September 2013

FSO Alert: Money market funds face tough new regulation

European Commission proposes a Regulation on money market funds

  • Share

On 4 September 2013, the European Commission proposed a new EU Regulation on Money Market Funds (MMF). The Regulation applies to MMF collective investment undertakings that require authorisation as UCITS under Directive 2009/65/EC or are AIFs under Directive 2011/61/EU. It lays down detailed requirements on MMF eligible assets, investment policies and risk management, valuation rules, specific requirements for constant net asset value (CNAV) MMF (including the requirement to have a NAV buffer), rules in relation to external support and transparency requirements.


Under the Regulation, a money market fund (MMF) is a UCITS[1] or an AIF[2] which invests in short term assets and has, as distinct or cumulative objectives, offering returns in line with money market rates and preserving the value of the investment.

The Regulation distinguishes between:

  • Short-term MMF, which may be variable NAV (NAV) or constant NAV (CNAV)
  • Standard MMF, which may invest in longer term instruments than short-term MMF. Standard MMF cannot be CNAV
  • MMF, which refers to both short-term MMF and standard MMF

Following implementation of the Regulation, UCITS and AIF cannot use the designation “money market fund“ or “MMF“ or a designation that suggests a money market fund such as “cash”, “liquid”, “money”, “ready assets”, “deposit-like” or similar unless the UCITS or AIF has been authorised in accordance with this Regulation.

MMF which are UCITS remain subject to the UCITS Directive, and MMF which are AIF remain subject to the Alternative Investment Fund Managers Directive (AIFMD) unless otherwise specified in the Regulation.

Eligible assets

The eligible assets of MMF are defined in the new regulation, replacing, for UCITS, the eligible assets requirements of the UCITS Directive.

The eligible assets of MMF are:

  • Money market instruments (MMI)
    MMI are defined, by reference to the UCITS Directive[3], as instruments normally dealt in on the money market which are liquid and have a value which can be accurately determined at any time.
    The following conditions apply:
    • The MMI must be an eligible MMI under the UCITS Directive
    • The MMI must meet either of the following characteristics:
      • Have a legal maturity at issuance of 397 days or less
      • Have a residual maturity of 397 days or less
    • The MMI must benefit from one of the two highest possible internal ratings (see Section entitled Internal assessment procedure), or be issued or guaranteed by a central authority or central bank of a Member State, the European Central Bank (ECB), the EU, the European Stability Mechanism (ESM) or the European Investment Bank (EIB)
    • Exposure to securitisation will be eligible if the underlying exposure or pool of exposures consists exclusively of high credit quality and liquid corporate debt with a legal maturity at issuance of 397 days or less; or a residual maturity of 397 days or less

Standard MMF, can also invest in MMI which undergo regular yield adjustments in line with money market conditions every 397 days or on a more frequent basis which do not have a residual maturity exceeding two years.

  • Deposits with credit institutions subject to EU or equivalent supervision which are:
    • Repayable on demand
    • Mature in no more than 12 months
  • Financial derivative instruments dealt in on a regulated market or over-the-counter (OTC) which meet the following criteria:
    • The underlying consists of interest rates, foreign exchange rates, currencies, or indices representing one of these categories
    • The derivative serves only for the purpose of hedging the duration and exchange risks inherent to the other investments of the MMF
    • The counterparties to OTC derivative transactions are subject to prudential regulation and supervision approved by the competent authorities of the MMF home Member State
    • The OTC derivatives are subject to reliable and verifiable valuation on a daily basis and can be sold, liquidated or closed by an offsetting transaction at any time at their fair value at the initiative of the MMF
  • Reverse repos where:
    • The MMF has the right to terminate the agreement at any time within a maximum of two working days
    • The market value of the assets received is at all times at least equal to the value of the cash given out
    • The assets received are MMI compliant with the requirements of the Regulation, and cannot be sold, reinvested, pledged or otherwise transferred. The MMF may also receive liquid transferable securities or other money market instruments provided they are of high credit quality and are issued or guaranteed by a central authority or central bank of a Member State, the ECB, the EU, the ESM or the EIB or issued or guaranteed by a central authority or central bank of a third country provided that the third country issuer is awarded one of the two highest internal rating grades. Securitisations cannot be received by the MMF as part of a reverse repo
    • The assets received by the MMF as part of a reverse repo must be included for calculating the diversification and concentration limits (see Section entitled Diversification and concentration rules)

Portfolio rules

Short-term MMF and standard MMF must comply with the following portfolio rules:

  Short-term MMF Standard MMF
Maximum weighted average maturity 60 days 6 months
Maximum weighted average life 120 days 12 months
Minimum investment in daily maturing assets 10% 10%
Minimum investment in weekly maturing assets 20% 20%


Diversification and concentration rules

 A MMF must comply with the following rules[4]:

  • It cannot invest more than:
    • 5% (10% in the case of a standard MMF) of its assets in MMI issued by the same body
    • 5% of its assets in deposits with the same credit institutions
  • The aggregate of all exposure to securitisations cannot exceed 10% of its assets
  • The aggregate exposure to a counterparty from OTC derivative transactions must not exceed 5% of its assets
  • The aggregate amount of cash provided to a counterparty of a MMF in a reverse repurchase agreement cannot exceed 20% of assets
  • It cannot have an exposure to a single body of more than 10% (15% in the case of a standard MMF) through investment in:
    • MMI issued by the body
    • Deposits with the body
    • OTC derivatives giving counterparty risk exposure to the body
  • It cannot hold more than 10% of the MMI issued by a single body except in respect of holdings of MMI issued or guaranteed by a central, regional or local authority or central bank of a Member State, the ECB, the EU, the ESM or the EIB, a central authority or central bank of a third country, or the public international body to which one or more Member States belongs.

A MMF may, however, invest up to 100% of its assets in different MMI issued or guaranteed by a central, regional or local authority or central bank of a Member State, the ECB, the EU, the ESM or the EIB, a central authority or central bank of a third country, or a public international body to which one or more Member States belong, providing, inter alia:

  • It holds at least six different issues of the issuer
  • It invests no more than 30% of assets in a single issue
  • Prospectus, marketing communication and constitutional document disclosures are made in relation to any investment into such a body exceeding 5% of assets

Internal assessment procedure

The manager of a MMF is required to establish, implement and consistently apply prudent and rigorous internal assessment procedures for assessing the credit quality of MMI.

The internal assessment procedure shall be based on an internal rating system. Each issuer of a MMI in which a MMF intends to invest must be assigned an internal rating based on the internal assessment procedure.

The manager is required to ensure, inter alia, that:

  • The information used when assigning an internal rating is of sufficient quality, up-to-date and from reliable sources
  • The assignment of internal ratings is based on a thorough analysis of all the information available
  • It monitors assignments of internal ratings on an ongoing basis, and reviews assignments at least annually and every time that there is a material change (within one month of the change) that could have an impact on the rating
  • It reviews assignment methodologies at least annually
  • The assignment of internal ratings and their periodic reviews is not performed by the persons performing, or responsible for, portfolio management of the MMF

The internal assessment procedures must be approved by senior management and the governing body, and, where it exists, the supervisory function, of the manager of the MMF.

Risk management

The UCITS Directive risk management and global exposure rules continue to apply to UCITS MMF and the AIFM Directive risk and liquidity management rules apply to AIF MMF.

In addition, the manager of a MMF is required to implement know your customer and stress testing requirements.

The “know your customer” requirements include, inter alia:

  • Establishing, implementing and applying procedures to identify the number of investors, their needs and behavior, the amount of their holdings with a view to anticipating concurrent redemptions by several investors considering at least:
    • Identifiable patterns in investor cash needs
    • The sophistication of the investors
    • The risk aversion of the investors
    • The degree of correlation or close links between investors
  • Ensuring that the value held by a single investor does not exceed at any time the value of daily maturing assets and redemption by an investor does not materially impact the liquidity profile of the MMF

 The stress testing requirements include, inter alia:

  • Implementing procedures which allow the identification of possible events that could have unfavorable effects on the MMF
  • Regularly conducting stress testing
  • In the case of CNAV MMF, estimating the difference between the CNAV and the NAV, and the impact of the difference on the NAV buffer (see Section entitled NAV buffers for CNAV MMF)
  • Developing action plans for different possible scenarios, and, where the stress tests reveal vulnerability, taking action to strengthen the robustness of the MMF. The results of the stress tests and action plan must be submitted to the Board of Directors of the MMF’s manager for amendment (as appropriate), and approval. The report with the results of the stress testing must be submitted to the competent authorities of the manager and of the MMF, which, in turn, communicates the report to ESMA

Neither MMF nor their managers are permitted to solicit or finance a credit rating agency for rating the MMF.

Valuation and calculation

The assets of MMF must be valued at least on a daily basis.

The following table summarizes the applicable valuation and issue and redemption price requirements:

Valuation method Marking to market, where possible, otherwise marking to model[5] Either of:
  • Marking to market, where possible, else marking to model[5]
  • Amortized cost
Issue and redemption price NAV per unit or share CNAV per unit or share

The NAV per unit or share, using marking to market or model, must be calculated for each MMF, on a daily basis irrespective of whether it is a CNAV MMF or not. The different between the CNAV and the NAV must be continuously monitored.

 NAV buffers for CNAV MMF

CNAV MMF are required to establish and maintain a NAV buffer amounting to at least 3% of the total value of the MMF’s assets. The NAV buffer must be composed of cash, and held in a segregated reserve account. It must not be included in the calculation of the NAV or CNAV. The NAV buffer will be introduced on an increasing scale over the first three years of implementation of this regulation (1% within one year, 2% within two years and 3% within 3 years).

The NAV buffer must be used exclusively in the case of subscriptions and redemptions to equalize differences between the MMF’s NAV per unit or share and the CNAV per unit or share.

Senior management must be appropriately informed of negative differences equalized through the buffer. Where the negative difference reaches 15 basis points, the Board of Directors of the manager, the competent authorities and ESMA must be informed.

Where the buffer falls below 3%, it must be replenished. The competent authority must be immediately notified. Where the buffer has decreased by more than 10 basis points, and has not been replenished within one month, the MMF automatically ceases to be a CNAV MMF and is prohibited from using the amortized cost and/or rounding methods; investors, the competent authority and ESMA must be informed immediately.

External support

CNAV MMF may not receive external support apart from replenishment of the NAV buffer.

Competent authorities may permit other MMF to receive external support in exceptional circumstances, provided that the support is duly justified and the investors are immediately informed.


A MMF shall indicate clearly whether it is a short-term or a standard MMF in any external or internal document.

A CNAV MMF shall indicate clearly that it is a CNAV MMF in any external or internal document.

The marketing documents of MMF must state that:

  • The MMF is not a guaranteed investment
  • The MMF does not rely on external support to guarantee the liquidity or stabilize the NAV
  • The risk of loss of principal has to be borne by the investor

Any communication by the MMF or its manager shall in no way suggest that an investment in the units or shares of the MMF is guaranteed.

Investors must be informed of the method or methods to value the assets of the MMF and calculate the NAV.

CNAV MMF must explain to investors and potential investors the use of the amortized cost method and/or of rounding and the role and functioning of the NAV buffer and the risks related to it.

The manager of a MMF is required to report information to the competent authority of the MMF at least on a quarterly basis, and, on request, to the competent authority of the manager (if different), including:

  • The type and characteristics of the MMF
  • Portfolio indicators, such as the total value of assets, NAV, WAM, WAL, maturity breakdown, liquidity and yield
  • The size and evolution of the NAV buffer
  • The results of stress tests
  • Information on the assets held in the portfolio of the MMF, including:
    • Characteristics of each asset: name, country, issuer category, risk or maturity, internal ratings assigned
    • Type of asset, including, where relevant, details of the counterpart
  • Information on the liabilities of the MMF including:
    • Country of investor
    • Category of investor
    • Subscription and redemption activity


The competent authority will be responsible for supervision and compliance with the Regulation.

Competent authorities shall monitor UCITS or AIFs established or marketed in their territories to verify that they do not use the MMF designation or suggest that they are a MMF unless they comply with the Regulation.


Now that the Regulation has been proposed by the European Commission, it must be adopted by the European Parliament and Council of the European Union.

The Parliament and Council will now review the proposed regulation, and each will adopt its own position (including any proposed amendments). In principle, all three institutions then enter into trialogue negotiations with the objective of establishing a common position between themselves, before it is voted by the Parliament and Council.

The Regulation will be directly applicable in all Member States on the twentieth day following publication in the Official Journal of the European Union. MMF existing when the Regulation enters into force will benefit from six months in order to comply with the Regulation and demonstrate compliance to their competent authorities.


The Regulation represents a substantial upgrade of the Regulation of MMF; the impact needs to be assessed on a case-by-case basis.

For variable NAV MMF, the Regulation is likely to represent incremental change and increase in the cost of running MMF.

Some of the requirements, such as the risk management requirements for all MMF and the NAV buffer for CNAF MMF, may, however, mean that certain MMF business models will no longer be viable.

In addition, the Regulation broadens the scope of MMF, bringing any investment fund, whatever label it uses, whose investment objective is similar to that of a MMF, in scope of the Regulation. For many investment funds which are not currently classified as MMF, thisimplies a substantial new compliance burden.

For non-EU MMF marketed to EU investors, it may be challenging not only to comply with all of the requirements of the Regulation and but also to demonstrate compliance with the requirements of this regulation to one or more EU competent authorities.

How EY can help

EY can help all types of EU and non-EU MMF and their managers to perform a strategic review of their MMF and other liquidity fund ranges, and prepare for early compliance with the proposed new regulatory requirements.


Download the FSO Alert (pdf, 2mb)

[1] Undertaking for collective investment in transferable securities

[2] Alternative investment fund

[3] Directive 2009/65/EC

[4] Companies included in the same group for the purposes of consolidated accounts or in accordance with recognised international accounting rules are considered as a single body for the purpose of calculating these limits.

[5] Where possible, the assets of MMF should be valued using the marking to market method at the more prudent side of bid and offer unless the institution can close out at mid-market. Where marking to market is not possible, they should be valued conservatively using marking to model.