On 4 September 2013, the European Commission published a draft regulation on the regulation of European money market funds. Money market funds are important investors in certain types of securitisation, particularly asset backed commercial paper, and the draft Regulation includes some detailed provisions dealing with this relationship. This is explained in the recitals: “Due the fact that during the crisis certain securitisations were particularly unstable, it is necessary to impose maturity limits and quality criteria on the underlying assets”. The limitations imposed are such that the only types of securitisation which are eligible are those with underlying assets consisting of short term corporate debts, such as trade receivables. Assets linked to the acquisition or financing of services or goods by consumers (such as personal loans, auto loans, credit card debts and residential mortgages) are expressly excluded. The draft regulation also requires that the underlying corporate debts be “of high credit quality and liquid”.
The proposed regulation is not open to public consultation although it is to be expected that lobbying will continue. Money market funds (and particularly US money market funds) are known to be important investors in European asset backed commercial paper and although this regulation will not affect purely US money market funds it will have an impact on money market funds established in Europe. Asset backed commercial paper is generally issued by conduits which are backed by diverse collateral which could include trade receivables but also other common assets such as residential mortgages and auto loans. Equally it remains to be seen how ESMA will evaluate the credit quality and liquidity of trade receivables when they prepare the regulatory technical standards to implement the other criteria suggested in the regulation and whether conduit portfolios will be able to meet those criteria. Is it possible that conduits will be set up specifically to be eligible for money market funds if this regulation comes into effect in the current form?