CNAV MMFs and external support. When at that time we considered
this proposal we asked, given the Government's reservations about
some matters, related to capital buffers, repurchase agreements
and eligible securitisations and credit rating agencies, to hear
about progress in Council working group discussion (which we recognise
will not be for some time) on these issues. We asked also to hear
about the Government's estimate of the costs of the proposal,
once established. Meanwhile that document remains under scrutiny.[36]
The document
9.8 With this Opinion the European Central Bank (ECB)
seeks to influence and inform negotiation of the draft Regulation
on MMFs. The ECB supports the proposals. It outlines alternative
drafting in some technical areas and makes the following additional
points from a policy perspective:
· in order to promote a level playing field
the Regulation should clarify the interaction between national
provisions relating to the transposition of the UCITS Directive
and the Alternative Investment Fund Managers Directive and the
directly applicable provisions of the proposed Regulation;
· where the Regulation would require the
CNAV MMFs to hold a capital buffer, further assessment should
be made as to whether the buffer should be fixed at 3% of the
value of the fund or whether it should take into account the risk
profile of the fund;
· the rules on replenishing the capital
buffer should be more flexible and take into account the extent
to which the buffer has been depleted;
· the proposal allows for VNAV MMFs to receive
sponsor support only in exceptional circumstances and with the
consent of their competent authority in order to promote
consistency across the EU as to what constitutes an exceptional
circumstance and to deal with risks that are supranational in
scope it may be desirable to introduce coordination at the EU
level;
· there should be further consideration
of the impact of the Regulation on bank intermediation and whether
the proposal will lead to a reallocation of funds from MMFs to
the banking system and what impact this would have on short-term
money markets, of the proposal's likely effect on the functioning
and depth of the securitisation markets and of the proposal's
impact on concentration within the MMF market; and
· there is a possibility that introduction
of mandatory internal rating systems in MMFs, as an alternative
to relying on external ratings, may not result in different credit
assessments being made this means that there would be
no increase in the number of highly-rated issuers and consequently
no mitigation of the risk of asset sales in economic downturns.
The Government's view
9.9 In her Explanatory Memorandum of 29 September
2014 the Economic Secretary to the Treasury (Andrea Leadsom),
while noting that the Opinion does not have any direct policy
implications for the UK, sets out for us the Government's views
on the points made by the ECB, as follows.
Treatment of capital buffers
9.10 The Minister says that the Government does not
agree with the imposition of capital buffers for CNAV funds and
so sympathises with the ECB position that more consideration should
be given as to how the size of any buffer would be calculated
and how buffers would operate.
Meaning of exceptional circumstances with regard
to sponsor support
9.11 The Minister tells us that the Government agrees
that permitting sponsor support in exceptional circumstances could
lead to divergent views on what circumstances might qualify as
exceptional. She continues that the Government believes, however,
that this is best clarified in the text of the Regulation itself.
Bank intermediation, securitisation markets and
concentration
9.12 The Minister says that the Government notes
the ECB position that further consideration should be given to
the impact of the proposals on bank intermediation, the securitisation
markets and market concentration and has itself expressed concerns
about the impact of this proposal in these areas.
Internal rating systems
9.13 The Minister comments that the Government agrees
that the development of an internal rating system by funds will
not necessarily lead to changes in the assessed credit worthiness
of given investments.
9.14 Finally, the Minister notes that the Italian
Presidency in the Council has stated that it hopes to reach a
general approach on the draft Regulation by the end of 2014.
Previous Committee Reports
None.
36 (35298), 13449/13 + ADDs 1-2: see Nineteenth Report,
HC 83-xviii (2013-14), chapter 12 (23 October 2013). Back
|