MMFs in Europe

European MMFs (mostly established in France, Ireland and Luxembourg) manage about €1 trillion of assets and constitute around 15% of the EU’s funds industry.  MMFs are an important source of short-term financing for financial institutions, corporates and governments; they are one of five workstreams identified by the Financial Stability Board in 2012 in relation to the Shadow Banking System.

The MMF Regulation introduces:

• risk management requirements which impose stress testing and internal processes to determine credit quality for money market instruments, and ‘Know Your Customer’ policies and procedures;
• liquidity management requirements for Public Debt Constant Net Asset Value (“NAV”) and Low Volatility NAV MMFs. External support to guarantee the liquidity of an MMF or to stabilise its NAV are prohibited; and
• transparency requirements to investors and competent authorities.

Changes for UK MMFs

The UK MMF Regulations widen FCA authorisation and intervention powers in respect of unit trust funds and contractual schemes and allow funds which are Open-Ended Investment Companies (“OEICs”) or Alternative Investment Funds (“AIFs”) to be MMFs.

The Financial Services and Markets Act 2000 is amended to provide powers of authorisation and intervention for the FCA in respect of unit trust funds and contractual schemes, both of which may be types of MMF.

The Open-Ended Investment Companies Regulations 2001 are amended in order to allow funds which are OEICs to apply to become MMFs, or for funds which apply to be authorised as an OEIC to be authorised as an MMF at the same time.

The Alternative Investment Fund Managers Regulations 2013 are amended to make provision for the FCA to direct the manner in which an application may be made for an AIF to be authorised as an MMF, and the process for intervention by the FCA in respect of such a fund.

The Financial Services and Markets Act 2000 (Qualifying EU Provisions) Order 2013 is amended to enable the FCA to investigate and bring enforcement action against funds directly for contravention of a requirement imposed by the MMF Regulation or any directly applicable regulation or decision made under the MMF Regulation.

The FCA has updated their application forms to account for the introduction of the MMF Regulation. Most existing MMFs operate under the UCITS Directive, but some operate under the AIFMD. The MMF Regulation will not amend either Directive, and their managers will need to remain authorised under either one of them.

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The EU Money Market Funds (“MMF”) Regulation came into force on 21 July 2017 and applies to new MMFs from 21 July 2018 and to existing MMFs from 21 January 2019.

Although the MMF Regulation is directly applicable under EU law, the FCA and the Treasury have identified areas of the UK regulatory framework that require changes so that the Regulation can work properly in the UK. This Consultation Paper (“CP”) on the MMF Regulation will be of interest to:

• UK fund managers which already manage and/or market funds as MMFs, or funds that are substantially similar to MMFs (as defined in the MMF Regulation), in the UK or another Member State, or intend to do so;
• European Economic Area (“EEA”) fund managers which already manage and/or market MMFs in the UK or intend to do so;
• MMF depositaries;
• intermediaries advising on and distributing MMFs; and
• investors in MMFs.

The MMF Regulation establishes a framework of requirements to improve the liquidity and stability of MMFs. Most existing MMFs operate under the Undertakings for Collective Investment in Transferable Securities (“UCITS”) Directive but some operate under the Alternative Investment Fund Managers Directive (“AIFMD”). The MMF Regulation will not amend either Directive and MMFs and/or their managers will need to remain authorised under one or other of them. Instead, the MMF Regulation introduces product rules that disapply and replace the investment restrictions in the UCITS Directive for MMFs that are UCITS funds, and introduces product rules for those MMFs that are Alternative Investment Funds (“AIFs”).

The FCA Handbook currently specifies investment restrictions and other provisions for MMFs which are authorised funds. These reflect the guidelines on a common definition of European MMFs, issued in May 2010 by the Committee of European Securities Regulators (“CESR”, now “ESMA”). Those guidelines have now been superseded by the requirements of the MMF Regulation.

The FCA propose to delete COLL 5.9, which deals with the investment powers of MMFs, and other provisions in the Collective Investment Schemes sourcebook (“COLL”) that are superseded by the requirements of the MMF Regulation; for example, MMFs’ transparency requirements. There are references to MMFs in the Prudential sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”) and Client Assets sourcebook (“CASS”) which are unaffected by the MMF Regulation.

Certain provisions in COLL 5.2, 5.6 and 8.4 are no longer required and the FCA proposes to disapply them.

The references to a ‘qualifying money market fund’ in CASS 7.13 and in COLL reflect the FCA’s implementation of the Markets in Financial Instruments Directive (“MIFID”, I & II). The MMF Regulation does not update or supersede the definition of money market instruments or funds in these Directives. As the MIFID definition is different from that in the MMF Regulation, the FCA proposes to leave those FCA Handbook provisions unchanged.

The definition of a ‘designated money market fund’ in BIPRU 12 does not match the definition of a ‘money market fund’ in the MMF Regulation. The FCA proposes to retain the BIPRU definition for ‘designated money market fund’ in the FCA Handbook.

Since MMFs are structured as UCITS funds or AIFs, they will continue to come under the existing requirements derived from those Directives. Accordingly, the firms managing them will continue to pay annual FCA fees in:

• fee-block A.9 as managers and depositaries of investment funds, and operators of collective investment schemes or pension schemes; and
• in some cases, as portfolio managers in fee-block A.7.

Firms should be able to submit draft applications for the authorisation of new MMFs from 21 May 2018.

The FCA is asking for comments by 23 March 2018.

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