Updated: Apr 13, 2019
The implementation of the Money Market Fund Regulation coincides with the implementation of the Simple, Transparent and Standardised regulation on securitisations or STS.
What does STS mean?
Simplicity: All underlying exposures (loans, assets) that into the securitization engine should be homogenous. Do not mix, for instance, loan types: infrastructure loans and autoloans as an example. Do not also mix loans of differing quality: high-grade and low-grade loans for example. Simplicity definitely excludes starting out with an investment instrument which is itself a securitization!
Transparent: investors should be able to identify what loan (assets) went into the securitization and should be able to look-through to be able to arrive at an informed judgement of the risks involved.
Standardised: comparability across different securitisations should be enabled through standard criteria to be disclosed in each case.
MMFR makes references to STS as it allows securitizations to be invested in, by Money Market funds.
MMFR does not prohibit investment in non-STS securitisations.
It simply allows more proportion of securitisations in the portfolio if they are STS compliant (20%); and only 15% if the securitisations are not STS compliant.
So, there is an incentive for structurers to comply with STS if they want to make a pitch to Money Market Funds.
And yet – consider the difference between the limit of 20% for STS-compliant and 15% for non-STS compliant securitisations. That is fully 5%. And the Reserve Premium Fund broke the buck in September 2008 with only 1.15% of its assets being in Lehmann.
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