Money market funds

SUMMARY OF

Regulation (EU) 2017/1131 on money market funds

WHAT IS THE AIM OF THE REGULATION?

It establishes European Union (EU) rules to make money market funds (MMFs)* more resilient and better able to withstand market shocks. It does so by ensuring uniform rules on prudential requirements, governance and transparency for managers of MMFs.

KEY POINTS

The legislation applies to all MMFs managed and/or marketed in the EU. There are three types of MMFs:

variable net asset value (VNAV), mainly depending on market fluctuations;
public debt constant net asset value (CNAV), which try to maintain a fixed price for each share;
low volatility net asset value (LVNAV) — a new category of MMF which can offer a fixed price under strict conditions and higher liquidity requirements.

It requires MMFs to have sufficient liquid assets to meet any sudden withdrawal of investment.

LVNAVs and CNAVs must hold at least 10% of assets that mature (i.e. to be repaid by the issuer) within 1 day and 30% that mature within 1 week.
VNAVs need to hold at least 7.5% of assets that mature within 1 day and 15% within 1 week.

It introduces rules on portfolio diversification and valuation of assets. An MMF may invest no more than:

5% of its assets in money market instruments issued by the same body;
10% of its assets in deposits made with the same credit institutions;
17.5% in other MMFs, to prevent circular investments.

The regulation sets:

a 15% limit on reverse repurchase agreements* with the same counterparty;
specific limits for covered bonds.

It prevents MMFs from receiving any financial help from other institutions, notably banks.

It also requires MMF fund managers to:

apply prudent quality assessment procedures to potential investments;
be aware of the activities of their investors;
supply the appropriate surveillance information to the relevant authorities.

The European Commission must review the legislation by 21 July 2022.

Implementing and delegated acts

Implementing Regulation (EU) 2018/708 lays down technical standards with regard to the template to be used by managers of MMFs when reporting to competent authorities, as stipulated by Article 37 of Regulation (EU) 2017/1131.
Delegated Regulation (EU) 2018/990 amends and supplements Regulation (EU) 2017/1131 with regard to simple, transparent and standardised securitisations and asset-backed commercial papers, requirements for assets received as part of reverse repurchase agreements and credit quality assessment methodologies.
Delegated Regulation (EU) 2021/1383 amends Delegated Regulation (EU) 2018/990 with regard to requirements for assets received by MMFs as part of reverse repurchase agreements.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 21 July 2018, apart from some rules that have applied since 20 July 2017 (Articles 11(4), 15(7), 22 and 37(4)). It fully applies to funds that need to change their rules as from 21 January 2019 (Article 44).

BACKGROUND

MMFs are mainly used as an alternative to bank deposits to invest excess cash for short periods of time. They enable investors to diversify their financial holdings, while allowing them to recover these at short notice. In the EU, the funds manage assets of some €1 trillion which are used to finance the real economy.
However, market turbulence, as seen in the 2007/2008 financial crisis, and more recently in March 2020, can lead to a run on funds. If large groups of investors start to withdraw their cash, potentially others across the EU follow, damaging the financial system.
The EU legislation follows similar moves by the G20 group of industrialised countries and the Financial Stability Board to strengthen oversight and regulation of the shadow banking system.
For further information, see:
- Legislative history of Regulation (EU) 2017/1131 (European Commission)
- Money market funds in the EU (Council of the European Union).

KEY TERMS

Money market fund. A mutual fund issuing shares to investors to finance their activities.

Reverse repurchase agreement. Where the purchaser of securities agrees to sell them back at an agreed price on a specific date.

MAIN DOCUMENT

Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds (OJ L 169, 30.6.2017, pp. 8–45).

Successive amendments to Regulation (EU) 2017/1131 have been incorporated in the original text. This consolidated version is of documentary value only.