As we mentioned in our August 9 Link of the Day, Irish law firm Dillon Eustace published a brief review of pending European Money Market Fund Reforms, entitled, "Ireland: A Guide To Money Market Funds Under The MMFR." The paper states, "After protracted negotiations, the Council and the European Parliament reached political agreement on the final text of the Regulation on MMFs (the "MMFR") in November 2016." We review the guide in more detail below, with a focus on pending disclosure requirements for European-domiciled money market funds. (Note: Our European Money Fund Symposium, which will take place Sept. 25-26 at The Renaissance Paris La Defense Hotel in Paris, France, will discuss European Money Market Fund Reforms in detail too.)

The law firm explains, "MMFs are a considerable source of short-term financing for credit institutions, governments and corporations. For investors, MMFs are mainly used to invest excess cash within short timeframes and offer diversification of their investment portfolio while maintaining a high level of liquidity. MMFs in issue in the EU manage assets of approximately E1 trillion representing approximately 15% of the EU’s fund industry. As of 31 May 2017, Irish domiciled MMFs had assets under management of approximately E486.5 billion reflecting Ireland's status as the leading European domicile for MMFs."

It continues, "The Council formally adopted the MMFR on 16 May 2017 following the Parliament's approval of the agreed text on 5 April 2017. The MMFR entered into on 20 July 2017 (having been published in the Official Journal of the European Union on 30 June 2017) and will become effective from 21 July 2018 with the exception of certain provisions imposing obligations on the European Commission to adopt delegated acts and implementing technical standards, which provisions came into effect on 20 July 2017. Consequently the provisions of the MMFR will not impact new MMFs until 21 July 2018 and existing UCITS and AIFs that meet the definition of an MMF under the MMFR will have 18 months (i.e. by 21 January 2019) to comply with the requirements of the MMFR and submit an application to their national competent authority for authorisation under the MMFR."

The paper tells us, "The purpose of this briefing is to summarise and clarify the: Key elements of the MMFR i.e. scope; types of MMFs; investment policy requirements regarding eligible assets, diversification, concentration and credit quality; risk management requirements regarding portfolio rules (such as WAM, WAL and liquidity buckets), MMF credit ratings, know your customer and stress testing; valuation and dealing requirements; specific requirements for Public Debt CNAV MMFs and LVNAV MMFs; external support; transparency and reporting requirements; and, Next steps in the implementation of the MMFR."

It says, "MMFs may be set up as one of the following types under the MMFR: a VNAV MMF; a Public Debt CNAV MMF; or a LVNAV MMF. The "LVNAV MMF" or low volatility net asset value MMF is a new category of MMF and has been made available as a viable alternative to existing CNAV MMFs given: LVNAV MMFs may apply the amortised cost method of valuation to their assets that have a residual maturity of up to 75 days. However, where the difference between the market value of any asset and the amortised cost method of valuation of that asset does deviate by more than 0.10%, the price of that asset must be calculated using its market value; and LVNAV MMF may only offer shares for subscription or redemption at a constant net asset value per share where such price does not deviate by more than 0.20% from the net asset value per share of the MMF calculated in accordance with market prices."

Dillon Eustace writes, "MMFs must be classified as either: Short-Term MMFs; or Standard MMFs. Although Short-term MMFs may be structured as Public Debt CNAV, LVNAV or VNAV MMFs, Standard MMFs may only be structured as VNAV MMFs.... Compared to Short-Term MMFs, Standard MMFs are subject to less onerous requirements under the MMFR relating to: weighted average maturity ("WAM") and weighted average life ("WAL")." European Short-Term MMFs will, like US MMFs, have maximum WAMs of 60 days and maximum WALs of 120 days, while Standard MMFs (unbelievably) will have maximum WAMs of 6 months and maximum WALs of 1 year.

The paper says the new regulations ban external support and outline new "Transparency and Reporting Requirements," saying, "The manager of an MMF must, at least weekly, make all of the following information available to the investors of the MMF: the maturity breakdown of the portfolio of the MMF; the credit profile of the MMF; the WAM and WAL of the MMF; details of the 10 largest holdings in the MMF; the total value of the assets of the MMF; and the net yield of the MMF."

It adds, "In addition to reporting already required under the UCITS Directive and the AIFM Directive, the manager of an MMF must report to the competent authority of the MMF on at least a quarterly basis ... a detailed list of information on the MMF, including the type and characteristics of the MMF, portfolio indicators, results of stress tests and information on the assets and liabilities held in the portfolio. Competent authorities must collect and transmit that data to ESMA which is tasked with creating a central database of MMFs."

The law firm comments, "The manager of a LVNAV MMF must also report the following additional information: every event in which the price of an asset valued by using the amortised cost method deviates from the price of that asset calculated in accordance with the mark-to-market/mark-to-model by more than 10 basis points; every event in which the constant net asset value per share deviates from the net asset value per share by more than 20 basis points; and every event in which (i) the proportion of weekly maturing assets falls bellows 30% and net daily redemptions on a single business day exceed 10%; or (ii) the proportion of weekly maturing assets falls bellows 10%, and the measures taken by the board of the MMF."

Finally, they say, "By 21 January 2019, an existing UCITS or AIF regulated by the Central Bank of Ireland (the "Central Bank") that invests in short-term assets and has as a distinct or cumulative objective the offering of returns in line with money market rates or preserving the value of the investment must submit an application to the Central Bank together with all documents and evidence necessary to demonstrate compliance with the MMFR. Within two months of receiving a complete application, the Central Bank must assess whether the UCITS or AIF is compliant with the MMFR and issue a decision."

See too our August 15 News, "SnP on Uncertainty in European Money Funds; MFI International Holdings" and our August 2 News, "Risks in Chinese Money Funds? Fitch on European Money Fund Reform."

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