Documents considered by the Committee on 21 July 2015 - European Scrutiny Contents


31 Financial services: Money Market Funds

Committee's assessment Politically important
Committee's decisionNot cleared from scrutiny; further information requested; drawn to the attention of the Treasury Committee
Document details(a) Proposal for a Regulation about Money Market Funds (b) European Central Bank Opinion on the proposed Regulation
Legal base(a) Article 114 TFEU; co-decision; QMV; (b) —
Department

Document numbers

HM Treasury

(a) (35298), 13449/13 + ADDs 1-2, COM(13) 615

(b) (36321), 12713/14, —

Summary and Committee's conclusions

31.1 Money Market Funds are open-ended funds that invest in short-term debt securities such as Treasury bills and commercial paper. This proposed Regulation would introduce rules specific to Money Market Funds. It would deal with investment policies, risk management, valuation rules, constant net asset value funds and external support. The European Central Bank has published this Opinion on the proposed Regulation, seeking to influence negotiation of the text.

31.2 When in October 2013 the predecessor Committee first considered the proposed Regulation it heard that the Government had reservations about aspects of the proposal related to capital buffers, repurchase agreements and eligible securitisations, and credit rating agencies. When that Committee last considered the matter, in March 2015, it heard that negotiations on the proposed Regulation had not progressed under the Latvian Presidency, but that a European Parliament text likely to be adopted in April might put pressure on the Presidency to restart discussions. The Committee was told that, in relation to some details about the likely European Parliament position, this was consistent with the European Central Bank Opinion, which the Government welcomed. The predecessor Committee kept the documents under scrutiny, pending further information on developments.

31.3 The Government tells us that in April the expected European Parliament position was indeed adopted, that the Government will be seeking amendment on two points in that position, and that it seems likely that the Presidency would now recommence negotiations of the proposed Regulation.

31.4 We are grateful to the Government for the information it now gives us. We look forward to hearing about how Council consideration of the proposed Regulation is developing, particularly in relation to the reservations it has expressed to the predecessor Committee and to us. Meanwhile the documents remain under scrutiny.

Full details of the documents: (a) Proposal for a Regulation on Money Market Funds: (35298), 13449/13 + ADDs 1-2, COM(13) 615; (b) European Central Bank Opinion of 22.05.2014 on a proposal for a Regulation on Money Market Funds: (36321), 12713/14, —.

Background

31.5 Money Market Funds (MMFs) are open-ended funds that invest in short-term debt securities such as Treasury bills and commercial paper. They take one of two forms — Constant Net Asset Value (CNAV) MMFs, which seek to maintain a fixed value of units in the fund so that the redemption values of investors' holdings do not change, and Variable Net Asset Value (VNAV) MMFs, which have a floating unit value that fluctuates with changes in the value of the underlying assets. This proposed Regulation, document (a), would introduce rules specific to MMFs. It would deal with investment policies, risk management, valuation rules, CNAV MMFs and external support. The European Central Bank (ECB) has published this Opinion, document (b), on the proposed Regulation, seeking to influence negotiation of the text.

31.6 When in October 2013 the predecessor Committee first considered the proposed Regulation it heard that the Government had reservations about aspects of the proposal related to capital buffers, repurchase agreements and eligible securitisations, and credit rating agencies. When that Committee last considered the matter, in March, it heard that:

·  negotiations on the proposed Regulation had not progressed under the Latvian Presidency;

·  however, the European Parliament was due to vote in Plenary on the text proposed by the ECON Committee in April, which might put pressure on the Latvian Presidency to restart discussions;

·  if discussions did resume, it was likely that the Presidency would seek views on the ECON Committee's proposed compromise, which deleted the Commission's proposed capital buffer for CNAV MMFs and replaced it with a regime that sought to preserve some of the utility of CNAV MMFs while dealing with financial stability risks;

·  the ECON Committee's proposals were consistent with the ECB Opinion, for example on clarifying when sponsor support could be given, the impact on securities markets and market concentration and in refining the internal ratings system, which the Government welcomed;

·  views in the Council on the appropriate treatment of CNAV MMFs had been polarised;

·  it was not yet clear whether Member States would support a compromise which built on the ECON Committee's proposals; and

·  if progress was made in this direction, however, there was a chance that discussions could progress quickly, especially since the European Parliament was likely to be in a position to begin trilogue discussion by April.

31.7 The predecessor Committee kept the documents under scrutiny, pending further information on developments.

The Minister's letter of 19 June 2015

31.8 The Economic Secretary to the Treasury (Harriett Baldwin) reports developments following the European Parliament voting through its mandate on 28 April, noting in particular that its proposals for CNAV MMFs are likely to have a bearing on Council discussions, where negotiations have stalled due to polarised views on the options for reform. She says that the European Parliament text proposes a number of changes to the categorisation of CNAV funds, including proposals for a 'Low Volatility Net Asset Value (LVNAV) MMF', an 'EU Public Debt CNAV MMF', and a 'Retail CNAV MMF'.

31.9 On the LVNAV fund proposal the Minister explains that this seeks to maintain the utility of a CNAV MMF, while addressing financial stability risk. She says that the LVNAV would manage risk by:

·  effectively limiting the maturity of investments to under 90 days, which will limit volatility of the underlying assets;

·  reducing the use of amortised cost accounting; and

·  lowering from 0.5% to 0.2% the amount that the Net Asset Value of the fund could deviate from the constant price, which would reduce the 'cliff-edge' effect that has caused previous stability concerns.

31.10 The Minister, noting that these proposals include placing a sunset clause on LVNAVs, which would revert them to a VNAV structure after four years, adds that sunset clauses are not intended to be applied to products that do not already exist, so the Government will be seeking to amend this element of the proposed LVNAVs.

31.11 Turning to an EU Public Debt CNAV MMF the Minister tells us that the European Parliament proposes allowing CNAV MMFs to continue operating where they are invested in EU government debt. She says that:

·  during the financial crisis, government debt MMFs actually saw an increase in investment, suggesting that investors run to, not from, Public Debt CNAV MMFs during times of stress;

·  it is broadly recognised, therefore, that Public Debt CNAV MMFs pose less risk to financial stability (and in fact, the US has introduced a similar exemption);

·  although the yield on CNAVs invested entirely in government debt would be very low, they would provide utility for investors seeking a highly liquid cash management tool;

·  the European Parliament has, however, included a requirement for EU Public Debt CNAVs to invest a minimum of 80% of debt in EU government debt;

·  holding only EU government debt could be seen as protectionist and might lead to calls for reciprocity from other jurisdictions;

·  it is therefore important to continue negotiations on the restriction to EU debt within a Public Debt CNAV; and

·  the Government will be seeking to remove the restriction to EU debt in the proposal for a Public Debt CNAV.

31.12 As for a Retail CNAV MMF the Minister says that:

·  the European Parliament proposes to allow the marketing of CNAVs to investors who are considered less prone to redeem and provoke a run;

·  this includes local authorities and charities and UK local authorities are supportive of the proposal; and

·  as retail investors represent only 5% of the current CNAV market, it is not obvious that a Retail CNAV MMF as proposed would pose significant financial stability concerns, particularly given the additional requirements (increased liquidity, diversification and the introduction of liquidity fees) that the MMF Regulation would introduce.

31.13 Finally the Minister tells us that:

·  now the European Parliament has voted through its mandate, the Latvian Presidency has been strongly encouraged to restart negotiations;

·  it is therefore expected that negotiations will recommence shortly; and

·  it is currently unclear whether, and to what extent, proposals put forward by the Presidency will be based on the European Parliament text.

Previous Committee Reports

Thirty-seventh Report HC 219-xxxvi (2014-15), chapter 1 (18 March 2015), Fifteenth Report HC 219-xv (2014-15), chapter 9 (22 October 2014), and Nineteenth Report HC 83-xviii (2013-14), chapter 12 (23 October 2013).


 
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Prepared 30 July 2015