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Addressing systemic risks associated with market-based finance activities - Resilience of the EU financial sector in the global context

What are the issues remaining to be addressed regarding the proposed MMF regulation?

By Gill Neena - MEP, Committee on Economic and Monetary Affairs, European Parliament


In April 2015, the European Parliament adopted my report on the MMF regulation with a large majority. Since then the Council have failed to reach a common position on this dossier or have had any meaningful discussion on this dossier, recalling that it was originally launched by the European Commission in September 2013. This is an unacceptable delay. However the Dutch Presidency taking over the helm has indicated that they will endeavour to find a common position, as Minister Dijsselbloem confirmed this commitment on 18 February 2016. I welcome this as it is high time to conclude this file. Given that the Iosco peer review of September 2015 on the implementation of MMF regulation shows that reforms in the EU are still outstanding contrary to the US. What should be of a real concern to the Council is that all experts point to the potential risks of these types to the financial markets of funds particularly in today’s low interest rate climate.

What is so complex about this dossier that the Council is struggling to find an agreement?

There are two opposing opinions amongst a some of the member states. Firstly those who believe that constant net asset value (cnav) funds needs to be phased out completely, as they consider them as highly systemically risky, and that it could be one of the causes of the next financial crisis. Secondly, those who believe that the variable net asset value funds (VNAV) is the only one that should exist. This is not accepted by the cnav supporters who want a light regulatory framework that is sufficient to tackle this.

As rapporteur on this dossier in the European Parliament, I have been consistent in recognising that MMFs have an important role to play in providing short term funding for bank and non-financial institutions, and that they assist private and public institutions to manage their short term cash.

MMFs have an important role to play in providing short term funding for bank and non-financial institutions.

It is important that we have a regulatory framework that allows MMFs to fulfil these roles. At the same time we need to be mindful that these funds pose a systemic risk and that this risk is , managed in an appropriate way.

To achieve this objective, the parliament position is we should introduce stress tests, strengthen the liquidity, the diversification rules, increase transparency rules on the underlining investments, and put an end to any form of sponsor support. The major departure of the European Parliament proposal of the European commission is that it introduces three new types of CNAV MMF: the public debt MMF, the retail MMF, and the introduction of a low volatility net asset value MMF (LVNAV) that is subject to a sunset clause.

The Parliament compromise is a balanced one addressing the concerns of the key sectorial players and is a good starting point for discussion with the council. Unconfirmed reports suggest that there are some reservations on the sunset clause in the Council and some other minor points, but until we see a text of the Council we cannot move forward and finding a compromise.