A website called LeapRate.com published a brief entitled, "ESMA consults on Money Market Fund rules." It says, "The European Securities and Markets Authority (ESMA) has published a Consultation Paper (CP) on the Money Market Funds Regulation (MMFR). The CP contains proposals on draft technical advice (TA), draft implementing technical standards (ITS), and guidelines under the MMFR. The key proposals relate to asset liquidity and credit quality, the establishment of a reporting template and stress test scenarios." We review this article, ESMA's paper, and a new Fitch update on European money funds, below. (Note: Just another reminder to register ASAP for our upcoming Money Fund Symposium, June 21-23 in Atlanta, and to mark your calendars for our next European Money Fund Symposium, Sept. 25-26 in Paris, France.)

The article explains, "These represent the detailed rules required for the implementation of the new European Union regulatory framework aimed at ensuring the stability and integrity of money market funds. The key draft proposals under the different policy tools include: Technical Advice; Implementing Technical Standards - the development of a reporting template containing all the information managers of MMFs are required to send to the competent authority of the MMF; and Guidelines - guidelines on common reference parameters of the scenarios to be included in the stress tests that managers of MMFs are required to conduct."

The piece adds, "Stakeholders are invited to provide their feedback on these proposals by 7 August. ESMA will finalise the TA and ITS for submission to the Commission, and issue the guidelines, by the end of the year."

ESMA's publication, entitled, "Draft technical advice, implementing technical standards and guidelines under the MMF Regulation," explains in its "Executive Summary," its "Reasons for publication," "Article 15(7) of Regulation (EU) 2017/XX on money market funds ("MMF Regulation") empowers the Commission to adopt delegated acts specifying liquidity and credit quality requirements applicable to assets received as part of a reverse repurchase agreement. In a letter dated 20 January 2017 (see Annex II to this paper), ESMA was asked to provide technical advice to the European Commission."

It continues, "Article 22 of the MMF Regulation empowers the Commission to adopt a delegated act specifying: i) the criteria for the validation of the credit quality assessment methodologies referred to in Article 17 of the MMF Regulation; ii) the meaning of the "material change" that could have an impact on the existing assessment of the instrument and that would trigger a new credit quality assessment for a money market instrument; iii) the criteria for quantification of the credit risk and the relative risk of default of an issuer and of the instrument in which the MMF invests; as well as iv) the criteria to establish qualitative indicators on the issuer of the instrument. In its aforementioned letter of 20 January 2017, the Commission asked ESMA to provide technical advice on these topics."

ESMA's update adds, "Article 37 of the MMF Regulation (see Annex II to this paper for the full text of these Articles) provides that ESMA shall develop draft implementing technical standards to establish a reporting template containing all the information managers of MMFs are required to send to the competent authority of the MMF. Article 28 of the MMF Regulation provides that ESMA shall develop guidelines with a view to establishing common reference parameters of the stress test scenarios to be included in the stress tests managers of MMFs are required to conduct. This CP represents the first stage in the development of the technical advice, implementing technical standards and guidelines described above and sets out proposals for each on which ESMA is seeking the views of external stakeholders."

On Background, they write, "The proposal for a Regulation on Money Market Funds (MMFs) was published by the European Commission in September 2013. In June 2016, the Council succeeded in finding an agreement on this text under the Netherlands Presidency. On 7 December 2016, the Council confirmed its agreement on the final text of the Regulation negotiated with the European Parliament and the Commission. The publication of the Regulation in the Official Journal is expected in the second quarter of 2017."

The publication tells us, "In the most recent version of the text, there are a number of deliverables explicitly allocated to ESMA, as well as well as empowerments for delegated acts on which ESMA has been asked to provide technical advice to the European Commission.... The aforementioned letter from the Commission to ESMA indicates that the deadline for ESMA to transmit its advice to the Commission is 31 July. With respect to the implementing technical standards to be developed by ESMA, the MMF Regulation indicates that the Commission shall adopt the delegated act no later than 6 months after the entry into force of the Regulation."

In related news, Fitch Ratings published its "European MMF Quarterly 1Q17 on Money Market Funds/Europe last week, which commented, "Fitch saw minimal changes in asset allocations and flows in 1Q17 in anticipation of the French elections in May. In fact, exposure to France increased in EUR-denominated funds driven by increased French agency and corporate exposure. France exposure slightly increased in GBP-denominated funds, driven by increased French agency exposure, but decreased in USD-denominated funds. Similarly, we saw negligible changes in relation to Dutch issuers around the time of the election in the Netherlands."

They continue, "European constant net asset value (CNAV) MMF AUM increased across all currencies in 1Q17. GBP-denominated funds experienced the largest increase over the quarter, but this increase was in line with historical averages. Overall total European CNAV MMF assets reached EUR644 billion at end-March 2017.... EUR-denominated funds became increasingly barbelled in 1Q17, with substantial increases in assets maturing under seven days and with maturities longer than 90 days.... Average weekly liquidity (including eligible assets) increased to 39% at end-1Q17 from 37% at year-end. This increase was mainly driven by increase in overnight deposits."

Fitch adds, "The 7D gross yield on sterling prime MMFs fell further, to 0.34% (from 0.38% at end-4Q16).... Similarly, the 7D gross yield on EUR prime MMFs dropped further to minus 0.38%; nevertheless, these funds still saw inflows. In contrast, the 7D gross yield on USD-denominated prime funds increased to a high of 1.11%, reflecting the increase in the federal funds rate."

They write, "BNP Paribas is now the most widely held bank in EUR MMFs, followed by Rabobank and Credit Agricole. The biggest declines in issuer exposure were represented by Bred-Banque Populaire, followed by State Street and Credit Suisse. The biggest increases were observed in La Banque Postale.... The average portfolio WAM and WAL increased to 50 days and 59 days, respectively, compared to 46 days and 53 days the previous quarter.... The UK slipped to fifth-highest average issuer exposure in GBP MMFs and average overall UK exposure fell to 11% at end-1Q17 from 13% at end-4Q16. This will, in part, reflect a fall in direct UK government exposure from the heightened exposure at year-end as funds used government exposure as part of their overnight liquidity bucket."

Finally, they say on USD MMFs, "Average exposure to financials remained high at approximately 76%, albeit marginally below the average level of approximately 77% at end- December-2016. Agency exposure increased modestly during the quarter.... Average WAL increased over 1Q17, rising to 70 days, comparable with the highest levels seen in 2016. WAM remained broadly stable, albeit at the upper end of the recent range at 53 days on average as of end-March 2017."

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