Preparing to implement the MMF Regulation in the UK

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        </h2><h3><span style="text-decoration: underline;">Update 13 July 2018</span></h3>


        <p>On 11 July 2018, the FCA published PS18/17, containing its feedback to CP18/4 and final rules. For a summary of changes made to the FCA&rsquo;s original proposals, please see our elexica article <a href="http://www.elexica.com/en/legal-topics/asset-management/130718-mmf-regulation-the-fca-publishes-its-final-rules">here</a></p>
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        </h2><h3><span style="text-decoration: underline;">Update 25 June 2018</span></h3>


        <p>On 21 June 2018, the FCA published&nbsp;<a href="https://www.fca.org.uk/publication/forms/form-mmf.docx" target="_blank">Form MMF</a> for use when applying for authorisation of a Money Market Fund, together with an <a href="https://www.fca.org.uk/publication/forms/mmf-checklist.docx" target="_blank">MMF Checklist </a>to assist those making an application. The FCA is yet to publish a policy or feedback statement to CP18/4.</p>
        <p>The Commission Delegated Regulation is still awaiting publication in the Official Journal while the Council of the EU scrutinises its contents.</p>
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This article provides a high level view of the following aspects of the EU’s Money Market Funds Regulation (the MMF Regulation). Click on the relevant heading to go directly to the section:

• Why did the FCA publish CP18/4?
• Next steps
• The MMF Regulation - background
• What does the MMF Regulation do?
• The MMF Regulation, the UCITS Directive and the AIFMD
• What is the FCA proposing to change?
• What happens next?

Why did the FCA publish CP18/4?

On 21 July 2018, the EU’s Money Market Funds Regulation (the MMF Regulation) will come into effect.

From that date, a new money market fund (MMF) will need to be authorised as an MMF by its national competent authority (NCA) - in the case of the UK, this is the FCA. To comply with this obligation by 21 July 2018, new MMFs will need to seek authorisation before that date.

Existing funds have a transitional period to 21 January 2019 if they (a) are already branded as MMFs and operate under the regime set out in the “Guidelines on a common definition of European money market funds” (the CESR Guidelines) as amended by the ESMA Opinion of 22 August 2014 or (b) are funds which are substantially similar to MMFs.

The MMF Regulation has direct effect in Member States without the need to be transposed into national law. However, the FCA and HM Treasury have identified areas where changes are needed to the UK regulatory framework in order for the MMF Regulation to work properly in the UK. The FCA consulted on a number of these changes in CP18/4, “The European Money Market Funds (MMF) Regulation”.

Next steps

The consultation period for CP18/4 closed on 23 March 2018.

The FCA is now considering the responses received and intends to publish final rules as soon as possible, so that these are in place by 21 July 2018.

It has also indicated that it intends to make the relevant authorisation application forms available as soon as possible so funds can be duly authorised by the time the MMF Regulation comes into effect. The FCA’s original intention was to have published application forms on its website by "early May 2018" with firms then able to submit draft applications for authorisation of new MMGFs from 21 May 2018.

The MMF Regulation - background

Following the global financial crisis, the European Commission (the Commission) reviewed the regulation of shadow banking, including MMFs. The Commission concluded that, although MMFs were seen as relatively stable vehicles and a useful tool for investors in that they offer instant access to liquidity and stability of value, they could nevertheless pose a systemic risk. In the Commission’s view, in periods of high market turbulence it was difficult for MMFs - especially Constant Net Asset Value (CNAV) funds - to remain liquid, particularly in the face of large withdrawals or, ultimately, investor runs.

Following agreement between the Commission, Council of the EU and European Parliament, the MMF Regulation was published in the Official Journal on 30 June 2017 and comes into effect on 21 July 2018. The Commission and ESMA are currently in the process of finalising the Level 2 and Level 3 measures required by the Level 1 text.

What does the MMF Regulation do?

The MMF Regulation lays down rules for MMFs established, managed or marketed in the EU, on investment restrictions for an MMF, the MMF’s portfolio, the valuation of an MMF’s assets and the reporting requirements in relation to an MMF.

As such, the MMF Regulation (among other things):

• requires a collective investment undertaking that is established, marketed or managed in the EU as an MMF to be authorised in accordance with Article 4 (for MMFs which are UCITS) or Article 5 (for those which are AIFs)
• establishes the eligible assets that MMFs can hold
• sets minimum liquidity requirements
• requires MMF managers to implement a prudent internal credit quality assessment procedure - this must be reviewed annually by the management and Board
• requires an MMF to conduct regular stress tests - the results are to be sent to the relevant NCA, which will transmit them on to ESMA
• requires MMFs which are CNAV or Low Volatility NAV (LVNAV) MMFs - but not Variable NAV (VNAV) MMFs - to publish daily information about the subscription/redemption spread and NAV per unit
• requires all MMFs to make available key information about their portfolios on a weekly basis
• bans external third party support for MMFs (eg, cash injections or buying assets at inflated prices), and
• requires MMFs to report to their NCA quarterly (annually in the case of smaller funds) - reports are to include key portfolio indicators, results of stress tests and any proposed action plans, and information on the MMF’s assets and liabilities.

For a fuller summary of the scope of, and obligations under, the MMF Regulation, see the Simmons & Simmons MMF Legislative Tracker.

The MMF Regulation, the UCITS Directive and the AIFMD

As mentioned above, the MMF Regulation applies to any MMF established, managed or marketed in the EU, whether it is governed by the UCITS Directive (as the majority of MMFs are) or is an AIF under the AIFMD.

Neither the UCITS Directive nor the AIFMD is directly amended by the MMF Regulation, which instead introduces product level rules (see above) - these dis-apply and replace the relevant investment restrictions under the UCITS Directive for MMFs which are UCITS and introduce new rules for those which are AIFs.

For MMFs which are UCITS, the MMF Regulation relies on the existing UCITS authorisation procedures. Since the AIFMD leaves authorisation of AIFs to the discretion of Member States, the MMF Regulation introduces a harmonised authorisation procedure for MMFs which are AIFs, mirroring that for UCITS.

Although MMF managers will continue to be regulated by whichever of the UCITS Directive or the AIFMD applies, from 21 July 2018, managers (and funds) falling within scope of the MMF Regulation will have to comply with its additional level of MMF-specific rules.

What is the FCA proposing to change?

CP18/4 notes that COLL 5.9 (Investment powers and other provisions for money market funds) currently specifies investment restrictions for authorised funds which reflect the CESR Guidelines. Since the MMF Regulation will supersede the Guidelines, the FCA has proposed to delete COLL 5.9 in its entirety, along with other aspects of the Handbook which the MMF Regulation has replaced (such as the transparency requirements for MMFs).

The FCA Handbook also contains rules separately establishing investment restrictions on UCITS (COLL 5.2), non-UCITS Retail Schemes (NURS) (COLL 5.6) and Qualified Investor Schemes (QIS) (COLL 8.4). Since the MMF Regulation’s provisions apply equally to all in-scope MMFs (or substantially similar funds) regardless of their structure, the FCA has proposed to dis-apply the relevant provisions in COLL 5.2, COLL 5.6 and COLL 8.4 accordingly.

The FCA has also proposed to amend certain provisions within COLL 5, 6 and 7 to remove any discrepancy between its rules and requirements under the MMF Regulation. The provisions in question include:

• stock lending
• cash borrowing and lending
• dealing
• valuation and pricing of funds, and
• suspension and restart of dealings.

Some of the FCA’s changes in this area, however, have attracted criticism - the Investment Association (IA), for example, in its response to CP18/4 questioned the FCA’s decision to restrict MMFs from suspending dealing or deferring redemptions, which the IA regards as “important tools for protecting investors in the event of sizeable redemptions”. The IA stated its belief that it is “important that managers of MMFs can unambiguously apply these tools if and when they are required”.

The FCA notes, in CP18/4, that the costs of reviewing an application for authorisation for an MMF are likely to be comparable to those for authorising other UCITS schemes and authorised AIFs. The proposed application fees, therefore, range from £500 (for a UK AIF other than an authorised NURS or QIS) to £2,400 in respect of a QIS. The fee for authorising a UCITS scheme would be £1,200. The flat rate would be doubled where the application is in respect of an umbrella scheme. However, in a move which some in the industry consider unreasonable, the FCA also proposes to levy an administration charge of £300 in the case of an MMF already in existence when the MMF Regulation comes into effect on 21 July 2018 - such an MMF will need to make an application so that it is authorised before 21 January 2019.

The FCA has interpreted Articles 33 and 34 of the MMF Regulation as allowing for dilution levies as defined in the Handbook, but not for dilution adjustments. As a result, in CP18/4 it set out proposals to amend COLL 6.3.8 to reflect this. It also proposed to amend COLL 6.6 and COLL 8.5 so that existing obligations applicable to depositaries of authorised funds would continue to apply once the MMF Regulation is in effect. The FCA notes that, although these changes would not significantly affect depositaries’ duties, they would change the material to which depositaries may need to refer when discharging their obligations.

In CP18/4, though, the FCA notes that it does not intend to amend references in COLL and in CASS 7.13 to "qualifying money market fund". These reflect the FCA’s implementation of the provisions under MiFID2. Although the MMF Regulation and MiFID2 definitions of money market funds or money market instruments are different, the MMF Regulation does not supersede the MiFID2 definitions. As a consequence, the FCA does not intend to change the relevant provisions in its rules.

Finally, the FCA’s proposals would retain the BIPRU definition for "designated money market fund" - even though the BIPRU 12 definition does not match that of a "money market fund" in the MMF Regulation, the FCA noted that aligning the former would have a consequential impact on liquidity requirements for firms which the FCA regarded as being neither desirable nor necessary from a prudential perspective.

What happens next?

The FCA is expected to publish feedback to CP18/4, along with final rules in the near future. It will also make available on its website forms to be used when applying for authorisation under the MMF Regulation. Firms will be encouraged to make such application in good time so that, where necessary, they are authorised when the MMF Regulation comes into effect.

At the same time, the Commission and ESMA are in the process of finalising the remaining Level 2 measures.

To date, the following final Level 2 and Level 3 measures have been published:

• a Commission Implementing Regulation setting out the template for MMFs to report information to their NCA, and
• ESMA Guidelines on the stress test scenarios under Article 28.

In addition, a draft Commission Delegated Regulation was adopted by the Commission on 10 April 2018. This will be published in the Official Journal once agreed by the Council of the EU and the European Parliament.

Simmons & Simmons will be tracking and reporting on these developments in future elexica articles.