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July 13, 2018

EC published the Commission Delegated Regulation (EU) 2018/990 on simple, transparent, and standardized (STS) securitization and asset-backed commercial paper (ABCP) requirements for assets received as part of the reverse repurchase agreements and the credit quality assessment methodologies. This Regulation amends and supplements the Money Market Funds Regulation or MMFR (EU Regulation 2017/1131). Regulation (EU) 2018/990 shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. It shall apply from July 21, 2018, with the exception of Article 1, which shall apply from January 01, 2019.

Article 11(1) of MMFR allows MMFs to invest in securitizations or ABCPs. A specific incentive is in place to invest in STS securitizations or ABCPs. Since Regulation (EU) 2017/2402 already contains requirements for STS securitizations and ABCPs, MMFR needs to be amended to cross-refer to the provisions of Regulation (EU) 2017/2402, which contains these requirements. Point (c) in Article 11(1) of MMFR, has been replaced. The Regulation requires that the counterparty to a reverse repurchase agreement be creditworthy and that the assets received as collateral be of sufficient liquidity and quality to enable MMFs to achieve their objectives and fulfill their obligations, should such assets need to be liquidated. To ensure that the collateral provided under reverse repurchase agreements is of high quality, managers of MMFs shall apply additional requirements when the counterparty to an agreement is not regulated under the Union law or is not recognized as equivalent.

As per the Regulation, the credit quality assessment methodologies should be prudent enough to ensure that all qualitative and quantitative criteria supporting credit quality assessments are reliable and appropriate for properly assessing the credit quality of instruments eligible for investment. Managers of MMF should clearly establish, as part of the credit quality methodology, the criteria for a favorable assessment of instruments eligible for MMF investment, before performing the actual credit quality assessment. The methodology and criteria used for credit quality assessments should be consistent, except where there is an objective reason for diverging from the methodology or the criteria. The criteria and the methodology should be developed for recurrent use, not solely for a particular case. The consistent use of the criteria and of the methodology should make it easier to monitor the credit quality assessment. Managers of MMFs may override the output of an internal credit quality assessment methodology only in exceptional circumstances, including stressed market conditions, and where there is an objective reason for doing so.

As the quality of instruments may vary over time, the credit quality assessment should not be a once-off assessment, rather it should be carried out continually. In addition, it should be revised, in particular, when there is a material change, as referred to in Article 19(4)(d) of Regulation (EU) 2017/1131, in the macroeconomic or microeconomic environment that could have an impact on the existing credit quality assessment of the instrument. There is no reason to differentiate between the assessments that managers of MMFs carry out when investing directly in eligible assets and the assessment they carry out when they receive an asset as collateral; the credit quality assessment should be based on the same criteria in both cases.

 

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Effective Date: August 02, 2018

Keywords: Europe, EU, Banking, Securities, MMF Regulation, STS Securitization, ABCP, MMF, Reverse Repurchase Agreement, Credit Quality Assessment, EC

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