The European Union agreed on a new set of money market fund regulations, we learned from Bloomberg and Reuters. The European Parliament issued a release entitled, "Money Market Funds: breakthrough agreement between MEPs and Slovak Presidency," which says, "An agreement on the EU money market funds regulation has been struck by the European Parliament, Council and Commission, after lengthy negotiations, more than three years after the Commission published the original proposal." (See Bloomberg's "EU Strikes Deal on Tighter Rules for $1.1 Trillion Money Market, Reuters' "EU agrees new rules for money market funds, eliminating some, and our June 16 News, "European Money Fund Reform Deal Poised to Pass; CNAVs to Be LVNAVs.")
U.K. Rapporteur Neena Gill comments, "This is one of the most contentious and complex pieces of legislation that has been held up for more than three years. I am delighted we have an overall agreement between Parliament and the Council. I believe this is a win-win deal for both major European MMF sectors, variable and constant net asset value MMFs (VNAVs and CNAVs) respectively."
She adds, "Moreover the key objectives of preventing the future systemic risks and runs on the funds have been addressed. I am particularly pleased we found a viable operational model for low volatility net asset value (LVNAV) MMFs, which was introduced at the European Parliament's initative.... This agreement is an important step forward in MMF regulation, as the EU has been lagging behind on its international commitments to regulating the sector. The USA implemented its own reform in October this year."
The EU lawmakers' release continues, "MMFs provide highly liquid short-term financing, to investors seeking to diversify their portfolios, for business start-ups and small and medium-sized enterprises (SMEs). However, MEPs wanted to make them more resilient to crises, and make them more stable and less vulnerable in case of "runs", if most of their investors withdraw their funds at the same time in response to market turbulence."
It describes the "LVNAV: a new type of MMF proposed by the MEPs," explaining, "The Parliament proposed a new category of MMF: Low Volatility Net Asset Value MMF (LVNAV MMF) with an objective that it has to work for the real economy." The "Main LVNAV features include: A strict portfolio fluctuation band: the constant NAV cannot deviate by more than 20 basis points from the actual NAV -- this is far stricter than the 50 basis points used by CNAVs; Diversified portfolio with stringent concentration requirements to reduce risk, assets described more precisely and subject to strict conditions; Limit the use of the amortised accounting method for the valuation of assets; Strict daily and weekly liquidity requirements to fulfil potential redemption requests; A stringent regime of fees and gates in case of shortfalls in liquidity, to address the question of 'run risk and first mover advantage; and Increase[d] transparency to ensure investors and supervisors get better & earlier information."
The release continues, "The draft law should also require MMFs to diversify their asset portfolios, investing in higher-quality assets, follow liquidity and concentration requirements and have in place sound stress testing processes conducted at least bi-annually. The assets of a MMF would have to be valued at least once a day and the result should be published daily on the website of the MMF."
It adds, "The EP proposal that that a MMF should not receive external support from a third party including from its sponsor was also sustained in the agreement, together with a requirement that MMFs should report on the ten largest holdings in the MMF.... Some technical work on the text is now under way by the services of the three institutions. Afterwards, the agreement reached by the EP negotiating team will have to be approved by a plenary vote."
In other news, the Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of Oct. 31, 2016), which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See our Nov. 10 News, "November Portfolio Holdings: Treasuries Jump; Repo, TDs, CDs Fall.")
ICI's release explains, "The Investment Company Institute (ICI) reports that, as of the final Friday in October, prime money market funds held 28.9 percent of their portfolios in daily liquid assets and 47.4 percent in weekly liquid assets, while government money market funds held 59.7 percent of their portfolios in daily liquid assets and 76.2 percent in weekly liquid assets."
It says, "At the end of October, prime funds had a weighted average maturity (WAM) of 38 days and a weighted average life (WAL) of 61 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 43 days and a WAL of 95 days."
On Holdings By Region of Issuer, it adds, "Prime money market funds' holdings attributable to the Americas declined from $256.53 billion in September to $167.42 billion in October. Government money market funds' holdings attributable to the Americas rose from $1,759.69 billion in September to $1,790.59 billion in October."
The Prime Money Market Funds by Region of Issuer table shows Americas at $167.4 billion, or 44.3%; Asia and Pacific at $68.5 billion, or 18.1%; Europe at $138.4 billion, or 36.7%; and Other (including Supranational) at $3.1 billion, or 0.9%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.791 trillion, or 82.9%; Asia and Pacific at $65.8 billion, or 3.0%; and Europe at $301.3 billion, or 14.0%.
The release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data. The report includes all money market funds registered under the Securities Act of 1933 and the Investment Company Act of 1940, that are publicly offered. All master funds are excluded, but feeders are apportioned from the corresponding master and included in the report."
