European Money Market Reform – The U.S. Feels Your Pain

pathRoughly seven years ago, the introduction of Form N-MFP in the U.S. ushered in the era of systemic risk regulatory filing. During the economic crisis, regulators needed a way to quickly determine the market exposure from asset management portfolios so that they could use that information to determine the economic impact of major events like Lehman’s collapse. Pre-crisis regulatory reporting did not fit that bill, so the SEC created a new type of filing. Systemic risk reporting collects new information not previously reported, increases the collection frequency for both new and old information, and requires it all to be filed in a machine-readable format so that it can be run through military-grade analytics tools.

Expansion of Systemic Risk Reporting

The information collected from Form N-MFP just whet the SEC’s appetite for more. Over the past seven years they expanded the collection systemic risk information asset class by asset class, adding Form PF for private funds in 2012, updating Form ADV in 2017 for separately managed accounts, and finally, they will be adding Form N-PORT for regular old mutual funds next year, covering the entirety of the asset management market. The CFTC got in the mix in 2012 with Form CPO-PQR for commodity pools that were not mutual funds, Form CTA-PR for other commodities trading, and then rounded out the scope of their regulatory authority by adding mutual funds to the Form CPO-PQR filings in 2013.

Europe was the last to arrive, requiring AIFMD Annex IV for alternative funds in 2014. It now looks like they will expand on a path similar to that of the SEC, collecting systemic risk information one asset class at a time, with money market funds next on the list.

Regulation on Money Market Funds

In April 2017, the European Commission released its Regulation on Money Market Funds (MMF Reform), which replaced the Common Definition of European Money Market Funds (2014/1103) and supplements UCITS and AIFMD. The MMF Reform was published in the Official Journal of the European Union on June 30, 2017 and entered into force on July 20, 2017. The dual purposes of the MMF Reform are to mitigate the systemic risk that money market funds pose to the economy and to standardize the rules governing money market funds throughout the EU. The MMF Reform created or revised guidelines defining a money market fund, when a money market fund is allowed to purchase certain investments, when it can use a constant NAV, credit quality requirements, stress testing requirements, and transparency reporting to regulators and investors. The entirety of the list is, I’m sure, generating unpleasant flashbacks on this side of the Atlantic.

Article 37

Article 37 of the MMF Reform directs ESMA to establish a reporting template that includes information on each money market fund’s credit quality, its stress testing results, information about each holding in its portfolio, and information about the fund’s investors. It also requires a comparison of fair value to amortized cost for low volatility NAV money market funds. ESMA is required to finalize the implementing technical standards within six months of the MMF Reform’s entry into force or January 2018.

Towards that end, on May 24, ESMA released a consultation that included the draft implementing technical standards for the Article 37 reporting. The reporting must be made quarterly for funds above EUR 100 million in net assets or annually for those below. The reporting is the responsibility of the manager of the MMF, but there is a separate filing for each fund. The report must be transmitted to ESMA within 30 days of each period end. The first Article 37 report is expected in late 2019. More unpleasant flashbacks, this time on both sides of the Atlantic.

Now that ESMA has systemic risk data for private funds via AIFMD, and will soon have the same data for money market funds via MMF Reform, you can probably see where this is heading for the 31,000 UCITS funds. Having lived through Form N-MFP and Form PF, and now Form N-PORT, we say to all of our European colleagues that are now at a much earlier stage of that journey, we can feel your pain.

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