Documents considered by the Committee on 7 December 2016 Contents
18Financial services: Money Market Funds
Summary and Committee’s conclusions
Cleared from scrutiny
(a) Proposed Regulation on Money Market Funds; (b) European Central Bank Opinion on the proposed Regulation
(a) Article 114 TFEU, co-decision, QMV; (b) —
(a) (35298), 13449/13 + ADDs 1–2, COM(13) 615;
(b) (36321), 12713/14, —
18.1In October 2016 we gave the Government a scrutiny waiver in relation to trilogue negotiations of a proposed Regulation on Money Market Funds (open-ended funds that invest in short-term debt securities). This was on the basis that a Council General Approach met the Government’s key objectives and that the Presidency was expected to preserve the key elements of the package of reforms that were in line with UK objectives. However, we retained the matter under scrutiny and expected the Government to inform us about any significant changes made during the trilogue process.
18.2The Government now tells us that:
- the European Parliament and the Council recently reached an “in principle” agreement on the proposed Regulation;
- this agreement is adequately balanced and delivers the Government’s objectives and priorities;
- it also improves on the General Approach in some areas, notably significant progress being on two of the UK’s key negotiating interests—those concerned with the Low Volatility Net Asset Value and the public debt Constant Net Asset Value models of Money Market Funds; and
- as the agreement is in line with UK objectives and priorities, the Government intended to support it.
18.3We are grateful to the Government for this account of the final outcome on this proposed Regulation and now clear the documents from 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, —.
18.4We have kept under scrutiny since October 2013 a proposed Regulation, which would introduce rules specific to Money Market Funds. These are open-ended funds that invest in short-term debt securities such as Treasury bills and commercial paper, providing short term finance to financial institutions, corporations and governments. The proposed Regulation would deal with investment policies, risk management, valuation rules, constant net asset value funds and external support.
18.5The Government had outlined to us its aim to ensure the proposed legislation addresses the financial stability concerns with these funds that arose during the financial crisis, while maintaining operational qualities of the funds that are beneficial to investors. Council consideration of the proposal had been badly delayed by polarised views between key Member States. Meanwhile the European Parliament had adopted its view of the proposal.
18.6However, in October 2016 the Government told us that:
- the Council had been able recently to agree a General Approach on the proposal;
- the text of the General Approach met the Government’s key priorities, but it had abstained, because of the scrutiny reserve;
- the Slovak Presidency had begun trilogue discussions with the European Parliament; and
- throughout the trilogue negotiations, the Council intended to preserve the key elements of the package of reforms that are in line with UK objectives.
18.7Having no further questions to ask, we were content to give a scrutiny waiver for the documents. However, we retained them under scrutiny and expected the Government to inform us about any significant changes made during the trilogue process.
The Minister’s letter of 24 November 2016
18.8The Economic Secretary to the Treasury (Simon Kirby) first reminds us that:
- Money Market Funds currently may take one of two forms—either Constant Net Asset Value (CNAV) funds, where the value of the fund’s units should stay constant at £1/$1/€1, or Variable Net Asset Value (VNAV) funds, where the value of the underlying units is variable;
- in order to mitigate the financial stability risks associated with CNAV funds, this proposed Regulation would replace the CNAV model with two new types of fund structure—the Low Volatility Net Asset Value (LVNAV) fund and the public debt CNAV;
- LVNAV funds would have similar characteristics to the CNAV model but their pricing would become variable should the fund hit certain financial stability triggers; and
- public debt CNAVs would be CNAV funds that invest purely in government debt—as this is considered a more liquid asset class, public debt CNAVs would not need to price units variably in stressed market conditions.
18.9The Minister reminds us further that:
- the Council agreed a General Approach on this proposal in June 2016 and the Slovak Presidency has since engaged in political and technical trilogue discussions with the European Parliament; and
- the UK position throughout the negotiations on this matter has been to strike a balance between addressing the systemic risk concerns around Money Market Funds, while maintaining the operability of all types of these funds so as to retain a competitive market and provide investors with choice.
18.10The Minister then reports that:
- during the most recent political trilogue, on 14 November 2016, the European Parliament and the Council reached an “in principle” agreement on the proposed Regulation;
- the Government considers that this agreement is adequately balanced and delivers both its objectives and priorities, such as a ban on external sponsor support; and
- this “in principle” agreement also improves on the General Approach in some areas—notably the Government secured significant progress on two of the UK’s key negotiating interests, these are removal of a sunset clause on the LVNAV model and removal of a requirement for 80% of a public debt CNAV to be invested in EU debt by 2020.
18.11The Minister explains these two developments from the trilogue discussions as follows:
The sunset clause on the LVNAV fund structure
- under the European Parliament’s draft text, LVNAV funds would be automatically de-authorised and retired from the market five years after the adoption of the proposed Regulation;
- this clause could, however, be deleted if the findings of a Commission review, conducted in the fourth year after the adoption of the proposed Regulation, were that the structure could mitigate financial stability risks;
- as part of the “in principle” agreement, the sunset clause on the LVNAV fund structure has been removed; and
- this development is aligned to the General Approach, which does not include a sunset clause, and also with the Government’s objectives;
The requirement for 80% of a public debt CNAV to be invested in EU debt by 2020
- under the European Parliament’s draft text, EU domiciled public debt CNAV funds would only be able to invest in limited amounts of third country denominated currencies (for example US dollars);
- any restriction of investment to EU debt is counter to the Government’s negotiating objectives;
- as part of the “in principle” agreement, the implementation of a requirement for 80% of a public debt CNAV would be dependent on the outcome of a Commission review, to be undertaken five years after the entry into force of the proposed Regulation;
- this review would determine whether an EU debt quota is economically viable in light of the availability of short-term EU public debt instruments;
- it would also assess whether the LVNAV structure is an appropriate alternative for non-EU public debt funds, with a view to removing the public debt CNAV structure altogether; and
- the Government considers this review clause to be a good compromise, since the alternative that was being proposed would have amounted to a sunset clause on the public debt CNAV.
18.12The Minister concludes that:
- the Slovak Presidency has entered this “in principle” agreement into a silence procedure until 11.00 28 November 2016, with the intention of reaching a political agreement with the European Parliament soon afterwards;
- as the agreement is in line with UK objectives and priorities, the Government does not intend to break silence;
- the Presidency will then seek to present a compromise text at COREPER as soon as possible after the deadline to break silence elapses; and
- for this reason asks us to clear the proposal from scrutiny.
Previous Committee Reports
Thirteenth Report HC 71-xi (2016–17), chapter 7 (12 October 2016); Fourth Report, HC 342-iv (2015–16), chapter 7 (16 September 2015); First Report HC 342-i (2015–16), chapter 31 (21 July 2015); Thirty-seventh Report HC 219-xxxvi (2014–15), chapter 1 (18 March 2015); Thirty-second Report, HC 219-xxxi (2014–15), chapter 11 (4 February 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).