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COLL 5.9 Investment powers and other provisions for money market funds

Application

COLL 5.9.1R

1This section applies to the authorised fund manager and the depositary of an authorised fund and to an ICVC which is a UCITS scheme or a non-UCITS retail scheme operating as a money market fund or a short-term money market fund.

Explanation

COLL 5.9.2G
  1. (1)

    1This section contains rules on the types of permitted investments which schemes operating as short-term money market funds and money market funds may invest in. These rules are in addition to the requirements in COLL 5.2 (for UCITS schemes) and COLL 5.6 (for non-UCITS retail schemes).

  2. (2)

    1The purpose of these rules is to protect consumers by ensuring that an authorised fund or sub-fund which describes itself as a ‘money market’ fund operates in a more restricted fashion, and aims to maintain the capital value of the fund and provide a return in line with money market rates.

Investment conditions: short-term money market funds

COLL 5.9.3R

1A short-term money market fund must satisfy the following conditions:

  1. (1)

    its primary investment objective must be to maintain the principal of the scheme and aim to provide a return in line with money market rates;

  2. (2)

    it must invest only in approved money-market instruments and deposits with credit institutions;

  3. (3)

    it must, on an ongoing basis, ensure the approved money-market instruments it invests in are of high quality, as determined by the authorised fund manager;

  4. (4)

    it must:

    1. (a)

      provide daily net asset value and price calculation and daily subscription and redemption of units; or

    2. (b)

      where it is a non-UCITS retail scheme marketed solely through employee savings schemes and to a specific category of investor that is subject to divestment restrictions, provide weekly subscription and redemption opportunities to investors;

  5. (5)

    it must limit its investment in securities to those with a residual maturity until the legal redemption date of less than or equal to 397 days;

  6. (6)

    it must ensure that its scheme property has a weighted average maturity of no more than 60 days;

  7. (7)

    it must ensure that its scheme property has a weighted average life of no more than 120 days;

  8. (8)

    it must not take direct or indirect exposure to equity or commodities, including via derivatives;

  9. (9)

    it must only use derivatives in line with the money market investment strategy of the scheme and where using derivatives that give exposure to foreign exchange must do so only for the purposes of hedging;

  10. (10)

    it must only invest in non-base currency securities where its exposure is fully hedged;

  11. (11)

    it must limit its investment in other collective investment schemes as follows:

    1. (a)

      if it is a UCITS scheme, collective investment schemes which satisfy the requirements of COLL 5.2.13 R; or

    2. (b)

      if it is a non-UCITS retail scheme, collective investment schemes which satisfy the requirements of COLL 5.6.10 R;

    which meet the definition of a “Short-Term Money Market Fund” in CESR's guidelines on a common definition of European money market funds; and

  12. (12)

    it must aim to maintain a fluctuating net asset value or a constant net asset value.

[Note: box 2, paragraphs 1, 2, 3 (first sentence), 5, 6, 7, 8, 11, 12 and 13 of CESR's guidelines on a common definition of European money market funds]

COLL 5.9.4G

For the purposes of COLL 5.9.3R (12), a constant net asset value should be taken as referring to an unchanging face net asset value where income in the fund is accrued daily and can either be paid out to the Unitholder or used to purchase more units in the scheme. An authorised fund with a constant net asset value should generally value scheme property on an amortised cost basis which takes the acquisition cost of the security and adjust this value for amortisation of premiums (or discounts) until maturity.

[Note: definition of “Constant NAV Money Market Funds” in CESR's guidelines on a common definition of European money market funds]

Investment conditions: money market funds

COLL 5.9.5R

In addition to satisfying the conditions in COLL 5.9.3R (1), (2), (3), (4), (8), (9) and (10), a money market fund must:

  1. (1)

    limit investment in securities to those with a residual maturity until the legal redemption date of less than or equal to two years, provided that the time remaining until the next interest rate reset date is less than or equal to 397 days. Floating rate securities should reset to a money market rate or index;

  2. (2)

    ensure its scheme property has a weighted average maturity of no more than 6 months;

  3. (3)

    ensure its scheme property has a weighted average life of no more than 12 months;

  4. (4)

    limit its investment in other collective investment schemes as follows:

    1. (a)

      if it is a UCITS scheme, collective investment schemes which satisfy the requirements of COLL 5.2.13 R (Investment in collective investment schemes); or

    2. (b)

      if it is a non-UCITS retail scheme, collective investment schemes which satisfy the requirements of COLL 5.6.10 R (Investment in collective investment schemes);

    which meet the definition of a “Money Market Fund” or a “Short-Term Money Market Fund” in CESR's guidelines on a common definition of European money market funds; and

  5. (5)

    have a fluctuating net asset value.

[Note: box 3, paragraphs 1, 3, 4, 5, 6 and 7 of CESR's guidelines on a common definition of European money market funds]

High quality money market instruments

COLL 5.9.6R

In determining whether approved money-market instruments are high quality in accordance with COLL 5.9.3R (3), the authorised fund manager must take into account a range of factors including, but not limited to:

  1. (1)

    the credit quality of the instrument based on the authorised fund manager’s own documented assessment of its credit quality; 2

  2. (2)

    the nature of the asset class represented by the instrument;

  3. (3)

    for structured financial instruments, the operational risk and counterparty risk inherent within the structured financial transaction; and

  4. (4)

    the liquidity profile.

[Note: box 2, paragraphs 3 (second sentence) and 4 and box 3, paragraph 2 of CESR's guidelines on a common definition of European money market funds]

COLL 5.9.6AG
  1. (1)

    2When assessing the credit quality of an approved money-market instrument the authorised fund manager should have regard to credit ratings of that instrument provided by one or more credit rating agencies registered and supervised by ESMA.

  2. (2)

    However, the authorised fund manager should not rely solely or mechanistically on those credit ratings.

  3. (3)

    The authorised fund manager should undertake a new assessment of an approved money-market instrument to ensure it continues to be of appropriate credit quality, if any credit rating agency registered and supervised by ESMA that has rated the instrument issues:

    1. (a)

      a downgrade of that instrument below the two highest short-term credit ratings; or

    2. (b)

      for an instrument referred to in (4), a downgrade to below investment grade or any other equivalent rating grade.

  4. (4)

    The authorised fund manager of a money market fund may hold an approved money market instrument of a lower internally-assigned credit quality if the instrument is issued or guaranteed by one of the following:

    1. (a)

      a central authority of an EEA State or, if the EEA State is a federal state, one of the members making up the federation; or

    2. (b)

      a regional or local authority of an EEA State; or

    3. (c)

      the European Central Bank or a central bank of an EEA State; or

    4. (d)

      the EU or the European Investment Bank.

  5. (5)

    The guidance in (4) does not apply to the authorised fund manager of a short-term money market fund.

Calculating weighted average life and weighted average maturity

COLL 5.9.7R
  1. (1)

    When calculating the weighted average life for securities (including structured financial instruments) for the purposes of COLL 5.9.3R (7) and COLL 5.9.5R (3), the maturity calculation must be based on either:

    1. (a)

      the residual maturity of the instruments; or

    2. (b)

      if the financial instrument embeds a put option, the exercise date of the put option if the following conditions are fulfilled at all times;

      1. (i)

        the put option can be freely exercised by the authorised fund manager at its exercise date;

      2. (ii)

        the strike price of the put option remains close to the expected value of the instrument at the next exercise date; and

      3. (iii)

        the investment strategy of the scheme implies that there is a high probability that the option will be exercised at the next exercise date.

  2. (2)

    Where calculating the weighted average life for floating rate securities and structured financial instruments, the security's stated final maturity should be used and not the interest rate reset dates.

  3. (3)

    When calculating the weighted average life and weighted average maturity for the purposes of COLL 5.9.3R (6) and (7), and COLL 5.9.5R (2) and (3), an authorised fund manager must take into account the impact of derivatives, deposits and efficient portfolio management.

[Note: definition of “weighted average life” (second sentence) and box 2, paragraphs 9 and 10 of CESR's guidelines on a common definition of European money market funds]

CESR guidelines

COLL 5.9.8G

In addition to the parts of the CESR's guidelines on a common definition of European money market funds specifically referred to in this section, the authorised fund managers should have regard to the other parts of those guidelines when applying the rules in this section.