MMFs – A Regulatory Update from the IMMFA
The discussion regarding the regulatory fate of money market funds (MMFs) has been more muted in Europe in recent months. Progress was slight under the Latvian Presidency of the European Council during the first half of 2015, and similarly under the Luxembourg Presidency in this latter half of 2015.
Progress to date
As with other legislation, the first step is for the European Commission (EC) to make a proposal, in this case for a Regulation. With a Regulation (as opposed to a Directive for example) the rules will be applied in the same format across each of the Member States (MS), without leaving leeway for each State to interpret the implementation.
Once the EC’s proposal is made, it is considered by both the European Parliament (EP) - made up of MEPs - and by the Council of Ministers - made up of representatives of the governments of each of the 28 Member States. Each of these other bodies agrees its own version of the proposed legislation. Once this has happened, all three parties, the EC, the EP and the Council, come together in a process called ‘Trilogue’ through which the various proposals are debated and a final version of the Regulation is agreed.
The regulatory process to redefine MMFs in Europe has been long drawn out.
In the case of MMF Regulation, the EC took a long time to come out with their initial proposal. After several delays, it was eventually published in September 2013. This proposal, which is still the official version of the EC position, included many measures to enhance the diversification, liquidity and transparency of MMFs, which were viewed as being a framework to further strengthen the structure and resilience of MMFs in Europe. However it also included several less helpful measures, such as the need for CNAV MMFs to have a 3% cash buffer, the banning of ratings paid for by the fund manager and several counter-productive limitations on the use of repo and ABCP. Subsequent dialogue has suggested that the EC may be prepared to reconsider some of the points they made in their original draft.
The European Parliament started considering the EC’s proposal shortly after it was published. However, despite the fact that a great deal of involved debate took place, the EP’s first attempt to come up with a proposal was thwarted. They ran out of time to agree a new version of the MMF proposal before the European elections which took place in May 2014.
Changes after the European elections
The elections effected a significant change to the make-up of Parliament. The ECON Committee (Committee on Economic and Monetary Affairs) is the part of the EP which is responsible for considering the MMF legislation – the make-up of this committee was very different post the elections.
When the EP reconvened, a new group of MEPs started to consider the MMF file. After yet more debate, a proposal from the EP was agreed in April 2015. This version carried forward many of the market-strengthening measures to enhance diversification, liquidity and transparency, but left investors faced with severe restrictions on the funds they would be able to buy. Several technical issues were also left unresolved.