While money market funds have attracted regulatory attention on both sides of the Atlantic since the financial crisis, in Europe, the industry has had a more fundamental issue to tackle: defining for the first time what can and cannot be called a money market fund. In the United States, the legal framework for the money fund industry is relatively straightforward: Such funds are defined and regulated by Rule 2a-7 of the Investment Company Act of 1940. That said, Rule 2a-7 has had to keep up with the times.
When Lehman Brothers fell in September 2008, the Reserve Primary Fund’s exposure to the bank led the money market fund to write off $785 million in Lehman debt—and consequently to “break the buck,” as its net asset value (NAV) fell below the crucial $1 per share to 97 cents. A brief run on U.S. money market funds followed, and many other funds had to be supported by their sponsors.
The definition takes a two-tier approach, in contrast to U.S. regulations. The reason is clear: While the U.S. definition was introduced in 1983, much earlier in the development of the money market fund industry, the European definition is being overlaid onto an existing and diverse array of money market funds. “It’s a difficult task to come up with a definition to cover everything from kitemark AAA-rated products all the way through to domestic continental European funds, which are variable NAV, extended duration and able to invest in a slightly broader mix of assets,” says Marcus Littler, director of institutional liquidity sales at BNY Mellon. “Short of making everyone toe the line and bringing in one overarching definition, CESR has had to split it out.” (A kitemark is a U.K. symbol showing a product meets certain standards.)
The CESR definition identifies two distinct types of funds: short-term money market funds and money market funds. The more conservative of the two categories, the short-term money market fund, has a maximum WAM of 60 days and a maximum WAL of 120 days, in line with 2a-7 and IMMFA’s Code of Practice. In contrast, a money market fund has a maximum WAM of six months and a maximum WAL of 12 months. For both categories, the guidelines specify—among other things—specific disclosure to highlight the difference between money market funds and bank deposits.