On 9 July 2020, ESMA issued a public statement on external support under Article 35 of the money market funds (“MMF”) regulation (“MMF Regulation”). This statement was released in relation to financial markets authorities’ recent actions to mitigate the impact of COVID-19 on the EU’s financial markets. ESMA deemed it relevant to clarify the potential interaction between the intermediation of credit institutions and the requirements of Art. 35 of the MMF Regulation on external support.
ESMA highlights that the statement also aims to coordinate the supervisory approaches of national competent authorities (“NCAs”) in light of liquidity challenges for MMFs in the context of the current COVID-19 pandemic.
In the second half of March 2020, certain MMFs faced significant liquidity challenges. MMFs also faced sizable redemptions from their investors, while on the asset side, liquidity deteriorated quickly in money markets in particular in the commercial paper market in the EU and the US.
Banking intermediation in the purchase of MMFs’ short-term assets
ESMA takes the view that it is important to clarify the potential interaction between the intermediation of credit institutions and the requirement of article 35 of the MMF Regulation.
According to Article 35 of the MMF Regulation, MMFs are unable to receive external support, defined as “direct or indirect support offered to an MMF by a third party, including a sponsor of the MMF, that is intended for or in effect would result in guaranteeing the liquidity of the MMF or stabilising the NAV per unit or share of the MMF”.
According to article 35 of the MMF Regulation, external support shall include:
- cash injections from a third party;
- purchase by a third party of assets of the MMF at an inflated price;
- purchase by a third party of units or shares of the MMF in order to provide liquidity to the fund;
- issuance by a third party of any kind of explicit or implicit guarantee, warranty or letter of support for the benefit of the MMF;
- any action by a third party the direct or indirect objective of which is to maintain the liquidity profile and NAV per unit or share of the MMF.
ESMA clarified in relation to point b) above that transactions with third parties relating to the assets of the MMF are not purchased at an inflated price where they are executed at arm’s length conditions. ESMA further clarified that where third parties execute transactions solely with the MMFs to which they are affiliated it is indicative of a direct or indirect objective to maintain the liquidity profile and NAV per unit or share of the MMF, referred to in e) above.
ESMA, together with the NCAs, will continue to closely monitor the situation and will take or recommend any measures necessary to mitigate the impact of COVID-19.