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EU Reaches Final Agreement on Money Market Fund Reforms
AUTHOR(S): Tara Doyle, Michael Jackson, Dualta Counihan, Joe Beashel, Anne-Marie Bohan, Shay Lydon, Liam Collins, Philip Lovegrove, Elizabeth Grace, Oisin McClenaghan, Michelle Ridge
PRACTICE AREA GROUP: Asset Management and Investment Funds
MMF = money market fund
VNAV MMF = variable net asset value money market fund
CNAV MMF = constant net asset value money market fund
LVNAV MMF = low volatility money market fund
The Council of the EU has published the final compromise text of the regulation on MMFs (the “MMF Regulation”). The final rules represent a significant improvement on the rules first proposed in September 2013 and introduce new requirements relating to permissible investment policies, eligible assets, liquidity management, concentration, credit quality of investment assets and eligible securitisations. The rules will apply to all MMFs, whether they are UCITS or alternative investment funds (“AIFs”). This update focuses on the new rules applicable to public debt CNAV MMFs and LVNAV MMFs, as the majority of Irish domiciled MMFs are currently CNAV funds.
Types of MMF
According to the final compromise text, there will be three types of authorised MMF: (1) VNAV MMFs; (2) public debt CNAV MMFs; and (3) LVNAV MMFs. Public debt CNAV MMFs are defined as investing at least 99.5% of their assets in EU or non-EU government securities and securities issued by central banks and other prescribed international financial institutions. With the exception of this restriction on investment in non-governmental securities, public debt CNAV MMFs are similar to the CNAV MMFs that are currently available to investors and with which they are already familiar. LVNAV MMFs represent a new category of MMF that may be attractive to promoters of MMFs that will not qualify as public debt CNAV MMFs.
For LVNAV MMFs and public debt CNAV MMFs, at least 10% of the MMF’s assets must be comprised of daily maturing assets, reverse repurchase agreements that can be terminated within one business day or cash which can be withdrawn within one business day. At least 30% of the assets of a LVNAV MMF or public debt CNAV MMF must be comprised of weekly maturing assets.
In calculating the weekly maturing assets of a LVNAV MMF or public debt CNAV MMF, government-issued securities that are highly liquid, can be redeemed and settled within one business day and which have a residual maturity of up to 190 days may be included in the calculation, but only up to a maximum threshold of 17.5% of the MMF’s assets.
Public debt CNAV MMFs may use amortised cost accounting in addition to using the mark to market / mark to model method. LVNAV MMFs may use amortised cost accounting, but only in relation to assets that have a residual maturity of up to 75 days. Individual assets must be marked to market if the mark to market price of the asset deviates from the price calculated using amortised cost accounting by more than 10 basis points.
The units or shares of a LVNAV MMF may be issued or redeemed at a price that is equal to the LVNAV MMF’s constant NAV, provided that the constant NAV does not deviate from the MMF’s marked to market NAV by more than 20 basis points.
Redemption Fees and Gates
Where the proportion of weekly maturing assets of a LVNAV MMF or public debt CNAV MMF falls below the 30% threshold or where the net daily redemptions on a single business day exceed 10% of total assets, the MMF manager must immediately inform the MMF’s board which must undertake a documented assessment and decide whether or not to apply liquidity fees on redemptions, redemption gates or suspension of redemptions for any period up to 15 working days. Where the proportion of weekly maturing assets falls below 10%, the board must implement either liquidity fees on redemptions or a suspension of redemptions. If, within a period of 90 days, aggregated suspensions exceed 15 days, a LVNAV or public debt CNAV MMF will automatically cease to be a LVNAV or CNAV MMF.
One of the more controversial aspects of the European Commission’s original proposal for the reform of MMFs was a requirement for CNAV MMFs to put in place a 3% capital buffer to absorb day-to-day fluctuations in the value of a CNAV MMF’s assets and to ensure that MMFs were prepared should they require support. It was also proposed that CNAV MMFs would only be able to receive external support through this capital buffer. The final compromise text provides that all sponsor support will be prohibited and there is no requirement for any capital buffer to be maintained.
At earlier stages in this process, there had been suggestions that all CNAV MMFs would be required to convert to LVNAV MMFs or that a “sunset clause” would provide that authorisations granted to LVNAV MMFs would lapse five years after the entry into force of the MMF Regulation. There is no sunset clause in the final text, which provides for a standard review of the MMF Regulation five years after its entry into force and for that review to include whether changes should be made to the regime for public debt CNAV MMFs and LVNAV MMFs.
Next Steps and Comment
The European Parliament and the Council of the EU will now formally vote to adopt the final text, which is still subject to technical changes. It is expected that the finalised, official version will be published in the Official Journal of the EU (“OJ”) in mid-2017. The MMF Regulation will enter into force 20 days after publication in the OJ and will apply 12 months from the date of entry into force. There will be an 18 month transitional period for existing MMFs from the date of entry into force, with the result that it is expected that the MMF Regulation will apply fully from late 2018 or early 2019.
The reforms of MMFs are of particular interest to the Irish funds industry, as MMFs represented 23% of the assets of all Irish domiciled funds (or €441 billion) as at July 2016. The final outcome of the negotiations, in particular the removal of the requirement for a capital buffer and the exclusion of sunset clauses in respect of CNAV MMFs and LVNAV MMFs, recognises the important role MMFs play in the European financial system for investors seeking a low risk, liquid and well diversified means of investing cash. We believe that the final provisions can work to ensure the ongoing viability of MMFs, including CNAV MMFs, while the introduction of LVNAV MMFs offers a further option for promoters and investors.
The final compromise text may be accessed here.