European Parliament takes steps to bolster vulnerable MMFs
10 April 2017 Brussels
Image: Shutterstock
The European Parliament has finalised and approved new rules to make money market funds (MMFs) more resilient to turbulence in the market.
The parliament outlined measures intended to improve MMFs’ resistance to stress, and to address vulnerability to ‘panic runs’ on their money.
Funds must diversify their asset portfolios and invest in higher-quality assets. They must also meet new liquidity and concentration requirements and implement stress testing processes to be completed quarterly, at a minimum.
MMF assets will also have to be valued at least once a day, with results published daily.
Rapporteur Neena Gill, member of the committee on economic and monetary affairs at the European Parliament, said: “I believe this is a win-win deal for both major European MMF sectors, variable and constant net asset value (CNAV) MMFs, respectively. The key aims of preventing future systemic risks and runs on funds have been addressed.”
Commenting on the new rules, Amanda Rowland, asset management regulation partner at PwC, suggested that the new rules could prove challenging to implement. She said: “The most critical issue will be assessing whether current funds offering a CNAV will be able to continue to do so under the new criteria.”
“Many fund managers will be faced with difficult choices around changing their portfolios to meet more stringent CNAV requirements or moving towards variable net asset value funds. Some may choose to shut down their MMFs altogether. Funds remaining as CNAV will need to prepare to use liquidity fees and redemption suspensions under certain circumstances, and all MMF managers will have to address the detailed rules around eligible assets, portfolio maturity, liquidity, valuation and transparency.”
“Those who have not already done so need to start seriously considering these strategic choices and begin what is likely to be quite a complicated journey around client communications, governance procedures and revisions to the prospectus.”
Members of the European Parliament also proposed a new category of MMF, the low-volatility net asset value (LVNAV) MMF.
LVNAV MMFs would have a diversified portfolio, subject to concentration requirements, and they would be subject to strict daily and weekly liquidity requirements.
The funds would also be required to describe assets more precisely, and assets would also be subject to strict conditions.
The new categorisation is intended to provide improved transparency in order to ensure investors get better quality information earlier.
Gill said: “I am particularly pleased that we found a viable operational model for LVNAV MMFs, which was included at the European Parliament’s initiative.”
The parliament outlined measures intended to improve MMFs’ resistance to stress, and to address vulnerability to ‘panic runs’ on their money.
Funds must diversify their asset portfolios and invest in higher-quality assets. They must also meet new liquidity and concentration requirements and implement stress testing processes to be completed quarterly, at a minimum.
MMF assets will also have to be valued at least once a day, with results published daily.
Rapporteur Neena Gill, member of the committee on economic and monetary affairs at the European Parliament, said: “I believe this is a win-win deal for both major European MMF sectors, variable and constant net asset value (CNAV) MMFs, respectively. The key aims of preventing future systemic risks and runs on funds have been addressed.”
Commenting on the new rules, Amanda Rowland, asset management regulation partner at PwC, suggested that the new rules could prove challenging to implement. She said: “The most critical issue will be assessing whether current funds offering a CNAV will be able to continue to do so under the new criteria.”
“Many fund managers will be faced with difficult choices around changing their portfolios to meet more stringent CNAV requirements or moving towards variable net asset value funds. Some may choose to shut down their MMFs altogether. Funds remaining as CNAV will need to prepare to use liquidity fees and redemption suspensions under certain circumstances, and all MMF managers will have to address the detailed rules around eligible assets, portfolio maturity, liquidity, valuation and transparency.”
“Those who have not already done so need to start seriously considering these strategic choices and begin what is likely to be quite a complicated journey around client communications, governance procedures and revisions to the prospectus.”
Members of the European Parliament also proposed a new category of MMF, the low-volatility net asset value (LVNAV) MMF.
LVNAV MMFs would have a diversified portfolio, subject to concentration requirements, and they would be subject to strict daily and weekly liquidity requirements.
The funds would also be required to describe assets more precisely, and assets would also be subject to strict conditions.
The new categorisation is intended to provide improved transparency in order to ensure investors get better quality information earlier.
Gill said: “I am particularly pleased that we found a viable operational model for LVNAV MMFs, which was included at the European Parliament’s initiative.”
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