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From Offshore Money Fund Report™: The protracted process of European money-market-fund reform took center stage on 16 Nov. when both the European Parliament and the Council of Ministers issued their respective releases announcing a provisional agreement had been reached between them and the European Commission on some aspects of money-fund reform.

J.P. Morgan’s Alex Roever, in his weekly fixed-income report, referenced "news sources" when he wrote they suggest that regulators "have settled on three types of funds post-reform: public-debt CNAV MMFs, low-volatility-NAV MMFs and VNAV MMFs." Roever continued, "Fees and gates will apply to CNAV and LVNAV MMFs but not VNAVs." He stressed that this remains a "draft" regulation and that a "number of technical issues need to be finalized." In keeping with the EP and Council’s respective releases, Roever explained that once the agreement is completed it will need "to obtain a sign-off from EU member states. If no issues are raised, the Parliament and the Council will be called upon to adopt the regulation." Roever speculated that it may be finalized by the end of this year or early next year.

Meanwhile, the EP announcement explained that the LVNAV-fund type has a "strict portfolio fluctuation band: the constant NAV cannot deviate by more than 20 basis points from the actual NAV – this is far stricter than the 50 basis points used by constant net-asset value" funds, noted the release. Another feature included stringent diversification and concentration requirements and "strict daily and weekly liquidity requirements to fulfill potential redemption requests." Increased transparency among money-market funds as well as "a stringent regime of fees and gates in case of shortfalls in liquidity, to address the question of ‘run risk’ and first-mover advantage," were included, said the release. The agreement reportedly removed a controversial sunset clause that called for termination of all LVNAV MMFs after five years of operation.

The EP further stated that the "EP proposal that a MMF should not receive external support from a third party including from its sponsor was sustained in the agreement, together with the requirement that MMFs should report on the 10 largest holdings in the MMF." Another recommendation, according to the EP, was that stress-testing be carried out "at least bi-annually."

The European Council’s release underscored that the agreement was "provisional," and among previous stated features, it included "a report by the Commission on the functioning of the regulation, accompanied by a review clause."

Gill Pleased

EP rapporteur Neena Gill, assigned the task to move reform forward, had this to say about the steps taken: "This is one of the most contentious and complex pieces of legislation that has been held up for more than three years. I am delighted we have an overall agreement between Parliament and the Council. I believe it is a win-win deal for both major European MMF sectors, variable and constant net-asset-value MMFs, respectively." Gill continued, "Moreover the key objectives of preventing the future systemic risks and runs on the funds have been addressed. I am particularly pleased we found a viable operational model for LVNAV MMFs."

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