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Article (93/279)
European regulation update: shadow banking
European regulation update: shadow banking

European regulation update: shadow banking


Focus on the latest European regulatory developments

Money Market Funds Regulation (MMF)

On 7 April 2017, the European Parliament announced that it has voted in plenary session to adopt the proposed Regulation on Money Market Funds. A provisional edition of the adopted text has also been published. The European Parliament proposed a new category of money market fund (MMF) – the Low Volatility Net Asset Value MMF (LVNAV MMF) designed specifically to work for small firms in the real economy.

The key features of the LVNAV MMF include:

  • A diversified portfolio with stringent concentration requirements to reduce risk, assets described more precisely and subject to strict conditions

  • Only limited use of the amortised accounting method to value assets

  • Strict daily and weekly liquidity requirements to fulfil potential redemption requests

  • Improved transparency, to ensure that investors and supervisors get better and earlier information

LVNAV MMFs should only be authorised for a period of five years. The European Commission will assess whether these rules are fit for purpose four years after they enter into force and propose whether LVNAV MMFs should be authorised further or indefinitely.

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On 16 May 2017, the EU Council adopted the MMF Regulation, which lays down rules and common standards on the structure of money market funds, their credit quality and liquidity. The Council's adoption of the final text follows approval of the text on 5 April 2017 by the EU Parliament. The Regulation will be published in the Official Journal and most provisions will apply twelve months after its entry into force.

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On 24 May 2017, ESMA published a consultation Paper on the MMF Regulation. The consultation paper contains proposals on draft technical advice, draft implementing technical standards (ITS), and guideline. The key proposals relate to asset liquidity and credit quality, the establishment of a reporting template and stress test scenarios.

Stakeholders are invited to provide their feedbacks on these proposals by 7 August. ESMA will finalise the TA and ITS for submission to the Commission, and issue the guidelines, by the end of the year

SFT Regulation

On 27 March 2017, ESMA published a press release highlighting its research on the level and calculation methodologies of haircuts used in the EU by SFTs market participants.  The research was published in its recent report on trends, risks and vulnerabilities (TRV) on 20 March 2017.

SFTs involve the temporary exchange of cash or securities against collateral. A discount, known as a haircut, is usually applied to the value of collateral to cover for risks related to the characteristic of the collateral and counterparty creditworthiness. Over time, haircuts may change to reflect the evolution of market conditions and can contribute to procyclicality and financial instability by reinforcing asset price movements.

Overall, ESMA takes the view that public authorities' understanding and analysis of the risks in SFT markets is inhibited by the lack of granular data, and will remain so, at least in the EU, until the reporting obligation under the SFT Regulation begins in 2018. Mindful of these limitations, the article sets out the collateral landscape in EU SFT markets and gives an overview of the haircut methodologies and levels currently used by market participants.

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On 21 April 2017, ESMA published its final technical to the Commission on fees for trade repositories (TRs) under SFTR as well as EMIR. ESMA notably advises to simplify the way to determine turnover of TRs for the purposes of calculating annual supervisory fees. ESMA also proposes to lower fees in case of concurrent application under both regimes.

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