Common standards 

The draft regulation lays down rules for MMFs, in particular the composition of their portfolios and the valuation of their assets, to ensure the stability of their structure and to guarantee that they invest in well-diversified assets of a goodcredit quality.

It also introduces common standards to increase the liquidity of MMFs, to ensure that they can face sudden redemption requests. 

It establishes common rules to ensure that the fund manager has a good understanding of investor behaviour, and to provide investors and supervisors with adequate information. 

The regulation prohibits sponsor support from third parties, including banks. 

A new category of funds 

An important new element of the regulation is the introduction of a permanent category of "low volatility net asset value" (LVNAV) MMFs. This new category has been made available as a viable alternative to existing CNAV MMFs. 

Under the new regulation, money market funds will be subject to new and strengthened liquidity requirements as well as other safeguards. In the case of CNAV and LVNAV MMFs, there are also additional safeguards such as 'liquidity fees and redemption gates'. These will be designed to prevent and limit the effects of sudden investor runs.  

Issues resolved 

The agreement reached with the Parliament covers, in particular: 

• liquidity and diversification requirements;
• assets in which MMFs can invest, including the role of government debt;
• transparency provisions;
• a review clause for government CNAVs. 

As concerns liquidity, the agreement includes the following requirements: 

• for LVNAVs and CNAVs, a minimum 10% portfolio investment in daily maturing assets and minimum 30% portfolio investment in weekly maturing assets. Of the minimum liquidity required in weekly maturing assets, up to 17.5% may be held in public debt instruments;
• for VNAVs, a minimum 7.5% portfolio investment in daily maturing assets and minimum 15% portfolio investment in weekly maturing assets. Of the minimum liquidity required in weekly maturing assets, up to 7.5% may be held in money market instruments or units/shares of other MMFs. 

As concerns diversification, the agreement provides for:

• a 17.5% limit on investments in other MMFs, with a safeguard to prevent 'circular' investments;
• a 15% limit on reverse repurchase agreements;
• specified limits for covered bonds and for deposits in the same credit institution;
• a targeted exemption from diversification rules for employee saving schemes. 

The agreement also includes a review clause requiring the Commission to report after five years on the functioning of the regulation. 

For public debt CNAVs, the Commission will report after five years on the feasibility of establishing an 80% EU public debt quota. The report will have regard to the availability of short term EU public debt instruments and assess whether the LVNAV MMF might be an appropriate alternative for the non EU government debt CNAV MMF. 

November 2016 draft directive on money market funds