The Money Market Funds Regulations 2018 (the “UK MMF Regulations”) are made in relation to EU Regulation 2017/1131 on money market funds (“MMF Regulation”) which will apply in the UK from 21 July 2018. They make amendments to ensure that the Financial Conduct Authority (“FCA”) is able to authorise money market funds (“MMFs”) and enforce the provisions of the MMF Regulation.
MMFs in Europe
European MMFs (mostly established in France, Ireland and Luxembourg) manage about €1 trillion of assets and constitute around 15% of the EU’s funds industry. MMFs are an important source of short-term financing for financial institutions, corporates and governments; they are one of five workstreams identified by the Financial Stability Board in 2012 in relation to the Shadow Banking System.
The MMF Regulation introduces:
- risk management requirements which impose stress testing and internal processes to determine credit quality for money market instruments, and ‘Know Your Customer’ policies and procedures;
- liquidity management requirements for Public Debt Constant Net Asset Value (“NAV”) and Low Volatility NAV MMFs. External support to guarantee the liquidity of an MMF or to stabilise its NAV are prohibited; and
- transparency requirements to investors and competent authorities.
Changes for UK MMFs
The UK MMF Regulations widen FCA authorisation and intervention powers in respect of unit trust funds and contractual schemes and allow funds which are Open-Ended Investment Companies (“OEICs”) or Alternative Investment Funds (“AIFs”) to be MMFs.
The Financial Services and Markets Act 2000 is amended to provide powers of authorisation and intervention for the FCA in respect of unit trust funds and contractual schemes, both of which may be types of MMF.
The Open-Ended Investment Companies Regulations 2001 are amended in order to allow funds which are OEICs to apply to become MMFs, or for funds which apply to be authorised as an OEIC to be authorised as an MMF at the same time.
The Alternative Investment Fund Managers Regulations 2013 are amended to make provision for the FCA to direct the manner in which an application may be made for an AIF to be authorised as an MMF, and the process for intervention by the FCA in respect of such a fund.
The Financial Services and Markets Act 2000 (Qualifying EU Provisions) Order 2013 is amended to enable the FCA to investigate and bring enforcement action against funds directly for contravention of a requirement imposed by the MMF Regulation or any directly applicable regulation or decision made under the MMF Regulation.
The FCA has updated their application forms to account for the introduction of the MMF Regulation. Most existing MMFs operate under the UCITS Directive, but some operate under the AIFMD. The MMF Regulation will not amend either Directive, and their managers will need to remain authorised under either one of them.