In light of the liquidity challenges faced by many money market funds (MMF) during COVID 19, ESMA has issued a public statement providing its interpretation of the provision of external support by third parties under Article 35 of the MMFR1.
Background
As readers will be aware, Article 35 of the MMFR prohibits a MMF from receiving "external support" in order to maintain liquidity or stability of NAV per share. This prohibition arose from the legislators' concerns that any such external support provided to MMF increases the contagion risk between the MMF sector and the rest of the financial sector.
Article 35 of the MMFR sets down five scenarios which amount to the provision of external support to a MMF.
Clarity on meaning of "external support"
In its statement, in which it recognises that some MMF are supported as a result of credit institutions purchasing short-term assets held by them in order to ease liquidity challenges, ESMA provides further clarification in respect of two of these scenarios.
ESMA has taken the position that assets of an MMF purchased by a third party will not be considered to be "at an inflated price" if they are executed at arm's length conditions.
It has also taken the view that a third party has a direct or indirect objective to maintain the liquidity profile and the NAV per unit or share of the MMF "where that third party executes solely with the MMFs to which they are affiliated".
Conclusion
The clarification provided by ESMA in its statement is to be welcomed as it provides the managers of MMF with some certainty around the types of arrangements which are likely to fall foul of the prohibition of external support under Article 35 of the MMFR.
Footnote
1 Regulation (EU) 2017/1131 of the European Parliament and of the Council
Originally published 10 July 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
