Citi 2018 FinReg Outlook

Dawn of a New Era for EU Money Market Funds After four years of debate the EU’s Money Market Fund Regulation goes live. In July, the EU’s Money Market Fund Regulation becomes effective, bringing with it new requirements and products that will reshape the European Money Market Fund (MMF) industry. The rules are the product of four years of intense, sometimes contentious, debate. The regulation, which closely mirrors the 2016 reforms introduced in the US, is part of a global effort to address perceived systemic risks associated with MMFs, such as susceptibility to liquidity runs. In particular, the focus is on Constant NAV (CNAV) MMFs, where funds aim to maintain a stable price, typically of one currency unit (e.g. one dollar, euro, pound, etc.). Policymakers are worried CNAV MMFs give investors a false sense of security, which could exacerbate a liquidity crisis if there was a run or large investor withdrawals. NEW CATEGORIES The new regime contains three categories of MMFs: Variable Net Asset Value Money Market Fund (VNAV MMF): Does not maintain a constant NAV and may invest up to 10% in money market instruments, securitizations, and asset-backed commercial paper issued by the same body, so long as the total of all exposures above 5% does not exceed 40% of the MMF’s value. Public Debt Constant Net Asset Value Money Market Fund (Public Debt CNAV MMF): Maintains a constant NAV, but must invest 99.5% in government and public securities and cash. Low Volatility Net Asset Value Money Market Fund (LVNAV MMF): Aims to maintain a constant NAV within 20 basis points of the fund’s mark-to-market NAV. Eligible assets are limited to short-term money market instruments, securitizations, and asset-backed commercial paper. NEW AUTHORIZATION REQUIREMENT All MMFs established, marketed, or managed in the EU must be authorized by an EU national regulator. The European Securities and Markets Authority (ESMA) will maintain a register of all MMFs, their types, portfolio restrictions, managers, and regulator. Any funds found to be in breach of the rules could have their authorization withdrawn. Although authorization is already required for Undertakings for Collective Investment in Transferable Securities (UCITS) funds, it is new for Alternative Investment Funds (AIFs), i.e. non-UCITS funds. It is important to remember the regulations apply to all AIF MMFs, regardless of whether the manager is in the EU or not. The authorization application for an AIF MATTHEW CHERRILL Vice President, Trustee & Fiduciary Services EMEA 31 30 Citi Custody & Fund Services – FinReg Outlook 2018