The agreement marks a further step in the completion of the post-crisis reform agenda and paves the way for trilogues with the European Parliament.
The Commission adopted its proposal for a regulatory framework of MMFs in September 2013 in order to address their potential impact on the financial system. MMFs are a key part of the international work on shadow banking and sustainable, market-based finance. These funds serve as an important source of short-term financing for financial institutions, businesses and governments. However, they have also been vulnerable to investor 'runs' on redemptions and have given rise to misperceptions that their returns are guaranteed. Today's Council agreement marks a major step in our efforts to ensure that MMFs can better withstand redemption pressures in stressed market conditions, while at the same time ensuring that they continue to provide a secure tool for European companies to manage their finances.
Jonathan Hill, EU Commissioner responsible for Financial Stability, Financial Services and Capital Markets Union said: “Today’s agreement is a step in the right direction. Strengthening the regulation and oversight of MMFs will ensure that the potential systemic risks are addressed, in line with the recommendations issued by the Financial Stability Board. It will also ensure MMFs can continue to provide their key role in supporting financing in the wider economy. "
Now that the Council has a negotiating mandate, the Commission expects trilogues with the European Parliament to commence shortly.
Money market funds are an important source of short-term financing for financial institutions, corporates and governments. In Europe, around 22% of short-term debt securities issued by governments or by the corporate sector are held by MMFs. They hold 38% of short-term debt issued by the banking sector. Because of this systemic interconnectedness of MMFs with the banking sector and with corporate and government finance, their operation has been at the core of international work on shadow banking.
The Commission published its proposal for a regulation on Money Market Funds in September 2013. The proposal reflected the recommendations issued by the Financial Stability Board (FSB) in October 2012, the main one being that all stable redemption MMFs (CNAV MMFs) should float their NAV (VNAV MMFs), where workable. Where conversion is not workable, the FSB proposed measures that are "functionally equivalent in effect to capital, liquidity, and other prudential requirements on banks that protect against runs on their deposits."
European-domiciled MMFs hold short-term assets accounting for approximately EUR 1 trillion, half of these assets are held by CNAV MMFs, the other half by VNAV MMFs. Given the significance of MMFs to the European short-term debt funding market, the Commission set out proposals to ensure risks were appropriately managed, whilst ensuring that money market funds can continue to support the financing of the wider economy.
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