On August 17, we wrote about BlackRock's comment letter on the European Securities and Markets Authority's "Consultation Paper on Draft technical advice, implementing technical standards and guidelines under the MMF Regulation". Today, we review several more of the dozen comment letters, which include feedback from European fund associations IMMFA, Irish Funds Industry Association, EFAMA, Assogestioni, BVI and ICI Global, and asset managers Amundi, AXA, and AFG. Like the BlackRock letter, the main concerns of commenters relate to share destruction, reverse repo and stress testing. (See ESMA's technical paper European MMF Reforms and see our May 30 News, "ESMA Publishes Consultation on European MMF Regs; Fitch on European" for more.)

IMMFA, the London-based Institutional Money Market Funds Association, writes, "The European Securities and Markets Authority (ESMA) invites responses to the specific questions listed in Consultation Paper on Draft technical advice, implementing technical standards and guidelines under the MMF Regulation (MMF), published on the ESMA website. The Institutional Money Market Funds Association Ltd ("IMMFA") is pleased to submit its comments on the ESMA Consultation Paper on Draft technical advice, implementing technical standards and guidelines under the MMF Regulation." (Note also that IMMFA Chair Reyer Kooy and Secretary General Jane Lowe will give the keynote to our European Money Fund Symposium, which will take place Sept. 25-26 in Paris, France.)

They explain, "IMMFA represents the European institutional money market fund industry that manages and promotes investment funds based on providing a constant Net Asset Value per share to investors. All IMMFA members' funds are UCITS, although it is possible that new entrants to the market could use the AIF structure in future. All but one are domiciled in Luxembourg and the Republic of Ireland (there is one UK fund). The funds offer cash management services, effectively intermediating between investors and issuers in the money markets (prime and government), as well as providing risk diversification away from direct deposit taking by banks. Typically the investor profile includes institutions such as corporations, investment firms including banks, pension funds, charities, local authorities and other public bodies."

The letter continues, "The money funds provide significant amounts of short term funding to the market, much of it for banks. At the end of May 2017, funds under management for IMMFA members' money market funds amounted to E647 billion.... We recognize that ESMA has to respond to specific tasks included in the Level 1 Regulation, and that the time available to do so is short. Nonetheless, we would urge that requirements are developed that take full account of the specificities of money market funds. The current level of prescription appearing in the draft advice and guidance would benefit from being more tailored to the way the money funds operate."

It tells us, "An overarching comment is that the consultation does not always appear to have taken full account of the very short term nature of the portfolios of money market funds, Short Term MMFs in particular.... Insufficient weight been given to the substantial tightening of the rules around each MMF type in the MMF Regulation. The consequence is that the draft advice and the guidance are in places over-extensive and do not acknowledge that the provisions of Level 1 already deal substantially with certain issues. For example the requirements for reverse repo collateral that goes beyond 397 days maturity are already restricted in the Level 1 text to government securities only, and in the case of third country government debt this is also already subject in Level 1 to the full rigours of the credit assessment process. The required advice on liquidity and credit quality should be sharply focused to the narrowed band of collateral remaining."

They add, "As mentioned, we were surprised to see, in paragraph 186, a potential policy statement on share destruction effectively buried within requirements on reporting. IMMFA does not share the interpretation that ESMA appears to be making in this paragraph. The creation and cancellation (destruction) of shares is a dynamic process that currently operates in accordance with UCITS directive provisions, as authorised by a number of EU Competent Authorities. It is the mechanism by which all open-ended investment funds handle inflows and outflows of investment. We are not aware of any reference in the MMF Regulation that seeks to change this process, nor would it be workable for any fund if this were the case. If, as we believe may be the case, ESMA is referring to a prohibition on reverse distribution mechanisms, for example to deal with negative yield, we still do not accept that there is a prohibition on this in the Level 1 text. Share cancellation is an approved and widely accepted mechanism."

Another comment letter writes, "The Irish Funds Industry Association ("Irish Funds") is the representative body for the international in-vestment fund community in Ireland. Our members include fund managers, fund administrators, transfer agents, depositaries, professional advisory firms and other specialist firms involved in the international fund services industry in Ireland. Ireland is the largest fund domicile in the EU for money market funds and the net assets of Irish domiciled MMFs amount to over E486 billion (Source: Central Bank of Ireland, May 2017). ESMA's Consultation Paper on the MMF Regulation is therefore of particular significance and relevance for the funds industry in Ireland."

It continues, "We commend ESMA for the significant body of work that it has undertaken to produce this Consultation Paper within a short timeframe and welcome the opportunity to respond to the detailed questions included therein.... In that regard, we wish to highlight a number of key points from our perspective: Destruction of shares – ESMA has included a statement that the destruction of shares is not allowed under the MMF Regulation. In this context, we wish to highlight the fact that the practice of reverse distribution, i.e. cancellation of units to deal with negative yield, is widespread, has been accepted by NCAs and is understood and utilised by investors. Reverse distribution is entirely consistent with MMFR and the UCITS Directive and in keeping with the objective under Article 1.1 of offering returns in line with money market rates, as well as a MMF's authority to redeem shares in circumstances set forth in the MMF's constitutional documents."

Irish Funds also highlights, "Reverse repurchase agreements and liquidity – the liquidity requirements imposed on LVNAV and CNAV MMF under Article 24(1)(e) and (g) mean that, following the implementation of MMFR, MMFs will become more reliant on short-term reverse repos. This fact underscores the importance of ensuring that the conditions for reverse repos falling under Article 15(6) are appropriately calibrated and future-proofed.... For entities that are not listed under Article 3, ESMA proposes additional requirements under Article 4. We agree with ESMA that haircuts should apply to such counterparties but we are not in favour of a standardised haircut framework which would deny managers the ability to adapt the haircut, when appropriate and necessary, to react to market conditions."

They say about "Regulatory reporting," "[W]e note the expansive nature of the regulatory reporting template proposed by ESMA. ESMA will be aware, from responses to previous consultations by the Commission under CMU and from discussions with industry stakeholders, of the significant administrative burden that the increase in regulatory reporting has created in recent years. With this in mind, we would urge ESMA to keep the reporting template strictly to the information required under Article 37(2) and (3) of the MMFR and to refrain from requesting additional data. We understand ESMA's rationale for taking the AIFMD reporting template as a starting point for MMFs. However, much of the reporting inspired from AIFMD is irrelevant in the context of MMFs."

Finally, they write about "Stress testing," "[W]e do not consider that the aggregation of stress testing results is appropriate in the context of investment funds or would serve any meaningful purpose. Each fund will have its own specific characteristics relating to portfolio composition, investor base, currency focus, etc., and consequently, funds will experience stress scenarios differently. Each fund is separate and portfolio management and risk management are done at the fund level, which gives the man-ager and the NCA the most accurate account of the relevant risks in the relevant fund."

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