Navigating the ‘alphabet soup’ of global organisations
by Kathleen Hughes, Vice Chair, and Brian Campbell, Chair Investment Committee, IMMFA
Policymakers are engaging globally on regulatory initiatives
- Momentum continues to build behind reforms to reduce the perceived risk of systemic crisis in money markets. Authorities internationally are working – in parallel and in some cases in collaboration – to reduce the potential for regulatory arbitrage in a globally interconnected industry. More news of proposals is anticipated in the coming months.
- The roles of the organisations summarised here vary. Only a select few have the authority to submit formal regulatory proposals to be signed into law. Where possible, we have distinguished between those whose function is mainly consultative, to guide and influence reforms, and those able to submit formal regulatory proposals to be signed into law, or to enforce them.
International
There is no single global regulatory or legal authority: regulatory authorities vary by the jurisdictions in which money market funds are registered. Accordingly, there is no single global definition of money market fund requirements. The input from international bodies is primarily consultative, in that they can issue recommendations to guide international practice, and these recommendations may form the basis for enforceable principles in national jurisdictions.
IOSCO – International Organization of Securities Commissions
- An association of organisations that regulate securities and futures markets around the world. Created in 1983, recognised as the international standard setter for securities markets.
- The IOSCO Principles, or Objectives and Principles of Securities Regulation, are internationally recognised regulatory benchmarks.
- Worked on the money market reform component of FSB’s recommendations, which are not enforceable but intended to set a benchmark for global practice.
- In April 2012, IOSCO published a consultation report, Money Market Fund Systemic Risk Analysis and Reform Options, which provided a preliminary analysis of the possible risks that money market funds could pose to financial stability and proposed a broad range of possible policy options. IOSCO sought public comment on the consultation with a due date of June 2012.
- In October 2012, IOSCO published its final report on policy recommendations for money market funds. IOSCO proposes to conduct a review of the application of these recommendations within two years with a view to assess whether the recommendations should be revised, complemented or strengthened.
Members include the main financial regulators from over 100 countries (including the SEC in the US, Financial Conduct Authority and Prudential Regulation Authority (formerly known as Financial Services Authority)) in the UK, France’s AMF and Germany’s BaFin), who regulate more than 90% of global securities markets. Related committees include a Monitoring Group comprising international financial institutions and regulatory bodies, such as the Basel Committee on Banking Supervision, European Commission and Financial Stability Board.
Link to IOSCO policy recommendations
FSB – Financial Stability Board
- Formed in 2009 following the global financial crisis.
- Evolved from the Financial Stability Forum, or FSF, a global organisation formed in 1999 by the finance ministers and central bank governors of the Group of Seven (G7) to oversee international financial stability.
- In October 2011, FSB released guidance on reducing the systemic risk of shadow banking and part of that guidance covered money market funds. Specifically, the FSB identified that IOSCO would examine regulator action related to money market funds.
- In November 2012, FSB formally endorsed IOSCO’s aforementioned policy recommendations on money market funds.
Members comprise representatives – central bankers and/or treasury officials – from 24 countries including the G-20. National representatives include regulators such as the SEC, Germany’s BaFin, France’s AMF and the UK’s FSA. International members include the Bank for International Settlements; the European Central Bank; the European Commission; the International Monetary Fund (IMF); Organisation for Economic Co-operation and Development; and The World Bank.
Link to FSB recommendations
[[[PAGE]]]
European Union
The European regulatory system spans a variety of jurisdictions. Under the existing regime, the majority of Funds comply with the UCITS Directive, which covers issues such as diversification of investment and counterparty risk. Authorisation as a UCITS fund allows a Fund to be distributed across the European Union (EU), including to retail investors.
EC – European Commission
- One of three main institutions that are involved in EU legislation, along with the European Parliament and the European Council.
- The EC is the body that proposes legislative reform within Europe.
- The EC has been assessing potential systemic impacts of shadow banking, including money market funds, for some time. In March 2012, the EC published a consultation seeking public comment on questions regarding shadow banking, including money market funds; the Commission published its findings in December 2012.
- In September 2013, the EC released a legislative proposal for regulation on money market funds.
- Shortly thereafter, the proposal was submitted for review by the European Parliament and European Council of Ministers. In order for legislation to be passed into law at the European level all three of the EC, European Parliament and European Council, need to agree.
Members: Commissioners are appointed by each EU member state.
Link to EC publication
Link to EC publication responses
Link to EC proposal
EP – European Parliament
- One of three main institutions that are involved in EU legislation, along with the European Commission and the European Council. One of the Parliament’s primary roles is debate, review and passage of European legislation, following negotiation with the EC and European Council. The Parliament also has democratic oversight over the work of other EU institutions and adopts the EU’s budget.
- In September 2013, following publication by the EC, the legislative proposal for regulation on money market funds was referred to Parliament and assigned to committee review by the Economic and Monetary Affairs Committee (ECON Committee).
- In November 2013, the ECON Committee published a draft report on the proposal; subsequently members of the Committee tabled suggested amendments to the draft and negotiations between the political coordinators followed with the view to agreeing on a common position.
- In February 2014, the ECON Committee postponed its vote on the proposed legislation.
- The ECON Committee is expected to resume consideration of the proposal after the institutional changeover following the European Parliament elections.
Members: The European Parliament comprises over 750 elected officials from the 28 Member States of the EU. Members of the European Parliament (MEPs) are elected by EU voters every 5 years.
Link to European Parliament Procedure file on Money Market Funds
ESMA – European Securities and Markets Authority
- Replaced the Committee of European Securities Regulators (CESR) on Jan. 1, 2011. ESMA provides technical guidance and acts as a financial markets oversight body, seeking the consistent application of European-wide legislation throughout the European Union.
- Member of the FSB and among the regulatory members of IOSCO.
- ESMA produced the current rules on the categorisation of money market funds. In May 2010 ESMA published the first harmonised definition of MMFs, and by the following year most funds had adopted ESMA’s standards, which range from governing sensitivity to interest rate risk, fund liquidity, asset maturity and credit risk.
- ESMA’s guidance and directives are implemented by local regulators.
Members: Each of the national securities regulators in Europe is represented in ESMA.
Link to ESMA standards
ESRB – European Systemic Risk Board
- Created in 2010, and tasked with devising ways to safeguard the financial system and improve its oversight.
- ESRB is primarily a technocratic body, and as such does not legislate, but will be instrumental in reforms related to systemic risk.
- In June 2012 ESRB published an Occasional Paper entitled Money Market Funds in European and Financial Stability, and undertook further analysis of how the EU should consider further regulation of money market funds.
- In February 2013 ESRB released policy recommendations for additional money market fund reform by the European Commission.
- ESRB’s recommendations are expected to inform the European Commission’s legislative proposals for reform of money market funds.
Members: Board members with voting rights include the president and vice president of the European Central Bank (ECB), the governors of each EU central bank, a member of the European Commission and heads of the European Banking Authority and ESMA.
Link to ESRB Occasional Paper
Link to ESRB policy recommendations
[[[PAGE]]]
US
FSOC – Financial Stability Oversight Council
- Established under the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 to provide comprehensive monitoring of the US financial system.
- FSOC’s role is mainly advisory. The Council is mandated to recommend that primary financial regulatory agencies apply new or heightened standards and safeguards on certain activities. FSOC focuses on activities it considers could create or increase the risk of significant liquidity, credit or other problems in the financial system.
- In November 2012, FSOC released proposed recommendations on money market fund reform for public comment with a comment period ending in February 2013.
Members: The Council consists of 10 voting members and five non-voting members, including federal financial regulators (such as the SEC and CFTC), state regulators and an independent insurance expert appointed by the President.
Link to FSOC proposed recommendations
PWG – President’s Working Group
- Originally established by executive order of the President of the United States in March 1988, in response to events in the financial markets surrounding October 19, 1987.
- PWG’s role is mainly advisory. In June 2009, as part of larger report on financial regulatory reform, the US Treasury Department proposed that the PWG prepare a report on fundamental changes needed to address systemic risk and to reduce the susceptibility of money market funds to runs.
- In October 2010, the PWG published its report, which detailed a number of options for further reform that the PWG requested be examined by the Financial Stability Oversight Council.Members: The President’s Working Group is composed of the Secretary of the Treasury, who chairs the Group; the Chairman of the Board of Governors of the Federal Reserve System; the Chairman of the Securities and Exchange Commission; and the Chairman of the Commodity Futures Trading Commission.
Members: The President’s Working Group is composed of the Secretary of the Treasury, who chairs the Group; the Chairman of the Board of Governors of the Federal Reserve System; the Chairman of the Securities and Exchange Commission; and the Chairman of the Commodity Futures Trading Commission.
Link to PWG’s report
SEC – Securities and Exchanges Commission
- Created by the Securities Exchange Act of 1934, the SEC holds primary responsibility for enforcement of the federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other electronic securities markets in the US.
- The SEC may also interpret federal securities laws and issue new rules and amend existing rules that govern the securities industry in the US.
- Specifically, the SEC oversees and has authority to amend Rule 2a-7 under the Investment Company Act of 1940, which stipulates requirements for US money market funds and their investment advisers. The SEC last amended Rule 2a-7 in January 2010.
- In November 2010, the SEC requested comment on structure reform options discussed in the Money Market Fund Report issued by the President’s Working Group. After reviewing those comments, the SEC hosted a May 201 Roundtable on Money Market Funds and Systemic Risk.
- In August 2012, then SEC Chairman Mary Schapiro released a statement saying that the SEC Commissioners could not reach agreement at that time to move ahead with a proposed rule.
- In June 2013, the SEC released a draft proposal of amendment to Rule 2a-7. During a 90-day comment period, the public, including investors and the industry, had an opportunity to express their concerns or support for the proposal. The SEC is still considering these public comments and whether to make adjustments to the proposed amendments, if any.
The SEC would need to conduct a second vote with a majority of Commissioners approving the final rule proposal in order to proceed with implementation.
- In March 2014, the SEC’s Division of Economic and Risk Analysis (DERA) published data analyses pertaining to money market fund reform, seeking additional public comment on this supplemental information.
Members: The SEC comprises five Commissioners, one of whom is designated Chairman; Commissioners are appointed by the US President with the advice and consent of the US Senate.
Link to SEC’s statement
Link to SEC’s Proposed Rule
Link to Comments on Proposed Rule
Link to SEC press release on DERA analyses
