The European Securities and Markets Authority (ESMA), which was formerly known as CESR (Committee for European Securities Regulators) and which "fosters supervisory convergence both amongst [European] securities regulators," published "a set of Questions and Answers on European Money Market Funds on Friday. A statement says, "The purpose of this document is to promote common supervisory approaches and practices in the application of the guidelines on a Common Definition of European Money Market Funds developed by CESR by providing responses to questions posed by the general public and competent authorities. This document is intended to be continually edited and updated as and when new questions are re-ceived. The date on which each question was last amended is included after each question for ease of reference. Questions on the practical application of any of the requirements of CESR's guidelines on a Common Definition of European Money Market Funds may be sent to the following email address at ESMA: moneymarketfunds@esma.europa.eu."
The full Questions and Answers: A Common Definition of European Money Market Funds, which applies to Europe only and which is heavy on ratings questions, states, "I. Background 1. The revised Undertakings for Collective Investment in Transferable Securities (UCITS) Directive puts in place a comprehensive framework for the regulation of harmonised investment funds within Europe. The extensive requirements with which UCITS must comply are designed to ensure that these products can be sold on a cross-border basis. The UCITS framework is made up of the following EU legislation: a. Directive 2009/65/EC, which was adopted in 2009. It is a 'framework' Level 1 Directive which has been supplemented by technical implementing measures (see the Level 2 legislation in b. below). b. Directive 007/16/EC1; Directive 2010/43/EU2; Regulation No 583/20103; Directive 2010/42/EU4; and Regulation No 584/20105 (the Level 2 legislation). 2. National laws of Member States may apply to collective investment undertakings that are not UCITS."
The document explains, "On 19 May 2010, ESMA's predecessor (CESR) published guidelines on a Common Definition of European Money Market Funds (Ref. CESR/10-049). These guidelines apply to collective investment undertakings authorised under Directive 2009/65/EC and collective investment undertakings regulated under the national law of a Member State and which are subject to supervision and comply with risk spreading rules and which label or market themselves as money market funds. 4. ESMA is required to play an active role in building a common supervisory culture by promoting common supervisory approaches and practices. In this regard, ESMA has adopted this Q&A and will continue to develop other Q&As as and when appropriate."
The Q&A continues, "The purpose of this document is to promote common supervisory approaches and practices in the application of the guidelines on a Common Definition of European Money Market Funds developed by CESR by providing responses to questions posed by the general public and competent authorities. The content of this document is aimed at competent authorities to ensure that in their supervisory activities their actions are converging along the lines of the responses adopted by ESMA. However, the answers are also intended to help management companies by providing clarity as to the content of CESR's guidelines on a Common Definition of European Money Market Funds, rather than creating an extra layer of requirements."
Under "Status," ESMA writes, "The Q&A mechanism is a practical convergence tool used to promote common supervisory approaches and practices under Article 29(2) of the ESMA Regulation. Therefore, due to the nature of Q&As, formal consultation on the draft answers is considered unnecessary. However, even if they are not formally consulted on, ESMA may check them with representatives of ESMA's Securities and Markets Stakeholder Group, the relevant Standing Committee's Consultative Working Group or, where specific expertise is needed, with other external parties. ESMA will review these questions and answers to identify if, in a certain area, there is a need to convert some of the material into ESMA guidelines and recommendations. In such cases, the procedures foreseen under Article 16 of the ESMA Regulation will be followed."
Some of the questions include: "Question 1: `What are ESMA's expectations in terms of a management company's internal rating process? Answer: A management company assesses the credit quality of a money market instrument using its internal rating process. The assessment of the credit quality of the instrument by the management company should be conducted according to the provisions of Article 23 of Directive 2010/43/EU on due diligence requirements."
"Question 7: Should the WAM be calculated using the duration or final legal maturity for fixed rate instruments? Answer: According to the definition of WAM on page 5 of CESR's guidelines, the WAM for fixed rate instruments should be calculated using the final legal maturity of the instrument and not the duration. Question 8: Should the WAL be calculated for individual instruments? Answer: No. According to the definition of WAL on page 5 of CESR's guidelines, the WAL should be calculated as the weighted average of remaining life (maturity) of the securities held in the fund."
Question 12: Are short-term money market funds and money market funds allowed to invest in non-base currency cash without hedging the currency exposure? Answer: No. Paragraph 11 of Box 2 and paragraph 1 of Box 3 of CESR's guidelines require the currency exposure arising from investment in securities denominated in non-base currency to be fully hedged and should be understood as covering investments in non-base currency cash as well."
