6.8.2014   

EN

Official Journal of the European Union

C 255/3

1.

The proposed regulation is part of a recent wider international effort to develop a regulatory framework for shadow banking entities. As emphasised in the Eurosystem’s reply to the European Commission’s Green Paper on shadow banking (hereinafter the ‘Eurosystem reply’), the ECB is very interested in developments concerning shadow banking because of its potential importance for financial stability (2).

2.

Specifically regarding the regulation of money market funds (MMFs), the International Organization of Securities Commissions (IOSCO) issued recommendations in October 2012 (3), which were subsequently endorsed by the Financial Stability Board (FSB), while the European Systemic Risk Board (ESRB) adopted policy recommendations addressed to the Commission in December 2012 (4). The Committee of European Securities Regulators (CESR), the predecessor of the European Securities and Markets Authority (ESMA), adopted in 2010 guidelines on a common definition of European money market funds (hereinafter the ‘CESR Guidelines’) (5), which the ECB has followed, adjusting the definition of MMFs for statistical purposes (6).

2.1.

The proposed regulation is consistent with international policy standards promoted for MMFs (12). As stated in the Eurosystem reply, the financial crisis highlighted specific financial stability and systemic risk-related concerns stemming from the MMF sector, which require careful consideration.

2.2.

Similar to deposit-taking banks vis-à-vis their depositors, MMFs undertake towards their shareholders to provide immediate liquidity upon request, thereby potentially blurring the distinction with banks. Given that MMFs also engage in maturity transformation (13), a sudden and large redemption by shareholders can end up forcing MMFs to scale back their investment activities in money market instruments. Since MMFs, unlike banks, do not have access to public safety nets, such as central bank financing and deposit insurance, a worst-case scenario would entail a loss of confidence by MMF shareholders seeking first-mover advantage. This could eventually lead to a run on MMFs, with asset holdings required to be sold at a discount. This risk is particularly acute in the case of constant net asset value MMFs (CNAV MMFs) to the extent that, owing to their business model, they could eventually be perceived as failing to redeem their units or shares at par.

2.3.

From a financial stability perspective, an investor run on MMFs would impair the functioning of money markets, contribute to spreading and amplification of financial risks throughout the system, and mainly impact those financial intermediaries, such as banks, that significantly rely on MMFs as a source of short-term funding.

2.4.

In addition, a number of large European banks are sponsoring MMFs. This circumstance poses financial as well as reputational risks for the sponsoring institutions that may consequently need to support, and eventually bail out, these MMFs. This form of interconnectedness of MMFs with other financial intermediaries also provides the rationale to reform the MMF regulatory framework.

3.1.

Against this background, there is international consensus on the importance of addressing risks arising from CNAV MMFs (14). The FSB endorsed the work by IOSCO (15), proposing two alternative options to address the above-mentioned risks: (a) removing the features of MMFs that increase their susceptibility to investor runs by requiring conversion of the CNAV model; or (b) allowing MMFs to use the CNAV model, provided that they comply with requirements functionally equivalent to prudential banking regulation.

3.2.

In general, while concrete policy measures undertaken may differ depending on the specific features of the markets, it is important to achieve substantial convergence at the international level in order to avoid that differences in regulation across major jurisdictions, notably between the European Union and the United States (where a very large share of the world’s MMF industry is established), give rise to potential regulatory arbitrage. In the United States, the responsible authorities are still assessing alternative approaches, ranging from mandatory conversion of CNAV funds to the introduction of liquidity fees and redemption gates (16).

3.3.

In this context, the proposed regulation would introduce a net asset value buffer (NAV buffer) for CNAV MMFs to address financial stability risks, thus avoiding a conversion to variable net asset valuation. The ECB notes that the NAV buffer required by the proposed regulation (17) is intended to improve the resilience of CNAV MMFs and their ability to repay investors requesting withdrawals at short notice. The ECB recalls that the ESRB earlier recommended a mandatory conversion of CNAV MMFs (18) and ruled out the alternative of applying capital requirements because the latter are likely to result in further consolidation of an already significantly concentrated industry, and therefore to a larger risk concentration from a macro-prudential point of view (19). The ECB notes that the NAV buffer option is motivated by the Commission with the need to avoid that the general floating of the NAV of all CNAV MMFs causes potential disruption to the financing of the real economy (and in particular to entities that depend on issuing short term debt held by MMFs) (20). The ECB considers this proposal as a step to address the risks stemming from CNAV MMFs, which is consistent with the FSB-endorsed IOSCO recommendations, and notes that the foreseen review by the Commission of the adequacy of the proposed rules three years after the entry into force of the Regulation (21) provides an opportunity to reconsider the matter and the implementation of the ESRB recommendation.

3.4.

Nevertheless, there are some aspects of the buffer that may warrant further assessment.

4.1.

The ECB welcomes the fact that the proposed regulation confines the provision of external support for CNAV MMFs to the NAV buffer (23). The ECB also welcomes that MMFs other than CNAV MMFs may only receive external support for guaranteeing their liquidity in certain exceptional circumstances with the agreement of the competent authority of the MMF concerned and, in the case where the support provider is subject to prudential regulation, the agreement of the prudential authority of the latter (24).

In this context, it should be ensured that risk management systems of parent companies receive proper and regular information from MMFs’ managers of their group, and that any information about a relevant liquidity problem that could trigger the need for support is promptly disclosed to the competent prudential authorities.

The ECB considers that such external support should be strictly exceptional. In order to prevent contagion effects, difficulties with MMFs in the redemption of units or shares should be primarily addressed through other means, such as temporarily suspending redemption requests as provided for in the UCITS Directive (25), or through the so-called redemption gates (26).

4.2.

In addition, national authorities may have a different appreciation of exceptional circumstances under which MMFs other than CNAV MMFs may be allowed to receive external support (27), specifically when the risk is supranational or wide in scope. For the MMF competent authority considerations with respect to the MMF’s stability may prevail over those relating to the stability of the sponsor bank. In order to ensure consistency in the application of this provision across Member States, introducing an element of coordination at Union level may be considered.

6.1.

The ECB notes the exemptions in the eligibility criteria for high credit quality instruments that are issued or guaranteed by a central authority or central bank of a Member State, the ECB, the Union, the European Stability Mechanism or the European Investment Bank (28). These exemptions are also in line with similar ones for government-related entities advocated by the recent FSB proposals on minimum haircut standards to be applied to securities financing transactions (29). The ECB notes that these exemptions will have to be consistently transposed in the managers’ internal credit assessment procedures (30).

6.2.

While welcoming the proposed regulation from a financial stability perspective, the ECB nevertheless points out the need for careful assessment of the combined impact of the proposed measures on the intermediation role of MMFs in the Union financial system. In particular, it is conceivable that the intermediation capacity of MMFs is potentially reduced, since MMFs will be required to hold a significant part of their assets (30 %) in daily and weekly maturing assets (31) while currently no such limitations exist. In addition, the recently introduced Liquidity Coverage Ratio (32), which treats funding from corporates more favourably than funding raised through asset managers, may increase incentives for banks to raise funding from corporates directly. Future rules on net stable funding may also affect the link between banks and MMFs. In this context, the ECB suggests further assessment of the impact of the proposed regulation on the pattern of bank intermediation and the issues that may arise during the transition from one intermediation regime to another. In particular, it should be assessed whether the reallocation of funds from MMFs to the banking system is substantial and whether this would in fact impact short-term money markets (33).

6.3.

Further, MMFs play an important role as one of the main investors in the market for short-term securitised assets, such as Asset Backed Commercial Papers (ABCPs). The ABCP market is important for the intermediation of short-term credit to the real economy, e.g. trade credit. The proposed regulation sets forth requirements for eligibility of securitised assets for investment by MMFs, including requirements for the underlying pool of assets regarding type, credit and liquidity risk and maturity limit (34). While the ECB acknowledges that these requirements will increase the transparency of MMF investment portfolios and improve credit and liquidity risk management, it suggests evaluating the benefits of the contemplated restrictions to investment in ABCPs against their impact on the functioning and depth of the securitisation markets.

6.4.

The Commission has already noted that the cost of implementing the reform may lead a number of existing funds to exit from the market (35), which in turn may lead to further concentration in an already concentrated market (36). If such a situation materialises, the remaining MMFs may become more systemically important, particularly with regard to the monetary policy transmission mechanism, due to MMFs’ involvement in short-term funding of banks. These aspects also warrant further assessment.

8.1.

With the entry into force of the proposed regulation, only collective investment undertakings authorised in accordance with the regime provided for therein may be established, marketed or managed in the Union as MMFs (40). The current definition of MMFs for the purposes of collection of ECB monetary financial institutions statistics is aligned with the CESR Guidelines, which ensures consistent treatment of MMFs for statistical and supervisory purposes. Thus following the entry into force of the proposed regulation (41) and pending further amendments to the ECB’s statistical framework, there may potentially be a period during which disparate definitions for supervisory and ECB statistical purposes apply. In this regard, Regulation (EU) No 1071/2013 (ECB/2013/33) contains criteria for identification of MMFs that are mandatory for statistical purposes, regardless of whether they are applied for supervisory purposes at a national level.

8.2.

The proposed regulation requires MMF managers to report information to the competent authorities on a quarterly basis. This information would then be made available to ESMA for the purposes of creating a central database of all MMFs established, managed or marketed in the Union. The ECB shall have access to this database for statistical purposes only (42). While the ECB supports this express reference, broader access to other MMF data may be necessary to ensure the European System of Central Banks’ contribution to (i) the smooth conduct of policies relating to the stability of the financial system and (ii) the ECB’s analytical and statistical support to the ESRB (43).