European Union money market fund reform regulation

Corporate treasure talking points


The 2008 financial crisis instigated the need for a more robust system for the regulation of Money Market Funds (MMF). The initial European Union (EU) MMF Reform1 draft was announced in 2013; but it wasn't until late 2016, after a peer review and industry stakeholders input that a final version of the regulation was agreed on. The final version is expected to be published in 2017 with funds required to implement 18 months later (estimated at late 2018).

  • Low Volatility Net Asset Value "LVNAV" MMF type Redemption fees and/or gates
  • Increased diversity requirements
  • Prohibition of third party sponsorship



Introducing the LVNAF fund Type

The most notable change is the introduction of the LVNAV to the short term MMF types that are permissible for corporate and institutional investors to temporarily deposit their operating cash. Whereas prior to the adoption of the reform, corporations could treat both Government and non­Government MMFs as constant or "CNAV" funds and thus apply the Amortized Cost Accounting treatment through the lifetime of the investments, the new regulation mandates that non­Government MMFs (funds holding instruments such as Corporate and Asset Backed Commercial Paper) be treated as LVNAV funds, which can only utilize Amortized Cost Accounting for up to 75 days, beyond which the LVNAV funds would have to be marked to market/model. Many other VNAV type funds will however remain unchanged.

LVNAV funds will seek to provide many of the key attributes that compel corporates to use CNAV MMFs but with the extra safety sought from the EU lawmakers. There are some notable differences between CNAV funds and LVNAV funds that investors must be aware. These include the introduction of a strict portfolio fluctuation band that will see funds able to retain a constant share price as long as shares do not deviate from the actual NAV by more than 20 basis points - CNAV funds currently are permitted to deviate by 50 basis points. 

Redemption Fees and Gates

The reform implements redemption fees and gates in both Government CNAV and LVNAV funds, which limits redemptions when liquidity levels fall below certain prescribed levels. This measure is put in place to protect against a liquidity crisis in which a multitude of investors request liquidity at one point in time thereby requiring the fund manager to sell off assets. As a result both CNAV and LVNAV are also required to maintain a minimum liquidity level of 10% on a daily basis and of 30% on a weekly basis.

Source: Council of the European Union November 30, 2016