The introduction of Article 37 Money Market Fund Reporting, albeit delayed until September 2020, has ushered in a new era of regulatory reporting. In an effort to provide insight into the new reporting protocols, we’ve answered a few frequently asked questions floating around the industry.

What is the main goal of the Article 37 MMF Reporting obligation?

Money Market Funds (MMFs) specialize in providing investors with short-term investment solutions, aiming to earn a higher premium compared to current and savings accounts.

MMFs are generally considered to be one of the safest investment vehicles with good levels of liquidity and low levels of risk. However, during the 2008-09 financial crisis even these instruments came under pressure due to the high volume of redemption requests. Following this crisis, ESMA wanted to increase transparency of MMF funds, with the primary aim to safeguard investors from liquidity risk ensuing from redemptions during adverse market conditions.

Article 37 MMF Reporting includes new requirements on transparency, valuations and investment policy, and obliges each MMF to have in place sound risk management, identifying stress testing, liquidation stresses and reverse liquidity analysis as core components of such oversight.

How does MMF size affect Article 37 MMF reporting?

MMFs with net assets above 100M EUR must report quarterly, while MMFs under 100M EUR report annually.

What is the reasoning behind requiring holdings-level disclosures in Article 37 MMF Reporting?

By requiring holdings-level disclosure with security classification, liquidity, and maturity information, ESMA is maximizing the information to be made available to national competent authorities to detect, monitor, and respond to risks in the MMF market. Different MMF types are only supposed to invest in certain asset types, and this reporting helps ensure compliance with ESMA’s mandates.

How do the new EU guidelines align with other regional guidelines?

In the EU, collective investment undertakings can operate as UCITS or as AIFs. The new rules on MMFs build on the existing legal framework established by the UCITS and AIMD Directives. Article 37 MMF Reporting has similarities with AIFMD Annex IV Reporting, in that both disclosures include performance, liquidity, risk metrics, beneficial ownership, investor concentration, and stress test results. These guidelines bring the European MMF sector into closer alignment with reporting criteria and requirements for MMFs in the US in SEC Form N-MFP, which already requires holding-level disclosure.

The stress testing component of Article 37 MMF Reporting aligns with the broader ESMA Liquidity Stress Testing requirements that apply to all UCITs and AIFs, with reporting beginning in September 2020.

What are the major challenges caused by new guidelines?

Implementing these MMF reports will entail a number of new tasks, processes and challenges. The first challenge relates to the complexity of the reporting task. Invariably, data required for this level of reporting is managed by a number of different departments operating in a number of different systems. Indeed, in the case of some of the data required, the information has not necessarily been utilized – or possibly even compiled – in the context of MMF reporting in Europe. Aggregating and organizing this data is not straightforward.

Do the guidelines present any opportunities for firms?

Despite the challenging complex data gathering and granular reporting, it’s important to recognize the strategic opportunity this new reporting structure represents. If the initial frameworks, process and data management systems are established in a robust and effective way, funds implementing the new regulations will be future-proofed and well equipped to handle further reporting obligations related to ESMA Liquidity Stress Testing. The guidelines do not yet specify reporting details and are much broader than the MMF regime, so organizations have flexibility in how they setup and conduct their test scenarios.

Organizations that that have prepared for one regulation, implementing regulatory reporting processes, that establish a rigorous risk management process for Article 37 MMF reporting will be in a much stronger position to replicate the process to meet subsequent these expanded regulatory requirements. Ideally, various regulatory requirements should be met through one business process.

Conclusion

On one hand, the new reporting protocols may seem onerous and may present challenges for firms, but on the other, this exercise in compliance may provide strategic opportunities. For a more comprehensive look into ESMA Article 37 MMF Reporting, download our eGuide here.

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