A stringent regulator, it is not the CSSF’s job to provide background information as to what this means on a practical basis to the financial sector for the uninitiated. However, as it will have a significant impact, and will require major investment on the part of providers and other stakeholders, it is worth understanding why. To get some context, Delano talked to Marc-André Bechet, director of legal & tax at the Association of the Luxembourg Fund Industry.
But first, what do we mean by money market funds and why are they important? PwC Luxembourg provides a good explanation:
“Money market funds (MMFs) are an important source of short-term financing for financial institutions, corporations and governments. MMFs hold almost half of short-term debt issued by the banking sector, government and corporations. On the demand side, MMFs are short-term cash management tools that provide a high degree of liquidity, diversification, stability of value of the principal invested combined with market-based yield. MMFs represent a crucial link, bringing together demand and offer of short-term money.”
As such a crucial link, “Following the financial crisis of 2007/2008, the G20 made a decision to look into money market funds from a market stability point of view,” explained Bechet. The European Commission launched lengthy negotiations and eventually reached an agreement with the European Parliament for draft legislation in November 2016. In May 2017 the regulation was adopted by council. It entered into application on 21 July 2018.
“The new regulation focuses more on market stability than investor protection,” said Bechet, “but obviously it increases investor protection too.” As a G20 initiative, “it is not limited to the EU, a number of jurisdictions have followed suit, albeit not in exactly the same manner. The US, China and Japan, for example, have taken the recommendations on board as further detailed by IOSCO in its Peer Review of Regulation of Money Market Funds.”
According to Bechet, “The MMFR is not an ‘opt-in’ regulation. The regulator took the view that that all funds that have the characteristics of a money market fund should fall under the scope of the MMFR. Even some funds that were investing in short-term fixed-income instruments, previously not subject to money market fund regulation, will now fall under the scope of the MMFR.”
As such, the first step is for asset managers and management companies to, “Take a look at their fund range and make an assessment to see if they have the criteria that would make MMFR applicable. For new funds, they should apply it immediately and for existing funds, a grandfathering period has been put in place until 21 January 2019 – although supervisory authorities would like to receive applications from funds and their managers ahead of this deadline.”
MMFR sets down 3 categories of money market funds: variable net asset value; constant net asset value and low volatility net asset value. According to Bechet, “Luxembourg is one of the few jurisdictions that offers all three categories, which gives us a competitive edge. France for example, only permits VNAV funds.”
Going forward, Bechet believes that MMFR, “will require significant investments by all players, including: IT platforms and robust processes, especially with regards to risk management and valuation. Beyond this, it is too early to say what its impact will be, but some form of consolidation is expected, and profit margins are likely to be further compressed.”
That said, Bechet is positive, confident that, “the industry will adapt."