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.[[[PAGE]]]
The Council of Ministers
At this stage the focus moved to the Council of Ministers. Under the Italian Presidency (Jul-Dec 2014), the MMF file had been considered several times, but agreement could not be reached. The next presidency was Latvia, (Jan-Jun 2015) given the limited resource available, formal progress was slow. However, we understand that in the background several of the Member States most interested in this file continued to meet on a informal or bilateral basis to try to find common ground. Luxembourg took over in the summer of 2015 and holds the Presidency from Jul-Dec 2015.
Traditionally, the country which holds the presidency of the Council aims to maintain neutrality in the matters it oversees. Given the important role which Luxembourg plays in the European MMF industry, it is difficult for Luxembourg to maintain a neutral stance. Also, given the other challenges facing EU currently, the impetus to push for a solution has temporarily subsided.
A push to move forward…
There is still a desire for the MMF debate to move forward. Both the EP and the EC are pushing the Council to move forward in order that the Trilogue process can start. Various additional factors will colour the debate as it moves forward. The new US MMF rules were agreed back in July 2014, and must be implemented by October 2016. Complying with the new US rules has not been easy. Two unanticipated outcomes have been that large sections of the market have chosen to become Government MMFs, restricting their investment to US government obligations, rather than go to a variable NAV format. Furthermore being obliged to operate with a variable NAV but still aiming to offer same day settlement, a feature which many MMF investors value highly, continues to present significant operational challenges. Even with a pricing infrastructure much further developed than that currently available in Europe, MMF managers are finding it extremely difficult to find a system which retains the full flexibility of the product.
We all know reform is coming, but in what form is anybody's guess.
Finally, during the time taken to progress this far, several other political factors have changed. We have a new European Commissioner responsible for financial markets policy and the focus of efforts in Europe is transitioning from how to prevent a repeat of the banking crisis to how to stimulate the economy. The MMFs are a significant constituent of the short-term debt market in Europe; many of the measures contained in the MMF proposals will exacerbate many of the problems of market liquidity already being experienced in that market. Clearly this runs contrary to the wider aims of Capital Markets Union.
… but no decisions yet
So despite the time already taken, there is still no clear indication of when we will have a new MMF Regulation and perhaps more importantly, when that Regulation will be implemented. We all know reform is coming, but in what form is anybody’s guess. MMFs are a key piece of the puzzle for a lot of real economy firms. It matters that policymakers should find a solution that works.
