Money market funds
Regulation (EU) 2017/1131 on money market funds
WHAT IS THE AIM OF THE REGULATION?
It establishes EU-wide rules to make money market funds (MMFs)* more resilient and better able to withstand market shocks. It does so by ensuring uniform rules on prudential requirements, governance and transparency for managers of MMFs.
The legislation applies to all MMFs managed and/or marketed in the EU. There are 3 kinds:
-variable net asset value (VNAV), mainly depending on market fluctuations;
-public debt constant net asset value (CNAV), which try to maintain a fixed price for each share;
-low volatility net asset value (LVNAV) – a new category introduced as a viable alternative to CNAVs.
It requires MMFs to have sufficient liquid assets to meet any sudden withdrawal of investment:
-LVNAVs and CNAVs must hold at least 10% of assets that mature (i.e. to be repaid by the issuer) within 1 day and 30% that mature within 1 week;
-VNAVs need to hold at least 7.5% of assets that mature within 1 day and 15% within 1 week.
It introduces rules on portfolio diversification and valuation of assets. An MMF may invest no more than:
-5% of its assets in money market instruments issued by the same body;
-10% of its assets in deposits made with the same credit institutions;
-17.5% in other MMFs, to prevent circular investments.
The regulation sets:
-a 15% limit on reverse repurchase agreements* with the same counterparty;
-specific limits for covered bonds and deposits in the same credit institutions.
It prevents MMFs from receiving any financial help from other institutions, notably banks.
It also requires MMF fund managers to:
-apply prudent quality assessment procedures to potential investments;
-be aware of the activities of their investors;
-supply the appropriate surveillance information to the relevant authorities.
The European Commission must review the legislation by 21 July 2022.
FROM WHEN DOES THE REGULATION APPLY?
It applies from 21 July 2018, apart from some rules that apply from 20 July 2017 (Articles 11(4), 15(7), 22 and 37(4)).
Money market funds are mainly used as an alternative to bank deposits to invest excess cash for short periods of time. They enable investors to diversify their financial holdings, while allowing them to recover these at short notice. In the EU, the funds manage assets of some €1 trillion which are used to finance the real economy.
However, market turbulence, as seen in the 2007/2008 financial crisis, can lead to a run on funds. If large groups of investors start to withdraw their cash, potentially others across the EU follow, damaging the financial system.
For more information, see:
-Legislative history of Regulation (EU) 2017/1131 (European Commission)
-Money market funds (Consilium).
Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds (OJ L 169, 30.6.2017, pp. 8-45)
last update 31.01.2018