Capco’s Regulatory Monitoring Newsletter
Posted: 16 October 2013 | Source: Capco
Money market funds – Extension to UCITS and AIFMD proposed
On 4 September 2013, the European Commission has proposed new regulation on money market funds (MMFs). MMFs traditionally invest in treasury bills, commercial paper and certificates and are operated by asset management companies. Managers of MMFs will continue to be subject to AIFMD and UCITS Directive but the product rules contained under the UCITS framework will be supplemented by the product rules contained in this new regulation for short-term (residual maturity of 397 days or less) and standard (maturity of two years) MMFs. The vast majority are bank sponsored; i.e. banks support share prices of the MMFs with their own capital. The proposed regulation is designed to counter ‘run of the fund’ during stressed market conditions, in order to allow for immediate redemptions (i.e. liquidity of the MMF) and the preservation of the underlying value (stability of the MMF). The regulation will be discussed with the European Parliament and the EU member states before it enters into force.
These newly proposed regulations will require asset managers and banks to review their current capabilities and assess the impacts in terms of cost of capital, processes and systems. The new regulation proposes, amongst others, the following provisions:
- The MMF’s asset mix should allow for investor redemptions: at least 10% of their assets in assets that mature on a daily basis and an additional 20% should be invested in assets that mature within a week.
- It will be prohibited for MMFs to invest in equities, equity derivatives, commodities and commodity derivatives and securities lending and repo activities.
- Internal credit risk assessment by the MMF in order to avoid internal focus on external credit ratings.
- Customer profiling policies in order to help predict large redemptions by investors.
- Mandatory capital buffer of 3% for constant net asset value (CNAV) funds (funds with stable subscription and redemption prices). It is expected that this rule will increase the management fee by 0.09 to 0.30% on a annual basis.