In what is likely to cause continued confusion in the money markets, the Committee for European Securities Regulators (CESR) announced yesterday that it will stick with its proposal of a two-tiered system of "money market funds," with "Short-Term Money Market Funds" being the new term for U.S.-style, or IMMFA money market funds, and "Money Market Funds" being the new term for longer-term, European-style ultra-short bond funds. Europe previously has not had any restrictions on the use of the term "money market fund." (See Crane Data's previous News briefs on the topic: "European Regulators Consult on Definition(s) of Money Market Fund" on Oct. 22, 2009, and "JPM, Crane Oppose Two-Tiered Definition for European Money Funds" on Jan. 13, 2010.)

A press release entitled "CESR sets out harmonised definition of European money market funds" says, "CESR publishes today its guidelines on a common definition of European money market funds (Ref. CESR/10-049). The guidelines aim to improve investor protection by setting out criteria to be applied by any fund that wishes to market itself as a money market fund. The criteria reflect the fact that investors in money market funds expect the capital value of their investment to be maintained while retaining the ability to withdraw their capital on a daily basis. A common definition will also help provide a more detailed understanding of the distinction between funds which operate in a very restricted fashion and those which follow a more 'enhanced' approach."

Lamberto Cardia, Chair of the Italian Commissione Nazionale per la Societa e la Borsa (CONSOB) and Chair of CESR's Investment Management Standing Committee, which prepared the advice, states, "The publication of these guidelines is a significant step in improving investor protection and will help stakeholders -- competent authorities, management companies and investors -- to draw a clearer distinction between funds according to their investment strategies. It was clear from the difficulties that arose in the markets in 2007 and 2008, that the term 'money market fund' covered a very broad range of investment funds. This created risks for investors who may not have fully understood the types of asset in which these funds were able to invest. In particular, the strategies of some funds may not always have been consistent with the generally accepted concept of money market funds as being relatively liquid, short-term investments. I am confident that CESR's guidelines will provide greater clarity and in so doing, better equip investors to be able to make informed investment decisions."

The release continues, "CESR's guidelines set out two categories of money market fund: Short-Term Money Market Funds and Money Market Funds. This approach recognises the distinction between short-term money market funds, which operate a very short weighted average maturity and weighted average life; and money market funds which operate with a longer weighted average maturity and weighted average life. For both categories of fund, CESR expects that there should be specific disclosure to explain clearly the implications of investing in the type of money market fund involved. For Money Market Funds, for example, this means taking account of the longer weighted average maturity and weighted average life of such funds. For both types of money market fund, this should reflect any investment in new asset classes, financial instruments or investment strategies with unusual risk and reward profiles."

"The guidelines will enter into force in line with the transposition deadline for the revised UCITS Directive (1 July 2011). However, money market funds that existed before that date will be granted an additional six months to comply with the guidelines as a whole," says CESR. See the full publication here: "CESR's Guidelines on a common definition of European money market funds." See the feedback statement here.

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