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Article 35.2.C in MMFR Would Do!

Updated: Apr 13, 2019

When Money Market Fund reforms were contemplated in USA and then the EU, the main trigger were the events of December 2008, when money market funds actually lost value due to the liquidity crisis during the Global Financial Crisis.

Most are familiar with the cut and thrust of the regulatory intervention. However, this particular piece is about the decrease in NAV resulting in the ‘breaking of the buck’.

That NAVs should fluctuate with the value of the assets in the fund is common sense. However, US MMFs quoted at a dollar NAV even though their values had gone below that, because that is how rules were back then. Funds were not allowed to “break the buck”.

By the time Money Market Fund reforms arrived, a corollary effect of the Global Financial Crisis – Quantitative Easing – made its presence felt around the world. Easy monetary conditions led to negative yields in bond and money markets.

And so, Funds had a ‘non-crisis’ reason for NAVs to decline: due to negative returns. And that resulted in the use of Share Cancellation Mechanisms, also known as Reverse Distribution Mechanisms. Simply put, these are the opposite of Dividend Distribution which happens when NAVs rise.

A Constant NAV Money Market Fund distributes the accrued interest as additional shares, or cash payouts.

When the accrued interest is negative, it does the exact opposite: it takes back or cancels, or reverse distributes shares. (Asking investors for cash back, corresponding to dividend payouts would be odd, to say the least.)

These are now no longer allowed with the European Commission letting the European Securities Market Authority know on October 4th, 2018, that it had no intention of diluting the uniform implementation of the Money Market Fund Regulation.

The EC cited regulatory consistency as the reason for sticking to its guns. It could also have merely cited Article 35 (2) c of the Money Market Funds Reform.

Article 35 prohibits external support from sponsors and others in propping up the NAV of a Fund. Such support can cause crisis in one market (the money market) to spread to other markets through those extending support such as the sponsors of the fund.

Clause c of Article 35 specifically prohibits any direction or indirect action by any third party which would maintain the NAV of a unit or share. And Share Cancellation Mechanisms quite sound like that.

The new and final compliance date for elimination of Share Cancellation, or Reverse Distribution is March 21, 2019.

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