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Capital Markets

UK to Tweak Guidance, Add Supervisory Fees to MMFs

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February 02, 2018

UK’s Financial Conduct Authority says new fees needed to properly supervise EC money market fund rules

BenjaminsWith new money market rules set to kick in in Europe in July 2018, the UK is assigning its Financial Conduct Authority (FCA) to be MMF supervisor. And in this role the FCA will need to make changes to its regulatory handbook and charge fees.

“[T]he FCA and the [UK] Treasury have identified areas of the UK regulatory framework that require changes so that the MMF Regulation can work properly in the UK,” the FCA said in a recent report. “The Treasury intends to give us certain powers to ensure that we can supervise firms’ adherence to the requirements of the Regulation.”

As such, the FCA said the UK Treasury was “in the process of drafting legislation to give the FCA the necessary powers to supervise firms’ adherence to the requirements of the Regulation. This will include an amendment to the Financial Services and Markets Act 2000 (Qualifying EU Provisions) Order 2013, which will allow the FCA to levy fees to cover the cost of authorizing and supervising MMFs under the [new MMF] Regulation.”

Following the financial crisis in 2008 and specifically the Reserve Primary Fund “breaking the buck,” US financial regulators got to work eliminating the dangers the MMF market could inflict on the broader market. That ultimately led to MMF reform implemented in the US in 2016, which included getting rid of the Constant Net Asset Value (CNAV) or “buck” structure. As with regulators in the US, the European Commission were concerned that during periods of market stress, it might be difficult for MMFs to remain liquid and stable, particularly if there were large withdrawals or investor runs. Like the US, the EC is eliminating CNAV fund regime.

It is said that Europe's journey transitioning to new rules will be different than the US experience. According to State Street Global Advisors this is because of the US and Europe’s different starting points – Europe already has low volatility net asset value (LVNAV) funds, which are seen as a good alternative CNAV) – as well as the contrasting nature of each market. “Specifically, the massive US investor switch from prime funds to government funds is unlikely to be replicated in Europe,” SSgA said, “not least because of the negative returns that are typically on offer from sovereign paper.”

For its part the FCA is now preparing for its role as MMF supervisor in the UK. To that end it is tweaking its handbook to comply with the new rules. This includes charging new fees, remove “any potential discrepancy between our rules and the provisions in the [EU] Regulation and so provide useful clarity to firms.” Also, eliminate any guidelines that now have been superseded by new MMF regulation as well as “disapply” certain provisions that are no longer required.

As for fees, the FCA said currently established MMFs will continue to pay existing fees according to their “pay-block,” (portfolio managers and managers and depositaries of investment funds, and operators of
collective investment schemes or pension schemes) however, it will “need to carry out additional supervisory work on MMFs” and thus proposes to “recover these costs through targeted charges on the funds (fee-block C) to avoid cross-subsidy.”

The FCA’s periodic fee to recover our annual supervisory costs will be a flat rate and go “according to the number of funds and sub-funds managed. In 2017-2018, the rates range from £410 for a firm with one or two funds, up to £9,020 for a firm with over fifty funds,” the FCA said.

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