Money Market Funds Proposed Change To Valuation Rules (Amortised Cost Valuation Methodology)

Author:Ms Grace O'Conner
Profession:Dillon Eustace
 
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  1. Introduction

    The Irish Financial Services Regulatory Authority

    ("Financial Regulator") currently permits money

    market funds (UCITS/non-UCITS) to provide for the use of an

    amortised cost valuation methodology. The Financial Regulator

    proposes to establish new conditions under which a money market

    fund is permitted to follow an amortised cost valuation

    methodology and to use the words "money market fund"

    in its title. The requirements imposed by the Financial

    Regulator as regards the use of an amortised cost valuation

    process are currently set out in Guidance Note 1/00 (Valuation

    of Assets of Collective Investment Schemes). These are intended

    to be replaced by the new Guidance Note - /08 (Valuation of

    Assets of Money Market Funds).

  2. New Draft Guidance Note - /08 (Valuation of Assets of

    Money Market Funds)

    The new conditions proposed by the Financial Regulator in

    the draft Guidance Note - /08 in respect of the use of the

    words "money market fund" in a fund's title and

    the use of an amortised cost valuation methodology are set out

    below.

    General Principle/Use of Term "Money Market

    Fund"

    Funds which propose to use the words "money market

    fund" or "UCITS money market fund" in their

    title and which propose to follow an amortised cost valuation

    methodology must obtain a triple-A rating from an

    internationally recognised rating agency together with a

    supplementary market risk rating (for example, AAAm by

    Standards & Poors or Aaa/MR1+ by Moodys). Such funds must

    be established as constant net asset value funds or as

    accumulating net asset value funds with a principal objective

    to preserve principal and maintain liquidity.

    Other types of money market funds may not use the words

    "money market fund" in their title and must value

    assets on a mark to market basis in accordance with Guidance

    Note 1/00.

    Use of Amortised Cost Valuation Methodology

    A money market fund is permitted to provide for the use of

    amortised cost as a method of valuation of assets subject to

    the following conditions:

    (1) Eligible assets: Without prejudice to

    the requirements of the UCITS Regulations1, the

    assets of a money market fund are restricted to cash or

    high-quality money market instruments.

    (2) Maturity: The assets of a money market

    fund are restricted to securities which comply with one of the

    following criteria:

    (a) have a maturity at issuance of up to and including 397

    days;

    (b) have a residual maturity of up to and including 397

    days;

    (c) undergo regular yield...

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