European Parliament approves new law on money market funds

The European Parliament has approved a new EU regulation on Money Market Funds, a key stage in a legislative process that could have significant implications for Ireland’s funds industry.

There had been worries that the new EU regulation on Money Market Funds – proposed in the wake of the financial crisis – could have an adverse effect on Ireland’s fund industry, by phasing out Constant Net Asset Value funds (CNAV). These type of funds dominate the Irish Money Market Funds industry, with around €300 billion worth of assets held in CNAV Money Market Funds in Ireland. Money market funds provide short-term financing for businesses, offering an alternative to bank deposits.

Under the proposal approved by the European Parliament today CNAV funds will continue to exist, though in a different format, and will be replaced by three new types of funds - Government CNAVs, Small Investor CNAVs and Low Volatility NAV funds.

It is understood that Ireland, along with Luxembourg and Britain which also offer CNAV funds, came under significant pressure from other member states including France which dominates the Variable Net Asset Value Funds (VNAV) market and favoured phasing out CNAVs. The European Commission had also proposed that CNAVs be phased out when it first announced the new Money Markets legislation in 2013.

Speaking in Strasbourg, Irish MEP Brian Hayes, who is one of the main negotiators on the package , said he believed a “balanced compromise” had been reached.

“The Parliament text recognises that both parts of the MMF industry , Constant Net Asset Value funds (CNAV) and Variable Net Asset Value Funds (VNAV) , will continue into the future” he said.

Stressing that EU financial regulation “must not disproportionately affect a small number of small Member States,” Mr Hayes said: “There has been a push from various EU lawmakers to completely eliminate CNAV funds as they consider them a threat to financial stability. Yet no CNAV fund in the EU has ever ‘broken the buck’ or returned less than its share price to investors. These funds are very important to the financing of large businesses, charities, local authorities and pension funds.”

The new rules endorsed by the Parliament also introduce new regulatory requirements for the funds, including the obligation to value the assets of a fund each day and publish the information online. Weekly information will also be provided to investors under the suggested proposals.

The European Council, the EU institution which represents member states, must now formulate its joint position on the proposed legislation before entering negotiation with the European Parliament.

With Luxembourg due to assume the rotating presidency of the EU in July, it is hoped that progress may be made on the legislation before the end of the year.

Under the previous EU internal markets commissioner, Michel Barnier, the European Commission proposed a new regulation on Money Markets Funds amid concerns that the funds were under-regulated and could pose a systemic risk to the financial system due to their size. Under the proposal agreed by the European Parliament on Wednesday, in future, money market funds will not be permitted to receive external support from a third party, including a sponsor, a proposal that addresses one of the key concerns of the European Commission.