MMF Regulation - the FCA publishes its final rules

Introduction

On 11 July 2018, the Financial Conduct Authority (FCA) published Policy Statement PS18/17, “The European Money Market Funds (MMF) Regulation”

PS18/17 provides the FCA’s comments on responses received to its consultation paper, CP18/4. In CP18/4, the FCA put forward a number changes to provisions in its Handbook - primarily in the Collective Investment Schemes sourcebook (COLL) - which it considered needed to be amended, deleted or disapplied to MMFs to avoid conflict with the MMF Regulation, prior to the Regulation taking effect on 21 July 2018.

From that date, a new MMF will need to be authorised as an MMF by its national competent authority.

Existing funds already branded as MMFs and operating under European Securities and Markets Authority (ESMA) guidance, and those substantially similar to MMFs as defined in the MMF Regulation, must apply by 21 January 2019 to be authorised under the new regulation.

The FCA also proposed, in CP18/4, to charge fees to recover the costs of authorising and supervising MMFs under the Regulation.

For a summary of the FCA’s proposals in CP18/4, see our earlier elexica article here.

The FCA’s response to comments received

In light of responses received to CP18/4, the FCA has decided to proceed with the main proposals on which it consulted - eg, to remove provisions in the Handbook that refer to the investment powers of MMFs. It has, however, decided to make several amendments to its original proposals, including:

Fund suspensions

In CP18/4, the FCA proposed to add a new sentence to COLL 7.2.1R(1), stating that the suspension of dealing of units in MMFs could be carried out only to the extent permitted under, and in accordance with, the MMF Regulation.

Following comments that this would severely limit when managers could suspend dealing in MMFs, removing the discretion to do this where it was in the interest of unitholders, the FCA has amended its proposed wording to make clear that, where applicable (the FCA’s emphasis), suspensions must be consistent with the MMF Regulation. This should not remove the fund manager’s discretion to suspend dealing as permitted generally by COLL, in circumstances other than those described in Article 34 of the MMF Regulation.

Deferred redemptions

One respondent noted that the FCA’s proposal to disapply COLL 6.2.21R to MMFs would mean that fund managers could only defer redemptions in an MMF in the circumstances provided for in the MMF Regulation.

As those set out in Article 34 of the MMF Regulation apply only to constant net asset value (CNAV) or low volatility net asset value (LVNAV) funds, the MMF Regulation did not exclude the possibility of deferred redemption being applied in other circumstances, particularly by variable net asset value (VNAV) funds.

Accepting that the MMF Regulation does not remove or restrict the power of managers of MMFs to defer redemptions but, rather, sets out specific circumstances in which CNAV and LVNAV MMFs should consider imposing a redemption gate limiting the number of shares or units to be redeemed on any one working day, the FCA has decided against disapplying COLL 6.2.21R to MMFs.

Depositary duties

The FCA has reworded its proposed amendment to COLL 6.6.4R(1) and COLL 8.5.4R(2), to make it clear that depositaries will be required to oversee the same areas of activity in respect of MMF managers as at present. Its original proposals – which imposed a requirement on depositaries to take reasonable care to ensure that MMFs are managed in accordance with the MMF Regulation - were criticised for appearing to require depositaries to oversee a wider range of activities, in respect of managers of MMFs, than is otherwise required under COLL.

Dilution adjustments

In CP18/4, the FCA noted that Articles 33 and 34 of the MMF Regulation appeared to allow for dilution levies but not dilution adjustments and it proposed to amend COLL 6.3.8R to reflect this. Several respondents, however, queried this view, suggesting that Article 29 of the MMF Regulation was sufficiently flexible to permit dilution adjustments.

The FCA agrees that it would be desirable for MMF managers to retain as much flexibility as possible to use anti-dilution tools to protect the interests of investors as has accordingly amended its original proposal to state that either a dilution levy or a dilution adjustment may be applied to a MMF “to the extent that it is permitted” under the MMF Regulation.

Fees

Following comments from respondents that the FCA should waive fees for the authorisation and supervision of funds under the MMF Regulation (either because of costs already incurred by MMFs in complying with the MMF Regulation, or to promote the UK as a jurisdiction in which to set up MMFs under the new regime), the FCA has replied that it would not be reasonable to ask other fee payers to subsidise MMFs.

However, the FCA recognises that the draft fees schedule included in CP18/4 was not clear as to the level of charges MMFs would face, so the figures have been included in PS 18/17 in a clearer format. 

PS18/17 also clarifies that MMFs will pay a different application fee, according to whether they are undertakings for collective investment in transferable securities (UCITS), non-UCITS retail schemes (NURSs) or qualified investor schemes (QISs). In each case, the fee will be identical to that for non-MMFs with the same legal structure.

Other matters

Factual errors in CP18/4

The FCA has taken the opportunity to correct two factual errors in CP18/4:

• paragraph 2.7 of CP18/4 contained the statement that each MMF could be a standard or a short-term MMF. In fact, neither a CNAV nor a LVNAV MMF can be a standard MMF but must be a short-term MMF. A VNAV MMF, on the other hand, can be either a standard MMF or a short-term MMF. (See Article 25(3) of the MMF Regulation), and

• paragraph 4.3 of CP18/4 stated that MMFs which already exist on 21 July 2018 would need to be authorised under the MMF Regulation before 21 January 2019. In fact, existing funds only need to have submitted an application for authorisation by that date.

In neither case does the initial error substantially impact on the FCA’s proposed rule changes

Qualifying MMFs

Most respondents to CP18/4 sought to persuade the FCA to remove separate references in the Client Assets sourcebook (CASS) and in COLL to a ‘qualifying MMF’ and/or bring this definition into line with those in the MMF Regulation. Several suggested, in particular, deleting the requirement in COLL 4.2.5R(3)(qa) for qualifying money market funds (QMMFs) to identify themselves as such in their prospectuses.

However, the FCA has concluded that it cannot remove separate references to a qualifying MMF from its Handbook since this term derives from the Markets in Financial Instruments Directive (MiFID), which is not affected by the MMF Regulation. Although the FCA has decided to retain the identification requirement in COLL 4.2.5R(3)(ga), it agrees that it is no longer useful to disclose QMMF status to retail investors in key investment information, so now proposes to delete COLL 4.7.3BR on key investor information and marketing communications in its entirety.

Miscellaneous proposals

In response to suggestions made by respondents, the FCA now proposes to:

• disapply COLL 6.3.5R(2) for MMFs, as well as COLL 6.3.5R(1) (on the calculation of the price of a unit in the fund)

• include in COLL 6.6.14R(1) a reference to the new provisions at COLL 5.2.4AG and COLL 5.6.4AG on the duty of the authorised fund manager to prevent misuse of scheme property

• disapply the requirement in COLL 6.3.9R to use forward pricing where a CNAV MMF or LVNAV MMF must convert to a VNAV MMF. (In such circumstances, the fund would have to use a price based on the previous day’s calculated NAV to calculate the new price. This would constitute historic pricing, which is contrary to COLL 6.3.9R as it stands.) and

• include transitional provisions to make it clear that, for an MMF that is already in existence before 21 July 2018, the current Handbook rules continue to apply until any application it makes for authorisation under the MMF Regulation has been determined.

Next steps

The rules will apply from 21 July 2018 to new MMFs (as well as to funds which are not currently marketed as MMFs but have substantially similar objectives to an MMF) after they have been authorised as an MMF under the MMF Regulation.

The rules will apply to funds already operating as either money market funds, or short-term money market funds (as currently defined in the FCA Handbook), only once they have been authorised.

Such existing funds have until 21 January 2019 to apply for authorisation as an MMF under the MMF Regulation. Transitional provisions will apply in respect of such existing funds.

Application forms for authorisation are available on the FCA website: www.fca.org.uk/firms/authorised-recognised-funds.