On Wednesday 16 November, the European institutions announced that they had reached an agreement on the proposed regulation bringing in a European framework for money market funds.
These funds, which are popular in France, Luxembourg and Ireland, can be used like banks by investors whilst not coming under the same prudential standards, for instance in terms of capitalisation and liquidity. The aim is not to oblige them to comply with the same standards as banks, but to make sure that they are in a position to ride out any new financial crisis.
The proposal dates back to September 2013, meaning that it has taken three years of tough negotiations to finalise it.
One of the most controversial measures was the treatment of constant net asset value (CNAV) funds, which offer constant remuneration even if the market value fluctuates. British MEP Neena Gill said that the agreement reached between the institutions would be “win-win” for the segment and that of variable net asset value (VNAV) funds.
As the European Parliament proposed, the final agreement provides for the creation of low volatility net asset value (LVNAV) funds (see EUROPE 11305). Parliament's negotiating position included a clause stating that these LVNAV funds would be converted into VNAV after five years. The Council was also in favour of creating LVNAV funds, but without this sunset clause. The clause does not make the cut of the final agreement.
Government CNAV funds, which would have to invest 80% of their assets in European public debt, will come onto the scene in 2025, unless a revision scheduled before then allows the Commission to observe that the LVNAV model could be a suitable alternative.
Readers may recall that the legislators rejected the Commission's base idea of requiring these funds to have a liquidity buffer of 3% of total assets for CNAVs, with the report providing instead for liquidity fees and redemption gates applied in times of stress, as per the American reform.
The EP's proposal that money market funds would not be eligible to receive external financial support from third parties, including their sponsors, was kept in the final agreement.
The agreement provides for a requirement of 10% of assets with maximum maturity of one day and 30% with a maximum maturity of one week for CNAV and LVNAV funds. For VNAVs, this requirement has been set at 7.5% of assets with a maximum maturity of one day and 15% with maximum maturity of one week. On this point, therefore, the final agreement is very much along the lines of the Council's negotiating position.
“This agreement is an important step forward in MMF regulation, as the EU has been lagging behind on its international commitments to regulating the sector. The USA implemented its own reform in October this year”, said Gill (S&D, UK), rapporteur of the EP on this dossier. Petr Jezek (ALDE, Czech Republic), shadow rapporteur for his group, described it as a balanced agreement for the benefit of financial stability and the real economy.
For its part, the Commission had made no official statement at the time of going to press.
The member states and members of the European Parliament have still to approve the agreement. (Original version in French by Élodie Lamer)