“De-moneynising” MMFs Shares: Third Parties Support in the US and the EU

Money market funds (MMFs) were at the center of the shadow banking system struck by the 2007-2008 crisis and their reform has occupied regulators both in the US and EU for several years. The main element of weakness that emerged during the crisis was that MMFs were part of a chain that performed credit, maturity and liquidity transformation and their shares were treated as safe as bank deposits. Nevertheless, MMFs were not subject to the same prudential regulation, nor they were backed by the public guarantees that protect the banking sector. Amongst the many regulatory options available to make MMFs more resilient, regulators both in the US and the EU opted for depriving the riskier MMFs shares of their moneyness, imposing a floating NAV. Within this context, the paper analyzes the reform of the legal technology that has been crucial in guaranteeing MMFs shares redeemability at par: third parties support. While the US has opted for more transparency, the EU has banned altogether third parties support. The paper provides a legal analysis of sponsor support provisions in the US and the EU, assesses the different regulatory initiatives in the broader context of the reform and evaluates their potential effect.