A money market fund ("MMF") is a type of mutual fund that invests in short term assets such as money market instruments ("MMIs") issued by credit institutions, governments or corporations (e.g. treasury bills, commercial paper and certificates of deposit).

Historically there were two main types of MMFs in Europe:-

  • A constant net asset value ("CNAV") MMF
    CNAV MMFs aim to preserve a stable value (such as €1) per share at which investors either subscribe or redeem. The net asset value of the assets held by a CNAV MMF can be subject to fluctuation resulting in a situation in which the market value of a share may not always equal the stable value per share (i.e. €1). To address this, a CNAV MMF employs amortised costs to value its assets.
  • A variable net asset value ("VNAV") MMF
    VNAV MMFs offer subscriptions or redemptions at a price equal to the MMF's net asset value per share. The value is calculated by subtracting the liabilities of the MMF from the market value of its assets, and is stated on a per share basis.

Investors tend to prefer CNAV MMFs to VNAV MMFs mainly because of their stable net asset value, avoidance of capital gains tax implications and expedited settlement.

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 €1 trillion representing approximately 15% of the EU's fund industry. As of 31 May 2017, Irish domiciled MMFs had assets under management of approximately €486.5 billion reflecting Ireland's status as the leading European domicile for MMFs.

The financial crisis of 2007 – 2008 shed light on several features of MMFs that make them vulnerable when there are difficulties in financial markets, in which circumstances a risk of contagion across the EU could ensue. In particular, when the prices of assets in which an MMF has invested start to decrease, especially during stressed market situations, the MMF cannot always facilitate redemptions immediately and preserve the principal value of shares issued by the MMF to investors. That situation could trigger sudden redemption requests on a massive scale, so called "runs", potentially triggering broader macroeconomic consequences (e.g. impacting credit institutions that significantly rely on MMFs as a source of short term funding).

Although Guidelines on a common definition of European money market funds were adopted by the Committee of European Securities Regulations on 19 May 2010 to address some of the vulnerabilities of MMFs highlighted during the financial crisis and to create a level playing field for MMFs in the EU, the Guidelines were not applied by all EU member states and therefore different national approaches prevailed.

Pursuant to the G20 commitments to establish direct regulation of MMFs, the European Commission proposed in 2013 an EU regulation on MMFs providing for the harmonisation of prudential requirements aimed at inter alia enhancing the liquidity and stability of MMFs in Europe.

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. 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 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; and
    • transparency / reporting requirements;
  • Next steps in the implementation of the MMFR;
  • Implications for existing MMFs; and
  • How Dillon Eustace can assist.

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