31 Financial services: Money Market
Funds
Committee's assessment
| Politically important |
Committee's decision | Not 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).
|