Documents Considered by the Committee on 22 October 2014 - European Scrutiny Committee Contents


9 Financial services: money market funds

Committee's assessment Politically important
Committee's decisionNot cleared from scrutiny; further information requested

Document detailsEuropean Central Bank Opinion on draft Regulation concerning money market funds
Legal base
DepartmentHM 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


 
previous page contents next page


© Parliamentary copyright 2014
Prepared 3 November 2014