Tuesday, October 21, 2014

E.U. Set to Resume Work on Money Market Fund Legislation

The new E.U. Parliament and the new Financial Services Commissioner signaled their intent to resume work on legislation enhancing the regulation of money market funds, an effort that stalled in the last Parliament and Commission. In a letter to the E.U. Council, Martin Schultz, President of the European Parliament, indicated that the body would take up the unfinished business of a Regulation on Money Market Funds (2013/0306). 

In his confirmation hearings before a Parliamentary panel, Financial Services Commissioner-designate Lord Jonathan Hill vowed to move forward with the money market fund reform proposals that are currently on the table. He said that the E.U. must find a solution that will allow money market funds to play a role in economy while at the same time ensuring financial stability. He believes that under the current regulatory regime money market funds can pose a systemic risk. He will try to build a consensus on regulations that are effective and at the same time encourage investment.

What is currently on the table is a proposal requiring money market funds to have a capital cushion buffer of 3 percent for constant NAV funds that can be activated to support stable redemptions in times of decreasing value of the fund’s investment assets. The proposed Regulation would also require certain levels of daily and weekly liquidity in order for the money market fund to be able to satisfy investor redemptions. Money market funds are obliged to hold at least 10 percent of their assets in instruments that mature on a daily basis and an additional 20 percent of assets that mature within a week.