On August 22nd 2014 the European Securities and Markets Authority ("ESMA") issued an opinion (the "Opinion") on the application of guidelines issued by the Committee of European Securities Regulators ("CESR") in May 2010, on a common definition of European money market funds ("MMF") (Ref. CESR/10-049, hereafter the "CESR guidelines"). The CESR guidelines entered into force on July 1st 2011.
The CESR guidelines set out criteria that money market instruments should respect in order to be considered as eligible investments for short term money market funds ("ST MMF") and MMF.
The Opinion is intended to modify the CESR guidelines, regarding the assessment of the credit quality of money market instruments and is as a result of the report of the Joint Committee of the three European Supervisory Authorities issued earlier this year. According to the CESR guidelines, a money market instrument should not be considered to be of high quality by managers of ST MMF and MMF unless it has been awarded one of the two highest available short-term credit ratings by each recognised credit rating agency that has rated the instrument.
The Opinion considers that when analysing whether a money market instrument is of high quality, the management company should take into account the credit quality of the instrument by performing its own documented assessment and on the basis of previous ratings of the instrument, carried out by credit rating agencies registered and supervised by ESMA. While there should be no mechanistic reliance on such external ratings, a downgrade below the two highest short-term credit ratings by any agency registered and supervised by ESMA that has rated the instrument should lead the manager to undertake a new assessment of the credit quality of the money market instrument to ensure it continues to be of high quality.
The Opinion further points out that as an exception to the above, sovereign issuance assessed as being of a lower internally-assigned credit quality may be held by a MMF.
The CESR guidelines will not be amended. National competent authorities will not have to notify ESMA whether or not they comply or intend to comply with the amended version of the CESR guidelines. However, ESMA will monitor the application of the Opinion by national competent authorities.
The Opinion can be found in the following link http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:146:0001:0033:EN:PDF.
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