1. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 5

1.1. Shadow banking context 5

1.2. International work on MMFs. 5

1.3. Related EU initiatives. 6

1.4. Consultation of interested parties. 6

1.4.1. Consultation on shadow banking. 7

1.4.2. Consultation on asset management 7

1.5. Impact Assessment Steering Group and IAB.. 7

2..... problem definition.. 8

2.1. Problem driver: MMFs offer features equivalent to bank deposits. 8

2.1.1. MMFs provide daily and unlimited access to liquidity. 9

2.1.2. MMFs offer stability. 10

2.2. Problems. 12

2.2.1. Contagion to the real economy. 12

2.2.2. Contagion to sponsors. 14

2.2.3. Early redeemers are advantaged over late redeemers. 16

2.3. Consequences. 17

2.3.1. Financial stability and bail-out risk. 17

2.3.2. Insufficient investor protection. 18

2.4. How would the problem evolve without EU action? The base line scenario. 18

2.5. Subsidiarity and proportionality. 19

3..... objectives. 20

3.1. General, specific and operational objectives. 20

3.2. Consistency of the objectives with other EU policies. 21

3.3. Consistency of the objectives with fundamental rights. 22

4..... policy options. 22

5..... analysis of impacts. 24

5.1. Options aimed at ensuring that the liquidity of the fund is adequate to face investor's redemption requests 24

5.1.1. Policy option 1.1: take no action at EU level (baseline scenario) 24

5.1.2. Policy option 1.2: Impose a hold back period for a proportion of the redemption order 25

5.1.3. Policy option 1.3: Impose a liquidity fee. 26

5.1.4. Policy option 1.4: Redemption in-kind. 28

5.1.5. Policy option 1.5: Set minimum liquidity thresholds for overnight and weekly maturing assets 28

5.1.6. Policy option 1.6: Enhance the quality of the portfolio. 30

5.1.7. Policy option 1.7: MMF managers should develop policies to anticipate large redemptions 32

5.1.8. Impact summary. 33

5.2. Options aimed at aligning the structure of MMF so they can withstand adverse market conditions 34

5.2.1. Policy option 2.1: take no action at EU level 34

5.2.2. Policy option 2.2: Increase transparency. 35

5.2.3. Policy option 2.3: require all MMFs to value their assets marked to market 36

5.2.4. Policy option 2.4: require MMFs to value their assets mark to market except in the last three months. 40

5.2.5. Policy option 2.5: introduce a NAV buffer for CNAV MMFs financed by MMF's investors 41

5.2.6. Policy option 2.6: introduce a NAV buffer for CNAV MMFs financed by the manager 43

5.2.7. Policy option 2.7: Require bank-like regulation for CNAV MMFs. 46

5.2.8. Policy option 2.8: Require MMF to float their NAV, except when they can demonstrate a sufficient capital buffer 48

5.2.9. Policy option 2.9: Ensure that managers no longer pay for credit ratings. 49

5.2.10. Impact summary. 50

6..... the retained policy options and instrument. 52

6.1. The retained policy options. 52

6.2. The choice of instrument 53

6.3. The scope of legislation. 54

6.4. The impact on retail investors and SMEs. 55

6.5. Social impact 55

6.6. Environmental impact 55

6.7. Impact on third countries. 55

7..... monitoring and evaluation.. 56

Introduction

Money Market Funds (MMFs[1]) serve as an important source of short-term financing for financial institutions, corporates and governments. In Europe, around 22% of short-term debt securities issued either by governments or by the corporate sector are held by MMFs. MMFs hold 38% of short-term debt issued by the banking sector.

On the demand side, MMFs provide a short-term cash management tool that provides a high degree of liquidity, diversification, stability of value as well as market-based yield. MMFs are mainly used by corporations seeking to invest their excess cash for a short time frame, for example until a major expenditure, such as the payroll, is due.

MMF, therefore, more than any other investment fund, represent a crucial link bringing together demand and offer of short-term money. Due to their central place in the money market, MMFs are subject to close scrutiny from central banks. Their holdings are part of the definition of the monetary aggregate M3. With assets under management of around 1’000 billion Euros, MMFs represent a category of funds that is distinct from all other mutual funds. The majority of MMFs, around 80% of the assets and 60% of the funds, operate under the rules of the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS), its implementing acts and guidelines issues by Committee of European Securities Regulators (CESR) and European Securities and Markets Authority (ESMA). Because of the systemic interconnectedness of MMF with the banking sector on the one hand and with corporate and government finance, on the other hand, MMFs are also subject to a special set of ESMA guidelines. In addition, the average size of a MMF by far exceeds the average size of a UCITS fund. For example, an individual MMF can reach the size of € 50 billion[2].

The issue of MMFs has been at the core of the international work on shadow banking. The Financial Stability Board (FSB) and other institutions, such as International Organization of Securities Commissions (IOSCO) and European Systemic Risk Board (ESRB) have analysed the financial sector in the course of 2011 and concluded that certain activities and entities were of systemic importance but had not been addressed to a sufficient degree. In the asset management sector, MMFs were singled out, especially those MMFs that maintain a stable share price, providing the impression that fund holdings are equivalent to a bank deposit. The above international bodies formulated policy recommendations designed to help the regulators in tackling certain issues raised by MMF. This impact assessment analyses the proposed policy tools and assesses their impacts, taking into account the specificities of the European MMF market. The list of options discussed in this report aim to address investor runs and the attached systemic consequences of such runs on the short-term funding for the European economy.

1. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 1.1. Shadow banking context

The 2008 crisis was global and financial services were at its heart, revealing inadequacies including regulatory gaps, ineffective supervision, opaque markets and overly-complex products. The response has been international and coordinated through the G20 and the FSB. The European Union has shown global leadership in implementing its G20 commitments. Overall, the reforms will equip the EU with the tools designed to ensure that the financial system, its institutions and markets are properly supervised.

However, there is an increasing area of non-bank credit activity, called shadow banking, which has not been the prime focus of prudential regulation and supervision. At the November 2010 Seoul Summit, the G20 Leaders identified some remaining issues of financial sector regulation that warranted attention. They highlighted “strengthening regulation and supervision of shadow banking” as one of these issues and requested that the FSB, in collaboration with other international standard setting bodies, develop recommendations to strengthen the oversight and regulation of the “shadow banking system”. The “shadow banking system” can broadly be described as “credit intermediation involving entities and activities (fully or partially) outside the regular banking system”.

The FSB's work highlighted that the disorderly failure of shadow bank entities can entail systemic risk, both directly and through their interconnectedness with the regular banking system. The FSB has also suggested that as long as such activities and entities remain subject to a lower level of regulation and supervision than the rest of the financial sector, reinforced banking regulation could drive a substantial part of banking activities beyond the boundaries of traditional banking and towards shadow banking.

After the November 2011 G20 Cannes Summit, the FSB has initiated five work-streams tasked with analysing the issues in more detail and developing effective policy recommendations. These work streams include: (i) the Basel Committee on Banking Supervision (BCBS) will work on how to further regulate the interaction between banks and shadow banking entities; (ii) IOSCO will work on regulation to mitigate the systemic risks (including run-type risks) of Money Market Funds (MMFs); (iii) IOSCO, with the help of the BCBS, will carry out an evaluation of existing securitisation requirements and make further policy recommendations; (iv) a FSB subgroup will examine the regulation of other shadow banking entities; and, (v) another FSB subgroup will work on securities lending and repos. These work-streams bring together the EU and other major jurisdictions including the US, China and Japan, who are each considering appropriate regulatory measures.

1.2. International work on MMFs

Following a public consultation of international stakeholders organised during the first half of 2012, IOSCO published its final recommendations[3] in October 2012. IOSCO issued a list of 15 recommendations aimed at addressing vulnerabilities arising from the liquidity side as well as the issue of MMF valuation. These recommendations serve as a basis for the definition of the options discussed in this impact assessment. The FSB reviewed the IOSCO recommendations in November 2012 and endorsed them as an effective framework for strengthening the resilience of MMFs to risks in a comprehensive manner.

The US authorities decided to engage in a reform of their national market. A first proposal was discussed throughout 2012 by the Securities and Exchange Commission (SEC) but the project was finally abandoned in August 2012[4]. The Financial Stability and Oversight Council (FSOC) however decided to continue the reform and proceeded with the publication of a consultation[5] in November 2012 indicating the way the US authorities will follow.

The ESRB has decided to set up an expert group on MMFs during the summer 2012 with the task to analyse the European MMF market and formalize recommendations for an EU context. The work started by gathering empirical data in the main EU jurisdictions hosting MMFs. The recommendations have been finalized in December 2012 and have been published the 18.02. 2013[6].

1.3. Related EU initiatives

The European Commission will present in the first half of 2013 the key results from the Green Paper on shadow banking issued in March 2012[7].

The European Parliament adopted a resolution on shadow banking[8] in November 2012 where it "invites the Commission to submit a review of the UCITS framework, with particular focus on the MMF issue, in the first half of 2013, by requiring MMFs either to adopt a variable asset value with a daily evaluation or, if retaining a constant value, to be obliged to apply for a limited-purpose banking licence and be subject to capital and other prudential requirements; stresses that regulatory arbitrage must be minimised;" The document addresses all the topics related to shadow banking and takes position regarding the way MMFs should be reformed in Europe.

Related to the specific topic of credit ratings, the European Parliament adopted the Commission proposal aimed at reducing the reliance on external credit ratings (CRA III[9]).

1.4. Consultation of interested parties

Since the beginning of 2012 the Commission has been engaged in extensive consultation with representatives from a wide range of organizations. The interaction has taken the form of bilateral and multilateral meetings[10], one written public consultation on shadow banking, one written public consultation on asset management issues including MMFs and a public conference on shadow banking. Through this process the Commission has obtained a wealth of information about the functioning of the MMF market and its various segments, as well as views on the issues to be solved and how to solve them. An important part of this information has been used in the preparation of this impact assessment.

1.4.1. Consultation on shadow banking

The responses to the Green Paper offered a broad picture of the European shadow banking sector which permitted to develop more targeted questions on MMF specific issues for the consultation on asset management. It was followed by a public conference in April 2012 attended by stakeholders from the EU and the US. Representatives from the regulator and industry sides, forming the panel on MMFs[11], presented their views on the need to reform the EU MMF market.

1.4.2. Consultation on asset management

A MMF chapter has been introduced in a broader consultation on various asset management issues[12] published on 26 July 2012 (it was closed on 18 October 2012). Stakeholders were informed about the availability of the consultation on the website of DG MARKT through the publication of a press release[13] and through electronic emails. The Commission services received 56 responses related to the MMF section[14]. All contributions have been thoroughly examined and relevant information contained in them has been taken into account throughout the report[15].

1.5. Impact Assessment Steering Group and IAB

Work on the Impact Assessment started in August 2012 with the first meeting of the Steering group on 28 September 2012, followed by 2 further meetings, the last one taking place on 4 December 2012. The following Directorates General (DGs) and Commission services participated in the meetings: Competition, Economic and Monetary Affairs, Employment Social Affairs and Inclusion, Health and Consumers, Industry and Entrepreneurship, Legal Services, Secretariat General, and Taxation Customs Union. The report with the minutes of the last steering group were sent to the Impact Assessment Board on 12 December 2012.

DG MARKT services met the Impact Assessment Board on 16 January 2013. The Board analysed this Impact Assessment and delivered its positive opinion on 18 January 2013. During this meeting the members of the Board provided DG MARKT services with comments to improve the content of the Impact Assessment that led to some modifications of this final draft. These are:

· The problem definition should provide greater detail on the MMF markets and underpin its description with further EU examples illustrating, in particular, the cross-border dimension of the problems.

· The report should better link both the objectives and the options with the identified problems and present a set of quantifiable operational objectives as a basis for robust progress indicators.

· The report should better assess the impacts on investors, and should strive to quantify the compliance costs that the envisaged measures would entail. The impacts on Member States and on international regulatory coherence should be also explained.

· The report should systematically present stakeholders views, in particular, in the sections analysing and comparing the options.

2. problem definition

2.1. Problem driver: MMFs offer features equivalent to bank deposits

MMFs are used by investors to place their cash for short periods of time. They represent a convenient tool for investors because they offer features analogous to bank deposits: instantaneous access to liquidity and stability of value. When the investors perceive that there is a risk that the MMFs may fail to live up to these promises, they will start to redeem, possibly leading to a so-called "run".

Investor runs are characterized by massive and sudden redemption requests by a large group of investors that want to avoid losses and be able to redeem at the highest possible price. Investor runs are systemically relevant as they force the MMFs to sell their assets rapidly in order to meet outstanding redemption requests. The spiral of redemptions itself accelerates the decline in the fund's net asset value (NAV), thus exacerbating declines in the NAV and the fear that the money market as a whole is unstable.

The MMF market is concentrated in a few Member states with FR, IE and LU representing more than 95% of the market in terms of assets under management. The market is nevertheless highly interconnected with other countries due to the high proportion of cross border investments and investors, and the cross border contagion links between the MMF and their sponsor domiciled in other countries.

2.1.1. MMFs provide daily and unlimited access to liquidity

MMFs may hold investment assets that may mature in a year or more but issue units or shares that are redeemable daily on demand. As such, MMFs provide maturity transformation, but in the absence of appropriate techniques and without any explicit liquidity backstop, they may have little capacity to satisfy redemptions once the value of their portfolio assets declines. Due to liquidity mismatches between the fund's assets and its commitment to provide for daily redemptions, the fund may be unable to meet all redemption requests, increasing the tendency toward 'runs' on MMF among investors and thus market instability.

When the MMF is confronted with redemptions, it will start to sell the most liquid assets which have the lowest liquidity costs, before being obliged to dispose of less liquid assets associated with higher liquidity costs when the redemption pressure increases. Therefore the more the redemption pressure increases, the more the MMF will sell assets with higher liquidity costs, the more the share price of the MMF will decrease. Because investors know that there might be such a mismatch between the asset's liquidity and the liquidity offered to them, they prefer to redeem as soon as possible in order to profit from the most favourable liquidity conditions, thus passing the liquidity cost to remaining investors. This can be seen as a first mover advantage. Investors use MMFs due to their high liquidity profile and once there are indications those MMFs may fail to satisfy this criterion, investors prefer to redeem.

The liquidity cost of an asset is mainly determined by its quality, basically its maturity and its credit quality. If not properly managed, both factors contribute to the liquidity mismatch. MMFs invest predominantly in money market instruments issued by different types of issuers, such as banks, governments and corporates. These instruments are in general short term and of good quality. But during stressed market situations, as in 2007 and 2008, these instruments can be affected by financial turmoil.

In 2007, several EU funds encountered difficulties following the subprime crisis in the US. These funds were sold to investors as MMF equivalents even if the majority of them did not comply with the then prevailing national rules (absence of EU rules in 2007 on MMFs). The problem stemmed from the fact that these "dynamic" or "enhanced" MMFs were invested in US Asset Backed Securities (ABS), principally in Asset Backed Commercial Papers (ABCP) which proved to be illiquid once the crisis started. The ABCPs are backed by different securities representing different types of assets: student loans, credit card receivables, auto loans or residential mortgages (including subprime). If there are any significant negative developments in any of the underlying markets, the quality and the risk of the ABCP will be affected. The 2007 crisis in the ABCP market, and subsequently in the MMF market, was linked to a sudden deterioration in liquidity due to the inability to price ABCP backed by US subprime residential mortgages. The events listed in Annex 5.1 illustrate the consequences of this drying up of liquidity on the MMF market. The fact that some MMFs that were invested in ABS were unable to meet all redemption requests led to investor runs on other MMFs.

In 2008, EU MMFs were again confronted to a crisis after Lehman Brothers defaulted which led to MMFs in several Member States having to face unusual large redemption requests. Investors lost confidence in the ability of the fund to maintain its daily liquidity because their investments in money market assets, especially the commercial paper issued by banks, were turning into increasingly illiquid asset classes.

Two academic papers[16] demonstrate the link between portfolio risks and runs: they observe that funds offering higher yields (thus higher liquidity risk and credit risk of the assets) prior to the crisis were confronted with larger runs than funds following a more conservative approach.

2.1.2. MMFs offer stability

The fact that MMFs offer price stability, often accompanied by AAA rating awarded by the credit rating agencies (CRA), gives the impression to investors that they are investing in a guaranteed bank-like product.

Price stability: Two closely linked core ingredients make MMFs stand out from the remaining universe of mutual funds as regulated in UCITS or alternative investment funds as regulated in the AIFMD.

MMFs, as opposed to all other investment fund vehicles, are structured as an investment that can be redeemed at a stable share or unit price. The method to achieve this stable price is the linearization of the value of investment assets (either for the entire range of assets or for those that mature in less than three months), often coupled with sponsor support in case the NAV of the investment assets deteriorate beyond a certain point.

Because MMFs are allowed to price investment assets using the amortized cost method, they avoid the fluctuations inherent in valuing a financial asset. This valuation method allows the MMF managers to linearize the value of the investment assets over their lifecycle, thus maintaining a stable price for the assets. On the other hand, a classic investment fund, not using amortized cost, uses the market value of the assets to price its portfolio, thus the NAV of the fund fluctuates in line with the market value of the underlying assets. Analysing the role that amortised cost accounting plays in a MMF does not call into question the overall usefulness of this accounting method for the remainder of the investment fund universe. What is at issue in this impact assessment is whether amortised cost, coupled with the promise of a stable share price, creates a situation where MMFs are particularly prone to sponsor support.

The fact that investors almost never observe movements in the NAV of their funds reinforces their expectation to have invested in a guaranteed product whose share price will always be stable. The stability of price contributes to the wide-spread investor perception that MMFs are equivalent to risk-free cash equivalent bank deposits. In stressed market conditions, investors begin to realise that MMFs might not live up to this stability expectation and for the first time might experience the loss of value of their shares. This realisation, coupled with the wish not to lose money, reinforces the incentive to redeem as soon as market stress begins to appear.

The use of amortized cost is used at different degrees in Europe, some countries allowing the use of this method for the entire portfolio and some others allowing it only for those assets in a portfolio that mature in less than three months. The MMFs using this method for their entire portfolio are usually called Constant NAV (CNAV) funds because their price never fluctuates. The funds using the amortized cost only for a proportion of their portfolio are usually called Variable NAV (VNAV), because their share price is subject to fluctuation.

The fact that the price of the CNAV MMFs never fluctuates and that the majority of CNAV MMFs maintain a stable NAV at €1 or $1 per share issued by rounding the market value of their shares to the nearest cent, further reinforces investors' perception to have invested in a deposit-like (guaranteed) product. In addition, the providers of such funds clearly state in their marketing material that the objective of their funds is to preserve the capital[17]. Even if this guarantee is normally only "implicit", investors in such MMFs often expect the sponsor to unconditionally support the MMF to maintain its stable NAV, creating an ultimately false expectation in the market that such investments are in a "guaranteed" vehicle. This triggers false incentives and exacerbates runs once investors realise that either there is no sponsor support after all or that sponsor support will be too little, too late to prevent the MMF from "breaking the buck".

When the market value of the fund's shares declines to € 0.9950, this situation is called "breaking the buck" (breaking the dollar or breaking the euro) because the fund must decrease its NAV from €1 per share to reflect current market value. According to CESR guidelines[18], a MMF should avoid situations where discrepancy between the market value and the value resulting from amortized cost accounting becomes material; otherwise the MMF can no longer issue and redeem units at the stable price. In the case of a fund that redeems all shares at €1, the permitted level of material discrepancy is usually set at 0.005 cents, an amount equivalent to the difference between €1 and €0.9950[19]. This means that the NAV will always be maintained at €1 or $1 as long as the value of the fund's shares remains between 0.9950 and 1.0050. When there is a material discrepancy between the market value and the rounded share value, the fund is obliged to lower its NAV to reflect the current market value of its portfolio.

In fact this rarely happens because the sponsors step in to provide support: the sponsor will pay for maintaining the difference between the stable value of €1 and the market value at a level that becomes not material. The support may take different forms, such as providing cash injections, liquidity facilities in the form of loans or by buying units of the fund at a price higher than the market price.

Such an event occurred in 2008 in the US when the Reserve Primary Fund was unable to maintain its stable NAV after Lehman defaulted (the fund held assets issued by Lehman). During the week following this event, the investors withdrew money amounting to 300 billion USD or 14% of total US MMF assets out of a fear that other sponsors would not be able to maintain the stable price[20]. In fact the outflows directly following the collapse of the Reserve Primary Fund were more than two times larger than the initial outflows triggered by the Lehman collapse. This tends to prove that the absence of sponsor support is in itself a cause of runs. The European CNAV MMFs were also affected by massive redemptions. According to data collected from the IMMFA organization[21], the CNAV MMFs encountered redemptions amounting to 25% of their total assets in a very short time period. Witmer, 2012, finds that CNAV funds “are more likely to experience sustained outflows” and that these outflows “were more acute during the period of the run on the Reserve Primary fund”. He also notes that: “consistent with the theory that constant NAV funds receive additional implicit support from fund sponsors, fund liquidations are less prevalent in funds with a constant NAV following periods of larger outflows”.[22] According to his findings, the outflows from European CNAV largely surpassed the outflows from European VNAV in September 2008.

AAA rating of funds: Credit ratings play a key role in MMFs as both the fund and the assets in which the fund invests may be rated. At the level of the fund, certain MMFs require the highest possible note, AAA, in order to comply with the industry code of practice[23]. AAA ratings create wrong expectations to investors that they are investing in a guaranteed product which, in turn, leads to runs when the CRA decides to put the AAA note on negative watch or to downgrade it. In addition, the methodology used by the different CRAs creates ambiguities regarding the factors taken into consideration for assessing the quality of a MMF. Basically S&P rating relates to credit risk of the MMFs investment assets, Moody's to credit and liquidity risk associated with these assets while Fitch's evaluates credit and liquidity risk of the assets plus an additional assessment of the likelihood of sponsor support. Therefore the ratings cannot be used interchangeably as they do not refer to the same analysis.

The fact that one CRA takes into consideration the ability of a sponsor to support their MMF also creates wrong expectations. Investors may be reinforced in their belief that they invest in a product that will be guaranteed whatever happens. When three funds from Prime Rate Capital Management (PRCM), belonging to the UK based Matrix group, were put on negative watch by Fitch in December 2011, they experienced very high levels of redemptions in just 2 weeks: -50% for their Sterling fund, according to IMMFA[24]. Matrix Group had over £4 billion of assets that were offered to retail and institutional clients.

2.2. Problems

The problems linked to investor runs are of a systemic nature due to: (1) MMFs close links to the real economy (the role that MMFs play in satisfying the short-term financing needs of entities using the money market as a funding tool), (2) their link to sponsors. In addition, runs on MMF also have an investor protection angle, since those that redeem late (usually private investors) are at an inherent disadvantage when compared to early redeemers.

2.2.1. Contagion to the real economy

The liquidity level of the funds has proven during the crisis not to be of a sufficient level which led some funds to suspend redemptions or to use other restrictions. In 2007, it is estimated that around 15 MMFs in the EU had to close, to suspend redemptions or to apply haircuts on the valuation of their MMF. In 2008, some EU MMFs were again obliged to suspend redemptions due to their inability to satisfy all redemption requests while others chose to decrease the NAV of their MMF[25].

Depriving investors of their short-term MMF investments may have repercussions on other entities that rely on short time finance through MMF. As mentioned above, in Europe, around 22% of short-term debt securities issued either by governments or by the corporate sector are held by MMF and MMF hold 38% of short-term debt issued by the banking sector. The economy is therefore highly interconnected with the MMF sector. This problem has a strong internal market angle since the investments of the MMF are largely performed on a cross border basis, as evidenced in Annex 3.3. This is particularly true for the MMFs domiciled in IE and LU (less than 3% of the MMF’s assets domiciled in those two countries are invested domestically according to the ESRB survey). A problem arising on a MMF domiciled in a specific country could then rapidly affect the financing of entities domiciled in other countries. The Reserve Primary failure illustrates this cross border contagion: a US MMF caused a severe liquidity crisis affecting the European MMFs and thus the European issuers of short term debt.

Because MMFs play a central role in the short term funding of entities like banks, corporates or governments, investor runs on MMFs may cause broader macroeconomic consequences. During the financial crisis of 2008, MMFs were forced to sell some of their investment assets in a declining market, fuelling a liquidity crisis. In addition, managers of MMFs were obliged to put aside enough cash resources in order to meet increased redemption requests. This prevented them from investing in short term securities, or restricted them to investing only in ultra-short term securities. In these circumstances, money market issuers faced severe funding difficulties with respect to longer term debt. The markets for longer-term commercial paper to be issued to MMF essentially dried up. While financial institutions (mainly banks) account for the largest part (around 85%) of the 1'000 billion EUR issued to MMFs, governments represent a share of around 10% whereas corporates account for roughly 5%. Governments and very large corporates use the money market as a means to obtain short term financing, alongside bank credit lines. Any contagion to the short term funding market could then also represent direct and major difficulties for the financing of the "real economy".

In addition to this system-wide event, an isolated event can also generate systemic implications. When an AAA rated fund is confronted with a negative watch or a downgrade, this can precipitate large redemptions. For example when Fitch Ratings placed three Prime Rate Capital Management (PRCM) funds on negative watch rating, the PRCM funds suffered significant redemptions, 50% in the case of its Sterling fund[26] A single rating decision may have consequences for the whole money market. Because the fund must sell its assets very quickly, a change in a single fund's rating may provoke a general price decline in money market instruments. A run on a fund with a larger size than the PRCM (the biggest EU fund has more than €50 billion in assets under management) confronted with the same events could have larger systemic implications, as described in the previous paragraph.

Another aspect relates to the rating of the assets in which the MMFs invest. In order to keep their AAA rating and avoid investor's runs, MMFs will invest only in very high quality instruments that benefit from the highest possible rating. Therefore once an issuer of money market instruments is put on negative watch or downgraded, MMFs will sell these instruments as quickly as possible, out of a fear that holding such 'downgraded' instruments may endanger the MMFs own AAA rating. These fire sales may have grave consequences for the downgraded issuer because its access to the money market funding may suddenly close, which may affect its viability. 2.2.2. Contagion to sponsors

Under the heading of sponsor support, this impact assessment will discuss contagion risks with respect to two types of sponsors: asset managers or banks.

An MMF can be sponsored either by an asset manager or by a bank. In case one MMF in a portfolio encounters problems in terms of liquidity or the NAV, this could have repercussion on the own funds of an asset manager or those of the sponsoring bank. MMFs have historically relied on discretionary sponsor capital[27] to maintain their NAV. In the case of CNAV, MMF sponsors may decide to provide support in order to avoid 'breaking the buck'. Sponsors are often forced to support their sponsored MMFs out of fear that their MMF is 'breaking the buck', due to the reputational risk, may trigger a panic that could spread into the sponsor other businesses. For bank sponsors, the risk is even more acute because the panic could spread to the bank's retail client base which in turn could lead the bank to default.

Sponsors are largely unprepared to face such situations because the "implicit" guarantee is not recorded as an explicit guarantee that would require the build-up of capital reserves. Because banks do not build capital reserves directly linked to their exposure to the risk of MMFs, , sponsor support may reach proportions that exceed their readily available reserves, depending on the size of the fund and the extent of redemption pressure. This, in turn, may provoke the failure of the sponsor and risk contagion to other entities that sponsor MMF. Because most of the sponsors in Europe are banks, it may create a contagion channel to the whole banking sector if one bank were to face funding difficulties due to the support provided to the MMF. As an example (Annex 5.2), European banks such as Société Générale, Barclays or Deutsche Bank, made losses linked to their MMF activities amounting to hundreds of millions of Euros. The exact magnitude of the sponsor support is however difficult to estimate due to the lack of communication from the sponsors.

Because MMFs and sponsors are rarely domiciled in the same country, the sponsor support creates cross border contagion channels. For example none of the sponsors of the MMFs domiciled in IE and LU are domiciled in those jurisdictions.

The importance of sponsor support can also be demonstrated by looking at the counterfactual; i.e. the absence of sponsor support. In this case the balance sheet of the asset manager may be largely insufficient for providing the support. The largest sponsors manage over €250 billion in MMF assets worldwide while in some cases their readily available cash in their balance sheet amount to only a few hundred millions[28]. The example of the Reserve Primary Fund is revealing: the manager announced that it will support the fund with its own money, and actually did so until it lacked the resources to continue redeeming all shares at $1. The sudden drying up of sponsor support led the CNAV MMF to break the buck, which created the run and finally led to a liquidation of the fund.

There is large evidence that European CNAV MMFs benefited from sponsor support during the crisis. The sponsor support has not been absent for VNAV MMFs during the crisis but suspension of redemption and NAV decreases were used more widely than sponsor support. In contrast to CNAV MMFs, VNAV MMFs do not need NAV support (i.e. loss absorption). The motivations behind the sponsor support to VNAV were, according to market participants that gave support, to indemnify clients in order to avoid complaints about mis-selling practices.

Because the sponsor support is so important for the ability of a MMF to maintain its stable price, the quality of the sponsor has become a decisive criterion in the investment choice of investors. According to a survey[29] made by Fitch Ratings, 80% of the European treasurers that have been consulted consider the financial standing of the sponsor when selecting a MMF. According to McCabe (2010) a factor influencing the runs is the credit risk of the sponsor. McCabe notices that sponsors with higher credit default spreads (measure of credit risk) were encountering larger outflows. In some cases MMF run by asset managers can be put at a disadvantage in comparison to a MMF run by banks. Because banks have to comply with minimum capital requirements and have much larger balance sheets than asset managers, investors have a tendency to switch to bank sponsored MMFs when a crisis arises, further increasing the redemption pressure on MMFs run by asset managers. In other cases, as highlighted by Gordon (2012), the banks can be put at a disadvantage in comparison to asset managers: during the 2008 crisis, when there was a complete loss of trust in the US banking system, MMFs run by US banks were suffering larger outflows than MMFs run by pure asset managers. This shows that there is a complete shift in investor behaviour: instead of looking at the portfolio risk and reward profile of the fund, they look at the sponsor ability to support the fund.

This is also illustrated by the reasons advanced by Fitch after it changed its opinion on PRCM funds, MMFs run by an asset manager. A statement from Fitch says: “The sponsor’s financial resources are no longer consistent with a ’AAAmmf’ rating, even after taking into consideration the funds’ conservative investment guidelines.”[30] This rating agency puts the emphasis on the financial strength of the sponsor instead on the intrinsic risks of the portfolio. This indicates a clear shift that AAA rated MMFs (CNAV MMFs) are no longer considered as classic investment funds but rather as bank guaranteed products. The fact that a larger sponsor, Federated Investors, announced during the week following the negative watch that it will buy the manager of PRCM funds calmed investors who stopped their redemptions. Fitch reaffirmed its earlier rating on that basis. While not downgraded, the MMFs owned by the asset manager Henderson Global Investors have been sold to Deutsche Bank in 2010 because the manager did not want to bear any longer the risk attached to the "implicit" guarantee given to investors[31]. These events give evidence that small asset managers have difficulties to provide the necessary guarantees for maintaining a stable share price.

Potential contagion channels induced by MMFs

2.2.3. Early redeemers are advantaged over late redeemers

The first mover advantage creates a situation where late redeemers have to bear the costs associated with early redemptions. There is thus a transfer of money from late redeemers to early redeemers. In the case of VNAV funds, the cost of the redemption generally amounts to the difference between the price at which the fund sells the assets (the bid price) and the price at which the investor gets redeemed (the mid-price). The difference between the bid price and the mid-price is usually very low but tends to increase during stressed market conditions. In the case of CNAV funds, the cost of the redemption may represent a substantial disadvantage for the late redeemers because the difference between the market value and the €1 price is usually higher[32].

The transfer of money for CNAV funds is well illustrated by the following example, provided by Chairman Shapiro in her testimony before the US senate, June 21, 2012: "Assume, for example, a fund with 1,000 shares outstanding with two shareholders, A and B, each of which owns 500 shares. An issuer of a security held by the fund defaults, resulting in a 25 basis point loss for the fund—a significant loss, but not one that is large enough to force the fund to break the buck. Shareholder A, aware of a problem and unsure of what shareholder B will do, redeems all of his shares and receives $1.00 per share even though the shares of the fund have a market value of $0.998. The fund now has only 500 shares outstanding, but instead of a 25 basis point loss has a 50 basis point loss and will have broken the buck. Shareholder A has effectively shifted his losses to Shareholder B."

What the above example shows is that the early redeemer, A, by taking out 500 shares at $ 1 has taken the full value of its shares, thereby shifting all the losses onto the remaining investor who now has to bear all of the loss when redeeming the remaining 500 shares. In addition the late redeemers may have to support additional inconvenience when the redemptions are temporarily suspended or even worse when the fund is liquidated after having broken the buck. The access to the liquidity is then stopped for the investor.

Another detrimental effect affects the retail investors in particular. Studies demonstrate that institutional investors are first to redeem as soon as stress appears in the markets, often leaving retail investors to bear the losses. During the 2008 US MMF crisis, redemptions were almost exclusively requested by institutional investors because they often possess superior knowledge of the market and have greater capacities and resources to react quickly, often on the basis of insight that is not yet available in the public domain[33].

2.3. Consequences 2.3.1. Financial stability and bail-out risk

Because the money market and sponsors are systemically relevant, investors may expect that, once sponsors are unable to support the stable NAV of their MMFs, governments would intervene and take the sponsors' place in providing financial assistance to MMFs. Following the Reserve Primary Fund breaking the buck, the US authorities had to provide unlimited guarantees in order to stop contagion. Once the US authorities announced that they would guarantee the $3 trillion of money invested in MMFs, the market calmed down and redemptions stopped. Without the support of the US government, the US MMFs would have continued to suffer from large redemptions[34].

The public authorities in Europe had also to step in to stop the contagion. Germany (DE) passed a law to stabilize the market with a specific article dedicated to the support of short-term instruments[35] accompanied by the intervention of their central bank. Luxembourg (LU) announced that it would take all necessary steps needed to stabilize the national money market funds[36]. In addition, the European industry pushed the ECB to grant liquidity support to MMF or their sponsors. Instead, the ECB decided to reduce the liquidity pressure by lowering interest rates and by broadening the scope of eligible collateral for banks (including usual money market instruments such as non-Euro marketable debt instruments and certificates of deposit traded on non-regulated markets).

The different reactions from the European entities were not conducive to enhance the stability of the European market as a whole. The fact that the DE authorities guaranteed their national MMFs had consequences on other countries. The DE guarantee resulted in flows from LU domiciled funds into DE domiciled funds, which led the LU authorities to make an equivalent declaration. Ireland (IE) also experienced immediate problems after the DE and LU announcements but the sentiment cooled down when the ECB intervened.

2.3.2. Insufficient investor protection

MMFs are most of the time not used for long periods of time but only for short period of time when the investor wants to place its excess cash for a few days or a few weeks. If the fund suspends redemptions for a few days or few weeks, this can put in danger the cash management process of the investor. In the case of a corporate using MMF to place their cash, a suspension can lead to the inability to perform the planned operational expenditures such as paying salaries. The consequences attached to liquidation may be extremely disruptive for the investor since redemptions will remain suspended for a potentially very long period of time and the precise amount recovered in the end will remain uncertain for an equally long time. The viability of an investor having a substantial part of their cash invested in a liquidated fund would then be put into question.

2.4. How would the problem evolve without EU action? The base line scenario

Rules governing MMF are currently scattered throughout different pieces of legislation, some taking the form of EU directives, some the form of guidelines developed by CESR and some the form of purely national legislation[37]. If no action is taken to create a legislative framework applicable to MMFs, it is very likely that the problems that have been identified will persist and could be aggravated by future market developments. Should investors be confronted to a new crisis affecting MMFs, they may decide to definitely stop using MMFs, thus endangering the existence of the money market and the issuers relying on it. Current rules are inherently insufficient to address an issue that has such a systemic impact for the whole EU. The EU is best placed to ensure a coherent response (please refer to Annex 7.4 for a discussion of other alternatives).

The MMFs would remain unprepared to face stressed market situations that are likely to reoccur in the future. The liquidity level might still not be sufficient to meet all redemption requests and the incentives to redeem first will still be present. Overall the contagion channels will persist, continuing to represent a threat for the European banking system and for the entities using the money market as a financing tool. The responses from the EU national authorities to a future crisis might still diverge to a large extent (e.g. by providing different levels of State guarantee in an uncoordinated manner), endangering the viability of the single market. The base line scenario is further developed in sections 5.1.1 and 5.2.1.

Action is required now to ensure harmonization of the EU law with the recommendations of the international organizations and the rules already applied in other jurisdictions. IOSCO, FSB or ESRB have finalized their conclusions and they recommend a new regulatory framework for MMFs. Europe also needs to align its rules with the higher standards that are already implemented in other jurisdictions, as the ones on liquidity implemented in the US. There is also a need to move forward by engaging the debate surrounding the issues linked to the stability, as the US did with the publication of the FSOC recommendations[38].

2.5. Subsidiarity and proportionality

According to the principle of subsidiarity (Article 5.3 of the TFEU), action on EU level should be taken only when the aims envisaged cannot be achieved sufficiently by Member States alone and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the EU. The aim of the proposal is to ensure a level playing field across Europe among the different operators that offer MMFs.

On account of their systemic importance to finance sectors of the EU economy, the aim is also to create a robust framework covering MMF as an essential source of short-term financing for the European economy. As shown in this impact assessment, when MMFs are confronted with large-scale redemption requests, the markets for commercial paper to be issued to MMF can quickly dry up. Issuers depend on MMFs as a financing tool and are evenly located throughout the EU. Governments and very large corporate use the money market as a means to obtain short term financing, alongside bank credit lines. Any contagion to the short term funding market could then also represent direct and major difficulties for the financing of the European "real economy".

In addition, as many operators that offer MMFs in Europe are domiciled in Member States other than those where the funds are marketed, the creation of a robust framework is essential to avoid cross-border contagion between a MMF and its sponsor. This is especially acute when the sponsor is located in a Member State that may not have the budgetary resources to bail out a defaulting sponsor. As MMF are predominantly domiciled in two EU jurisdictions (IE and LUX), both jurisdictions in which no sponsor banks are domiciled, the cross-border dimension of sponsor support becomes acute. The cross border dimension is further illustrated by the high proportion of non-domestic MMF investors in certain countries (IE and LU) as well as the high proportion of investments in money market instruments issued in other Member States.

By harmonising the essential product features that constitute a MMF the proposal aims to establish a uniform level of investor protection. Detailed rules on the daily or weekly liquidity of assets held by a MMF, the accounting methods used to calculate the NAV of money market instruments held in a fund, the calculation of a share price, possible additional requirements on those offering a stable NAV, policies on issuer concentration and 'know-your-customer' policies to anticipate large-scale redemptions are examples of measures that would require a uniform application across the EU in order to ensure their full effectiveness. Individual action at Member State level would lead to confusion on the key features of a MMF, its liquidity and the stability of its share price. Uncoordinated action at national level also risks that Member States define different liquidity ratios, different limits on issuer concentration and different methods on how to calculate the NAV and the share price applicable for redemptions. If each of these items were addressed in a different manner at national level, the risk of runs and cross-border contagion between a MMF and its sponsor would not be addressed effectively; especially when the issuers and the MMFs are located in different Member States. As MMF invest in a broad range of financial instruments across the EU, the failure of one MMF (for example due to insufficient regulation at national level, evidenced by the uneven implementation of the ESMA guidelines) would have repercussions on government and corporate financing across the EU.

National regulatory approaches are inherently limited to the Member State in question. Regulating the product and liquidity profile of a MMF at national level only entails a risk of different products all being sold as MMF. This would create investor confusion and would impede the emergence of a Union wide level playing field for those who offer MMF to either professional or retail investors. Therefore, action at European level is needed.

All of the above-mentioned product requirements are currently not part of existing UCITS rules. Although UCITS rules contain requirements on the investment instruments eligible to a UCITS funds, rules on measuring leverage and fund exposure as well as detailed rules on the operation of UCITS managers, the specific product profile of MMF –as described above – are not yet covered by the UCITS single rule book. Nevertheless, and in order not to introduce regulatory divergences in the harmonised UCITS universe, any update of the UCITS rules to account for the special features of MMFs must be undertaken at European level as well. In addition, and in order to avoid regulatory arbitrage, MMFs that are not covered by the UCITS rules must also be included in the creation of a uniform rule-book on the MMFs at European level.

The options analysed below will take full account of the principle of proportionality, being adequate to reach the objectives and not going beyond what is necessary in doing so. Whenever possible we have ensured that the retained policy options are compatible with the proportionality principle, taking into account the right balance of public interest at stake and the cost-efficiency of the measure. The requirements imposed on the different parties have been carefully calibrated. Whenever possible, requirements have been crafted as minimum standards (e.g., daily or weekly liquidity, issuer concentration limits) and regulatory requirements have been tailored so as not to unnecessarily disrupt existing business models (e.g., providing for appropriate transitional periods before the NAV of a MMF has to be floated or leaving operators the choice between stringent capital requirements and floating the NAV of their MMF). In particular, the need to balance investor protection, avoidance of cross-border contagion, efficiency of the markets, the financing of the European industry and costs for the industry have all been balanced in laying out these requirements.

3. objectives 3.1. General, specific and operational objectives

In light of the analysis of the risks and problems above, the general objectives are to:

(1) Enhance financial stability in the internal market;

(2) Increase the protection of MMF investors

Reaching these general objectives requires the realisation of the following more specific policy objectives:

(1) Prevent risk of contagion to the real economy;

(2) Prevent risk of contagion to the sponsor;

(3) Reduce the disadvantages for late redeemers, especially with respect to redemptions in stressed market conditions.

The specific objectives listed above require the attainment of the following operational objective:

(1) Ensure that the liquidity of the fund is adequate to face investor's redemption requests. This objective will be measured against the level of liquidity reached by the MMFs. This is linked to the natural liquidity that is independent from the secondary market constraints, and to the quality of the assets. A MMF with enhanced liquidity facilities and a portfolio of better quality will be able to face more effectively the redemption requests.

(2) Transform the structure of MMF so that the stability promise can withstand adverse market conditions. The structure of the MMF offers stability through three main aspects: the marketing material that promises a guarantee when this is not the case, the sponsor support for maintaining the NAV and the AAA rating that gives a false sense of security. According to these three features, this objective will be measured against three criteria: change in marketing materials, reduced events of sponsor supports and absence of massive redemptions following a rating downgrade.

3.2. Consistency of the objectives with other EU policies

The identified objectives are coherent with the EU's fundamental goals of promoting a harmonised and sustainable development of economic activities, a high degree of competitiveness, and a high level of consumer protection, which includes safety and economic interests of citizens (Article 169 TFEU).

3.3. Consistency of the objectives with fundamental rights

The legislative measures setting out rules for the provision of investment services and activities in financial instruments, including sanctions need to be in compliance with relevant fundamental rights embodied in the EU Charter of Fundamental Rights ("EU CFR"), and particular attention should be given to the necessity and proportionality of the legislative measures.

The following fundamental rights of the EU Charter of Fundamental Rights are of particular relevance:

• Freedom to conduct a business (Art. 16)

• Consumer protection (Art. 38)

Limitations on these rights and freedoms are allowed under Article 52 of the Charter. The objectives as defined above are consistent with the EU's obligations to respect fundamental rights. However, any limitation on the exercise of these rights and freedoms must be provided for by the law and respect the essence of these rights and freedoms. Subject to the principle of proportionality, limitations may be made only if they are necessary and genuinely meet the objectives of general interest recognised by the Union or the need to protect the rights and freedoms of others.

In the case of the fund legislation, the general interest objective which justifies certain limitations of fundamental rights is the objective of ensuring the market integrity and stability. The freedom to conduct a business may be impacted by the necessity to follow the specific objectives of ensuring sufficient liquidity, preventing the risk of contagion and enhancing safeguarding of investor's interests. We have focused our assessment on the options which might limit these rights and freedoms. The proposed new rules will overall reinforce the right to consumer protection (Art. 38), whilst respecting the fundamental rights and observing the principles recognised in the Charter of Fundamental Rights of the European Union as enshrined in the Treaty on the Functioning of the European Union.

4. policy options

In order to meet the first operational objective, the Commission services have analysed a total of seven different policy options. For ease of reference, these options are grouped into different headings, such as options on redemption restrictions, options on liquidity policies and options on MMF 'customer profiling'.

Policy options || Summary of policy options

1.1. No action || Take no action at EU level

Redemption fees and restrictions

1.2 Impose a hold back period for a proportion of the redemption order || MMFs would split the redemption in two phases. The investor would be able to redeem a substantial part (e.g., 95%) without restriction but would have to wait some time to receive the balance (5%). The held-back amount would serve to absorb any losses that may have occurred during the period.

1.3 Impose a liquidity fee || MMF managers may decide to implement a liquidity fee on redeeming shareholders during stressed market conditions. The fee would be based on the mark to market NAV.

1.4 Redemption in-kind || Under this option, the managers may decide to pass the liquidity cost of the redemption to the investor, by transferring the securities directly to the investor instead of the cash. This system would be applied to large redemption requests.

Increase the liquidity of portfolio assets

1.5 Set minimum liquidity thresholds for overnight and weekly maturing assets || MMFs would be obliged to hold minimum amounts of assets maturing overnight and in one week. This would allow the fund to have almost certain access to minimum amount of cash on regular basis.

1.6 Enhance the quality of the portfolio || MMFs would be obliged to ensure a high level of diversification by limiting the exposure to one single counterparty to 5% of the portfolio assets. In addition the exposure to certain ABS products will be prohibited.

Implement a "Know your shareholders" policy

1.7 MMF managers should develop policies to anticipate large redemptions || MMFs would have to adopt policies and procedures aimed at ensuring better knowledge of their customer base. This would allow better monitoring and anticipation of large redemption requests.

Options 1.2, 1.3 and 1.4 are mutually exclusive.

In order to meet the second operational objective, the Commission services have analysed a total of 9 different policy options. For ease of reference, these options are grouped into different headings, options on the transparency, valuation of MMF assets, on capital buffers and bank status and an option on rating.

Policy options || Summary of policy options

2.1. No action || Take no action at EU level

Increase transparency

2.2 Increase transparency toward investors || The managers of MMFs would be required to clearly state in their marketing material that their product does not benefit from any kind of guarantee.

MMF valuation methodology

2.3 Require all MMFs to have a fluctuating NAV: impose a full mark to market method and prohibit any method based on ‘rounding’ NAV or share prices. || MMFs would not be allowed to price their shares at a stable €1 per share net asset value (NAV). In order to convert to a floating NAV, two changes are necessary. First the amortized cost methodology should not be allowed anymore but the use of the mark to market methodology should be mandated for valuing all assets. The second change consists of requiring funds to publish their NAV at the detail of 1 basis point. This measure would stop the rounding method which permits MMF to publish a NAV of €1 when the true NAV could vary anywhere between 0.9950 and 1.0049.

2.4 Require all MMFs to have a fluctuating NAV: impose a full mark to market method except in the last 3 months and stop the rounding method || The MMFs would not be allowed to use price at a stable € 1 per share but could still value their assets at amortized cost, as long as the latter have a remaining maturity of less than 3 months. For all other assets, the use of the mark to market method would be mandated. As under option 2.2, the detail of the NAV should go to 1 basis point in order to avoid rounding.

NAV buffers

2.5 Introduce a NAV buffer for CNAV MMFs financed by investors || MMF that offer price stability would be obliged to create a fund-level reserve as a potential backstop against falls in the 'real' or 'shadow' NAV. The reserve would be drawn upon if losses on assets caused the MMF NAV to deviate from the redemption price of the CNAV (€1). The financing by investors would require retention of a portion of the MMF income to fund the NAV buffer.

2.6 Introduce a NAV buffer for CNAV MMFs financed by the manager || As option 2.5 but the buffer would be funded by the MMF manager itself.

Conversion to a bank status

2.7. Require bank-like regulation for CNAV MMFs || CNAV MMFs would have to reorganize as special purpose banks and be subject to banking oversight and regulation. This would lead MMFs to adopt bank-like capital reserve requirements and grant them access to central bank refinancing.

Valuation methodology or capital buffers

2.8 Require MMF to float their NAV, except when they can demonstrate a sufficient capital buffer || Managers of CNAV MMFs would be required to float the NAV of their fund (option 2.3) or, if they prove to their regulator that they have built a 3% NAV buffer, they would be authorized to continue using CNAV MMFs (option 2.6).

Ratings

2.9 Ensure that the MMF manager no longer pay for credit ratings at fund level || Under this option, managers will be prohibited from paying CRAs to award a rating on their funds

Groups of options (2.3-2.4), (2.5-2.6), 2.7 and 2.8 are mutually exclusive as are sub-options 2.3 against 2.4 and 2.5 against 2.6..

5. analysis of impacts

This section sets out the advantages and disadvantages of the policy options, measured against the criteria of their effectiveness in achieving the specific objectives (prevent risk of contagion to the money market, to the sponsors and create equitable treatment for all MMF investors) and their efficiency in terms of achieving these options for a given level of resources or at lowest cost. Impacts on relevant stakeholders and their views (see the text boxes) are also considered. The retained policy options should score the highest for each related specific objective while at the same time have the least costs and least impacts on stakeholders.

5.1. Options aimed at ensuring that the liquidity of the fund is adequate to face investor's redemption requests 5.1.1. Policy option 1.1: take no action at EU level (baseline scenario)

The baseline scenario for this set of options means that there will be no changes to all of the rules that are currently governing the liquidity of the MMFs. These rules are mostly provided by the CESR guidelines on MMFs which apply to all European funds that market themselves as MMF. These guidelines have limited the maturity of the assets in which the MMFs can invest and introduced maximum levels for the weighted average life (WAL) and weighted average maturity (WAM) of the MMF portfolio. These measures reduced the sensitivity of the MMFs to market risk which in turn increased the global liquidity of the European MMFs.

However these guidelines may not suffice to prevent large outflows in stressed market conditions because investors would still have an incentive to redeem in order to profit from the best conditions. In addition the secondary market of the money market instruments might still suddenly dry up, leaving no other possibilities to the fund than suspending redemptions. Suspensions are used by managers as a last resort, after they have explored all other possibilities. Taking no further action would imply that the funds would not be provided with intermediary tools that could prevent immediate recourse to suspensions. This would leave the problems of contagion and unfair treatment of investors completely unaddressed.

The results from the consultation highlight the need (expressed by the majority of the stakeholders from the MMF industry) to increase the liquidity level of assets held in MMFs. Some managers, from the FR market; consider that the liquidity should be enhanced for CNAV funds only while others, predominantly from DE, consider that no additional rules are needed.

Redemption fees and restrictions

The three following options are aimed at reducing the redemption pressure by acting on the investor side, by reducing some of the liquidity features of MMFs. The three possible measures are discussed in the IOSCO recommendation 10.

5.1.2. Policy option 1.2: Impose a hold back period for a proportion of the redemption order

Impact on financial stability: By retaining a portion of the redemption order (the 'hold-back'), the MMF keeps the possibility to adjust the redemption price downwards, at least on the amount withheld at redemption. This provides the MMF with some flexibility to revalue assets should the value of its assets decline after fulfilling the main part of a redemption order. The aim of this option would be to cause shareholders that redeem early to more fully bear the costs of their early redemption – essentially by requiring that they remain exposed to potential decreases in the NAV of the fund for some period after their initial redemption has been fulfilled. MMF shareholders would then be required to internalize the liquidity costs created by their redemptions which would lessen their incentive to engage in a run. Because the hold-back would apply irrespective of market conditions, it has the advantage of addressing the liquidity issue in all market conditions.

Both the level of the hold-back amount and the length of the hold-back period are critical for correctly assessing potential impacts of this option on financial stability. A hold-back amount set at a high level would fulfil its objective of reducing run risk but could prove disruptive for investors. On the other hand, a hold-back amount that would minimize the impacts for the investors could be less efficient in tackling the run risk. The same principle applies to the length of the hold-back period; the longer this period, the higher the negative impacts for the investors. On the other hand, a longer hold-back would better address liquidity bottlenecks.

Impact on MMF investors: The main drawback of this option is that it would impose redemption restrictions on MMF investors. This result would appear counterintuitive as MMFs have always been associated with high degree of liquidity; ease of redemption indeed represents one of the most important reasons why investors chose MMFs in the first place. Limiting the possibility of investors to redeem would automatically decrease the attractiveness of the MMFs in comparison with other products such as bank deposits.

A secondary effect for investors is that retail investors would not be negatively impacted anymore if institutional investors redeem first. As demonstrated during the crisis, institutional investors were the first to react, potentially leaving the retail investors to bear most of the MMFs loss in value. Removing the first mover advantage would also remove the advantages (better knowledge and resources to evaluate the risks) that institutional investors possess at the expense of retail investors.

Impact on the MMF sector and the economy: should the attractiveness of the MMFs be reduced for investors, this would in turn decrease the role played by MMFs in purchasing short term debt instruments, thus decreasing the significance of MMFs as a financing tool for the European economy.

Cash managers often invest their excess cash resources for a few days or a few weeks only. Therefore, retaining a portion of their investments on a longer period than their primary investment period could seem disproportionate. This could discourage cash managers to invest at all in MMF: cash managers know that they would have less cash available to finance the daily operations of their company or less cash to finance unexpected investments.

The responses to the consultation and interviews with industry participants reveal that even a small hold-back amount could dramatically impact the attractiveness of MMF as a flexible cash management tool. The responses to the consultation were almost unanimously opposed to this mechanism.

During the debate surrounding the work of the US SEC for reforming MMFs, the Investment Company Institute (ICI) commissioned Treasury Strategies[39] to undertake a study on the impacts of various proposals, including the hold-back mechanism. The study has been realised with US investors only. 90% of the investors that have been asked said that they would decrease or stop using MMFs if such an option would be retained. The Association for Financial Professionals (AFP), a US based association of cash treasurers, asked its members on the same question[40]: 80% would stop or reduce investing in MMF.

Impact on MMF managers: Option 1.2 also raises operational challenges for MMF managers who would need to adjust their redemption processes. Bifurcating redemption into two phases and monitoring the retained amount over an extended period could increase the costs and complicate the operations at the MMF middle and back offices.

5.1.3. Policy option 1.3: Impose a liquidity fee

The envisaged mechanism would impose a fee equivalent to the amount required to compensate for a decline in the mid-value of a MMF's portfolio before and after any redemption. This fee would be calculated taking into account the liquidity cost of the whole portfolio, not just the most liquid assets[41]. The fee would be applied only during stressed market conditions and would therefore avoid creating permanent disturbances for the investors. Different trigger mechanisms can be envisaged for the application of the fee. It can for example be linked to the amount of daily redemptions (expressed as a percentage of the fund's total assets under management), to a point in time when redemptions cause the bid value to substantially deviate from the mid-value or when the bid value substantially deviates from the par.

Impact on financial stability: A liquidity fee could diminish the incentive of runs if investors know that they would have to pay the cost of their redemption order. This could also incentivize them to remain invested in the funds because if they decide to sell the MMFs they would inevitably be subject to the liquidity fee. As the fee is dependent on stressed market conditions, an investor that remains invested would still have a chance to avoid the fee if the market conditions return to normal.

On the other hand, since investors would know that a liquidity fee can be imposed, they will have an incentive to start redeeming once they sense a slight stress in the markets in order to redeem before the market situation deteriorates even further and the fee is activated. In addition, the mere activation of a liquidity fee (depending on the trigger point chosen) could then confirm the signal of a stressed market and thus, by itself, give rise to a wave of panic among existing MMF shareholders. This is because the activation of the fee indicates either that the NAV has sunk below a certain threshold or that the MMF is facing massive redemptions. This could ultimately result in a closure of the fund as it is unlikely that new investors will subscribe once they become aware of the situation. The existence of the fee has pro-cyclical effects.

Impact on MMF investors: Because investors have been used to a highly liquid and relatively inexpensive product, some of them could consider switching from MMFs to other products. The frequency of the use of the liquidity fee and its amount is however key to assess the exact impacts on the investors. On the other side, the system would ensure a fairer treatment between investors once the fee is activated: late redeemers would not have any more to bear the costs of early redeemers. But it is not possible to exclude that investors with better knowledge might still decide to redeem before the activation of the fee.

Impact on the MMF sector and the economy: negative impacts cannot be ruled out but it is expected that, due to the temporary application of the fee, the impacts would be less disruptive than under the permanent mechanism of option 1.2.

Impact on MMF managers: The liquidity fee could raise some operational challenges for the managers. Once the fee is activated, managers would have to perform calculations based on mark to market prices of the assets and apply the fee equitably to all redeeming shareholders of the day. The mark to market prices may not be easily accessible and may raise operational costs.

The liquidity fee mechanism is supported by three MMF providers: IMMFA, HSBC and BlackRock, although BlackRock proposes to impose a standard fee of 1%. IMMFA prefers to let the decision to implement the fee to the Board of directors of the fund. HSBC and BlackRock propose to base the activation of the fee on objective triggers. BlackRock also proposes a liquidity trigger: when half of the daily or weekly liquidity is reached, the fee should be activated. Other respondents recommend applying the fee to CNAV funds only but the majority of the stakeholders believe that a fee would not be operationally achievable, that it would most likely increase runs due to its pro-cyclical effect and that it will decrease the attractiveness of the MMFs for the investors. In its response to the consultation, the CFA Institute[42] presents the results of a survey they conducted among their members on both sides of the Atlantic. Only 30% of the European respondents think that liquidity fees should apply to MMFs.

5.1.4. Policy option 1.4: Redemption in-kind

Large redemptions may impose liquidity costs on other shareholders in the MMF by forcing the MMF to sell assets in an untimely manner. A large redemption causes the MMF to sell securities, possibly in a declining market and transfer the loss to all remaining shareholders, instead of isolating the loss to the redeeming shareholder.

Impact on financial stability: A requirement that MMFs distribute large redemptions in-kind would force redeeming shareholders to bear their own liquidity cost and potentially reduce the incentive to redeem. This would permit MMFs to distribute, at least to a large redeeming shareholder, securities in-kind, in proportion to the redemption request and transfer to that shareholder, and that shareholder only, the market risk of selling the redeemed securities on in order to generate cash.

Impact on MMF investors: While this option has the advantage to almost eliminate the liquidity risk of the MMF, it does not eliminate this risk completely but passes it on to the investor. An investor confronted with urgent cash needs may still decide to sell-off the assets immediately after having received the securities from the fund. This option would therefore not prevent a general decline of the value of assets in a money market fund but could just delay the systemic implications of large redemptions and it is not granted that it could prevent runs since investors would still have an incentive to redeem before such a mechanism is implemented. It is also questionable that all investors would have the same operational capabilities to properly sell the securities because the burden of valuing and liquidating these assets would fall directly on the investors. Such a mechanism would have to be implemented only for large institutional investors that have such capabilities, potentially creating unfair treatment among investors.

Impact on the MMF sector and the economy: Apart from the operational challenges, this option could decrease the attractiveness of the MMF sector as a whole as investors become aware that, at least in times of stressed market conditions, they would have to sell redeemed securities themselves in the market, thus bearing the 'cost of liquidity' that is normally assumed by the MMF. This creates additional costs and delays and it is far from certain that investors would be ready to bear these burdens. Reduced attractiveness will tend to negatively impact the role played by MMFs in financing the economy, even if the mechanism is applied during stressed market conditions only.

This option receives very little support. Only two stakeholders (IMMFA and HSBC) argue that it represents a useful tool to manage large redemptions while acknowledging operational challenges. EFAMA and BVI analyse that the valuation, operational and legal issues will be too high. In the CFA Institute survey, only 19% of the EU respondents think that redemption in-kind should apply to MMFs.

Liquidity of portfolio assets

Both following options are aimed at enhancing the liquidity profile of the MMFs by increasing the natural liquidity and by enhancing the quality of the portfolio.

5.1.5. Policy option 1.5: Set minimum liquidity thresholds for overnight and weekly maturing assets

Impact on financial stability: When a MMF is confronted with redemption requests; it faces pressure to sell assets as soon as possible to meet these requests. Imposing minimum liquidity requirements could limit the liquidity costs associated with the sale of assets. If a minimum portion of the fund's holding is going to mature every day, respectively every week or month, this would ensure minimum cash reserves are available at no additional cost to redeem shareholders. The MMF would not be dependent on the secondary market - which is the first to suffer in a liquidity crisis. By increasing the ability of the fund to meet the redemption requests at no additional cost, it could allow the MMF to be better equipped in facing investor's runs. Nevertheless the positive impacts may not be overstated because, in stressed market conditions, the liquidity may evolve quickly and defaults of issuers are not excluded, even when exposure is confined to their short-term assets.

By decreasing the average maturity of the instruments held by the fund, such liquidity limits would also reduce the market risk of the MMFs since their portfolio would be less sensitive to interest rate fluctuations.

Impact on investors: Impacts on investors could prove to be rather limited; it could maybe lightly decrease their return because of the lower yields associated with very short term assets but at the same time decrease the risk associated with their investment. Therefore the impacts will be rather positive.

Impact on MMF managers: Managers would have to closely monitor their investments in order to follow these new requirements. They would lose some discretion in selecting assets since they had to invest in very short term assets in order to bring the portfolio composition in line with the new standards. This option has the advantage to be already implemented to certain MMFs through the IMMFA code of practice (see Annex 2.3), thus limiting any impacts in relation to the CNAV funds domiciled in IE and LU. According to the ESRB data, the MMFs already hold 20.6% of their portfolio in assets maturing the next day and 28.3% in assets maturing in less than one week.

Impact on the MMF sector and the economy: The trend toward investing more in very short term assets may have potential implications on the short term funding market. Because MMFs would be obliged to maintain very short term liquidity ratios, they would invest less in securities maturing at the end of the yield curve, potentially impacting entities that finance themselves under this maturity range (mainly between 1 and 2 years). This option might spawn a contraction of money supply in the yield curve range between mid-maturity and 397 days. The impact on European MMF may, however, be limited since only a very tiny proportion (only 1% of MMF assets are invested in the 1-2 years maturity range) of such mid-maturity assets are held in short-term MMF. Issuers of such short term debt instruments will therefore face very little impacts.

The vast majority of the respondents, being MMF managers, public authorities or investors, to the consultation would favour the principle of liquidity constraints. Some MMF managers however fears that it might decrease portfolio returns and thus reduce the attractiveness of MMFs, or that it could lead to a squeeze in the availability of very short term instruments.

This option is the recommendation 7 of IOSCO and is already implemented in the US under the rule 2a-7.

5.1.6. Policy option 1.6: Enhance the quality of the portfolio[43]

The liquidity of the MMFs is defined by the maturity of the assets (option 1.4) and the credit quality of the assets. The quality is mainly measured by the credit risk of an asset. An asset with high credit risk will usually be subject to larger price fluctuations and less liquidity.

Impact on financial stability: At the level of the portfolio[44] the credit risk can be mitigated to some extent through diversification: MMFs invest in assets issued by different issuers in order to limit impact on the portfolio of one single credit event. UCITS funds have currently the possibility to have a maximum exposure of 40% towards one issuer (or to issuers belonging to the same group) by combining the investments in money market instruments and deposits. Non-UCITS funds do not have such rules. Under this option, the maximum exposure to one issuer would be limited to 5% for the money market instruments and 5% for the deposits. This would reduce the risks faced by the MMFs, thus preserving their ability to perform the requested redemptions. On the other side, the MMFs that use the extended portfolio limits allowed by the ESMA rules could benefit from a higher limit set at 10% per issuer of money market instruments. These funds are not in the ESMA “short-term” category, always use fluctuating pricing methods and investors are aware of their longer term nature. For these reasons they can sustain a higher exposure limit than the short-term MMFs that are more prone to investor’s runs.

At the level of the assets, the MMFs would be prohibited from investing in certain ABS products such as Asset Backed Commercial Papers (ABCP) where the underlying assets do not consist of corporate debt. Those products linked to residential mortgages, student loans or other types of assets would be prohibited. Only securitized products linked to corporate debt and subject to strong prudential rules will be allowed up to a maximum of 10% of any single MMF portfolio. This option is designed to perpetuate the useful role that ABCP may play in financing the short term funding needs of small and medium companies that do not have the required size to issue directly money market instruments. This sector of the securitisation market was also less affected during the crisis.

The appropriateness of other ABS products for a short term and very liquid vehicle, such as a MMF, is questionable. The MMF managers have significantly reduced their exposure to the asset-backed sector since 2007 and the CESR guidelines now require the manager to take into account the operational and counterparty risk inherent in these structured financial transactions. However, risk cannot be ruled out entirely. Nothing prevents MMFs to increase again their investments in these kinds of products and it is not granted that another crisis will not affect this sector in the coming years. Because investors in MMFs are particularly risk-averse, any concerns in some ABCPs might cause investor's runs. Furthermore not all managers have the capabilities and resources to correctly assess the underlying risks of such instruments: it requires thorough analysis for evaluating the risk of each underlying security as well as the risks stemming from the structuring process of ABS. This can lead to the selection of instruments that are inappropriate for cash management purposes. In addition, the valuation of certain ABS is inherently highly complex leading to opaque prices which undermine investors trust. At the end this might impact the confidence that investors have in the stability of the MMFs. The prohibition to invest in certain ABS might represent a good solution to avoid any further problems linked to this market. The clarity towards investors will be increased and the stability of the MMF sector reinforced.

Impact on the MMF sector and the economy: The impacts of reducing the exposure limit would be rather limited for the CNAV funds domiciled in IE and LU. Under the IMMFA rules (representing 50% of the EU MMF assets), CNAV MMFs are already required to apply the 5% limit. Other funds will have in certain situations to adapt to these new rules. According to a representative panel of French VNAV funds, in some circumstances the exposure to a single issuer exceeds the limit of 5%. This is mainly the case for issuers that are important credit institutions. Some VNAV MMF managers argue that a 5% limit will have an impact on the issuers of money market instruments and on the portfolio of the MMFs itself. Different issuers of money market instruments may belong to a larger group thus their exposure would fall under the 5% limit applying to the whole group. This may reduce the possibility for a MMF to buy such instruments. This may for example be the case for regional banks issuing instruments and that belong to a larger banking group; the limit of 5% will include the regional banks and the banking group together. On the other side managers of VNAV MMFs argue that respecting a 5% issuer limit is difficult due to a scarcity of eligible issuers. This would impact the portfolio management of their fund.

These arguments may be valid for some VNAV MMFs but it is difficult to prove to which extent these managers cannot adapt to the new rule when half of the European market (CNAV MMF) already follows the 5% issuer’s limit. In addition many VNAV MMFs already follow the 5% limit without apparent difficulties. It should also be noted that the 5% limit will apply to money market instruments and to deposits separately which will enable the MMF to have a total exposure of 10% to a credit institution, provided that half is invested in money market instruments and half in deposits. The limit will not apply to government assets due to the lower risk attached to sovereign issuers. In addition the non-short-term MMFs will be able to use a higher limit of 10% which could bring the total limit to 15% by adding the 5% deposit limit. These funds represent around 50% of all VNAV funds so the impact will be much more limited on these funds.

Such a measure would also enhance international coherence because it is already implemented in the US, under rule 2a-7.

The impacts of prohibiting the use of ABCP will be limited because the managers invest only marginally in these assets. According to the ESRB survey, only 0.7% of the assets would be concerned. According to the data from IMMFA and concerning IMMFA funds only, the proportion of ABS in the portfolio ranges between 2% and 4% (this is a bit more than the 1.2% observed in the ESRB survey for CNAV funds). Issuers of ABCP should however be to some extent impacted, except the ones that issue ABCPs linked to corporate debts.

This option has not been directly tested in the consultation but the 5% exposure limit goes in the same direction as existing US rules (rule 2a-7), a policy often advocated by the stakeholders.

Impact on investors: Impacts on investors are expected to be very limited, their return should not be affected but the risk of their investment would decrease.

5.1.7. Policy option 1.7: MMF managers should develop policies to anticipate large redemptions

Impact on financial stability: As mentioned in the problem description, large and unanticipated redemptions may endanger the viability of a MMF. Requiring the manager to actively monitor its client base would permit the manager to anticipate large outflows and to adjust the portfolio composition to this upcoming event. Policies and procedures should be in place to ensure that appropriate efforts are undertaken to identify risk characteristics of the shareholders. Important indicators could be the identifiable pattern of investor's cash needs, the type of investor, and their risk aversion, the client's concentration in the fund or the seasonality of the flows. Particular attention should be paid to the main holders of the fund who can destabilize by their redemption the liquidity of the fund. Active monitoring of these holdings plus close relationship would help the manager to detect any need of cash.

Impacts on MMF investors: Impacts on investors would be rather limited; they may need to communicate more with the MMF manager on their investment horizon.

Impacts on MMF managers: "Know your customer" policies could increase some costs for the managers but this is mitigated by the fact that most of the managers are already engaged in active monitoring policies. According to a manager that already performs this task, the cost would comprise the need to build up an IT infrastructure to automate the provision of data which is estimated to amount to around €100’000, assuming that no pre-existing IT infrastructure can be reused. A drawback of such a method is that it would be impossible, without having an impact on data protection rights, to identify all clients since large proportions of assets are held through portals or omnibus accounts. There is no possibility to know the identity of the clients behind these nominee accounts, a fact which reduces the practicability of such an option. It is also doubtful that such an option could address the liquidity risk in its entirety since the incentives to run would still be present to a large extent as it would be difficult for the manager to anticipate the irrational behaviour often linked with investor's runs.

Impacts would be larger if clear client concentration limits would be imposed on top of client policies and procedures. This would have the advantage to limit the redemption risk arising from one single investor but would unduly impact the managers and the investors in regard of the limited additional advantages. Such a mechanism would be difficult to implement because it would be difficult to manage investor's positions just around the limit. This could force managers to redeem investors without their consent because they surpass the limit. The attractiveness of the MMF could be damaged for the investors while the managers would face additional burdens to manage the limits. Furthermore such a mechanism could not prevent investor's runs because a limit can be set on single investors only.

This option is the recommendation 8 of IOSCO and is already implemented in the US under the rule 2a-7.

This option was not directly tested in the consultation but was in numerous occasions cited by MMF managers, mostly running CNAV funds, as an appropriate option to anticipate large redemption requests.

5.1.8. Impact summary

Option 1.1 is not a viable option as it leaves the core problems without a coordinated EU policy response. Not acting at the level of EU rulemaking would entail that potentially the entire EU money market sector might be exposed to systemic risk.

Redemption fees and restrictions: A comparison between options 1.2, 1.3 and 1.4 reveals that the permanent hold-back mechanism in option 1.2 represents the highest burden for investors. A permanent hold-back is complex to administer and could have negative consequences for the viability of the entire money market industry. Both options 1.3 and 1.4 have the advantage of being temporary schemes, only triggered by stressed market conditions. This reduces their possible negative impacts. Option 1.4 appears to be more incisive than option 1.3, mostly due to the operational burden put on the investor who cannot redeem in cash but carries the liquidity risk of having to find buyers for the redeemed securities in a stressed market place. This might, in the end, result in much higher costs for the investors than the liquidity fee envisaged under option 1.3.

However none of these three options can address, in a satisfactory manner, the entirety of the problems, because none of these options would have any impact in preventing the problems. Of the three, Option 1.2 would have most success in preventing runs but its negative impacts are too large. The mechanisms of options 1.3 and 1.4 could help the fund to prevent a run by clearly indicating to investors that there is no advantage of redeeming early since the costs will be equalized among all investors. But there is a risk that the trigger will, in itself, convince investors that it is time, in any case (and irrespective of the fee), to redeem their investments with this particular MMF.

Increase the liquidity of portfolio assets: Option 1.5 has the advantage of increasing the ability of the fund to face redemptions by increasing the global liquidity standards and thus reducing the incentive to run to profit from better liquidity conditions. Impacts on investors and managers appear manageable but the objective to stop runs may not be completely achieved. Option 1.6 represents a good complement to option 1.5. It increases the quality of the assets, thereby reducing the risk of a credit event that could impact the liquidity profile of the fund.

Implement a "Know your shareholders" policy": By improving the information of the manager, option 1.7 could help in identifying and anticipating future redemptions but in no case could anticipate massive investor's runs or increase the ability of the fund to respond to these requests. In that sense it doesn't fulfil the objective but still represents a useful daily management tool that can be implemented at little cost.

Each option is rated between "---" (very negative), ≈ (neutral) and "+++" (very positive) based on the analysis in the previous sections. The benefits are, however, nearly impossible to quantify in monetary terms. The costs should be understood in a broad sense, not only as compliance costs but also as all the other negative impacts on stakeholders and on the market. This is why we have assessed the options based on the respective ratio costs-benefits in relative terms. The assessment highlights the policy option which is best placed to reach the related objectives outlined in section 3 and therefore the preferred one. The coherence with the US regulation is indicated in the effectiveness column. The options with the highest rates are bold bordered.

|| Impact on stakeholders || Effectiveness || Efficiency

1.1 No action || 0 || 0 || 0

1.2 Impose a hold back period for a proportion of the redemption order || (--) Investors will be confronted to delayed redemptions (-) Operational cost for managers || (+) By internalizing liquidity costs, investors have no more first mover advantages, thereby reducing runs and contagion || (--) Delay costs for investors and monitoring costs for the managers, aggravated by the permanent basis of the hold back

1.3 Impose a liquidity fee || (-) Investors will have to pay a fee in stressed situations (+) Fairer treatment once the fee is applied || (≈) Reduces the runs once the fee is applied but increases the runs before the fee is applied. Contagion channel still exists. (-) Pro cyclical effects || (-) Additional costs not compensated by improved stability

1.4 Redemption in-kind || (+) Managers do not face anymore the liquidity risk (--) Investors bear the full liquidity risk || (≈) Could reduce the incentive of runs but cannot eliminate it || (-) Investors will bear the costs of liquidating the assets

1.5 Set minimum liquidity thresholds for overnight and weekly maturing assets || (++) Investors will benefit from increased daily liquidity and less market risk (-) Investors could see their yield diminishing (-) Middle range maturity issuers could be affected || (++) Probability of a liquidity crisis diminishes (+) Strong convergence with the US regulation || (+++) Should not lead to increased costs but would grandly increase the liquidity level

1.6 Enhance the quality of the portfolio || (++) Investors benefit from reduced investment risk (-) Issuers of securities in ABCP can be affected || (++) Lower risk of credit risk, thus reducing liquidity risk || (+++) Very limited costs for the diversification provided

1.7 MMF managers should develop policies to anticipate large redemptions || (+) Managers can better adapt their portfolio profile to upcoming events || (+) Better anticipation of liquidity risk (+) Strong convergence with the US regulation || (+++) Very limited costs largely compensated by the increased information

5.2. Options aimed at transforming the structure of MMF so that the stability promise can withstand adverse market conditions 5.2.1. Policy option 2.1: take no action at EU level

If the risks associated with the stable pricing model are not addressed, the risk could persist that these MMFs could, in stressed market conditions, continue to represent a threat for the financial stability. The sponsors will continue to provide support to their MMFs without being prepared for it. This could still lead to situations where contagion can spread to the sponsor and the economy. The stability of the financial system would not have been increased.

In addition, no action at EU level will most probably leave the current market as it is, with countries allowing the use of amortized cost accounting for all MMF assets and others allowing a parti