Money Market Funds Regulations 2018 published

In brief…

On 11 June 2018, HM Treasury published the MoneyMarket Funds Regulations 2018 (the UK Regulations),which came into force on 21 July 2018. The UKRegulations are published in the context of the EURegulation 2017/1131 on money market funds (the EUMMF Regulation) which became applicable in the UK onthe same date.

While the EU MMF Regulation is directly applicable in theUK, the UK Regulations amend the Financial Services andMarkets Act 2000 and relevant secondary legislation inorder to designate the FCA as the authority responsiblefor authorizing and regulating money market funds (MMFs)in the UK. The FCA will have the power to investigate andbring enforcement actions against funds directly for breachof the EU MMF Regulation.

Overview of the EU MMF Regulation

The EU MMF Regulation introduces a framework ofrequirements towards enhancing the liquidity and stabilityof MMFs. In particular, the EU MMF Regulation aims toaddress concerns relating to MMFs spreading or amplifyingrisks throughout the financial system.

MMFs are investment funds that invest in highly liquid,short-term debt instruments such as government bondsor corporate debt. They are primarily used to provideshort-term finance to financial institutions, corporationsand local governments, allowing those entities to spreadtheir credit risk and exposure and avoid relying solely onbank deposits. MMFs are operated by asset managementcompanies which may either run the MMF independentlyor be sponsored by a bank to do so. MMFs can bedenominated in any currency; however, those based inEurope are generally denominated in euro, poundssterling or US dollars.

Article 1 of the EU MMF Regulation sets out that theRegulation applies to a collective investmentundertaking that meets the following conditions:

1. It requires authorization as an Undertaking for the Collective Investment of Transferable Securities (UCITS) or is authorized as a UCITS under the UCITS Directive 2009/65/EC (UCITS Directive), or it is authorized as an alternative investment fund (AIF) under the Alternative Investment Fund Managers Directive (AIFMD)
2. It invests in short-term assets, ie financial assets with a residual maturity not exceeding two years, and
3. It has distinct or cumulative objectives offering returns in line with money market rates or preserving the value of the investment

The EU MMF Regulation provides for three types of MMF:variable new asset value MMFs, public debt constant netasset value MMFs, and low viability net asset value MMFs.New transparency requirements under the EU MMFRegulation mean that investors should be clearly informedof the type of MMF and whether the MMF is of a short-term or a standard nature. The manager of an MMF isfurther required to make certain information available toinvestors on a weekly basis, including the maturitybreakdown of its portfolio, its credit profile, the totalvalue of its assets, its net yield, and details of the tenlargest holdings in the MMF.

The EU MMF Regulation prescribes the assets that MMFsare permitted to invest in. Broadly, these are moneymarket instruments, eligible securitizations and asset-backed commercial papers (ABCPs), deposits with creditinstitutions, financial derivative instruments, repurchaseagreements, reverse repurchase agreements, and units orshares of other MMFs. A securitization is eligible if it issufficiently liquid, it has received a favorable assessmentfollowing an internal credit quality procedure and meetsthe criteria for a simple, transparent and standardized(STS) securitization. Diversification requirements in theEU MMF Regulation mean that an MMF is not permittedto invest more than 5 percent of its assets in moneymarket instruments, securitizations and ABCPs issued bythe same body, or 10 percent of its assets in depositsmade with the same credit institution. The aggregate of allMMF’s exposures to securitizations and ABCPs may notexceed 20 percent of the assets of the MMF.

Also introduced by the EU MMF Regulation is therequirement for an MMF to have a prudent internal creditquality assessment procedure for determining the creditquality of the money market instruments, securitizationsand ABCPs in which it intends to invest.

Next steps for MMF managers and sponsor banks

Where a fund is already authorized as a UCITS or an AIF,it will need to submit prescribed documentation to itscompetent authority in order to be authorized as anMMF. The UK Regulations provide that the competentauthority in the UK will be the FCA. The EU MMFRegulation contains a transitional provision for existingUCITS and AIFs, allowing an 18-month window from thedate the EU MMF Regulation comes into force for thefund to submit an authorization application. Therefore,the deadline for existing funds to apply for authorization is21 January 2019.

For new funds, a UCITS can apply for authorization as anMMF as part of the UCITS authorization process. An AIFcan only be authorized as an MMF if its manager is alreadyauthorized under AIFMD.

Authorization will be valid across all EU member states.Before applying for authorization, managers and sponsorsof existing MMFs will need to consider which of the newmodel MMFs is most suitable for the fund to operate as,as well as how the fund will need to be adapted in orderto comply with the new requirements.