In December 2018, the Bank of Mauritius revisited the topic of excess liquidity in the Mauritian financial system. The Bank of Mauritius is the central bank and supervisory authority overseeing the stability of the financial system in Mauritius. It introduced a draft guideline on the issue of money market instruments on 18 December 2018 (the “draft guideline”) for the purposes of carrying out a consultation process which ended on 31 December 2018. The draft guideline is set to replace the regulatory framework on commercial papers established in January 2018. The latter created a licence for the issue of commercial papers. The proposed reforms to the regime extend to (i) the definition of the instrument, (ii) the criteria for qualification as issuer, (iii) the use of money market instruments, (iv) the requirements applicable to issuers and investors, (v) the procedures for issue, and (vi) the duties and obligations of the parties.
Through this article, we aim to outline the main features of the new money market instrument regime.
Definition and features
The draft guideline has brought a few key changes to the definition and features of money market instruments, all of which indicate an intention to capture a larger amount of short term debt within the scope of the regime. For instance, money market instruments are now defined as secured or unsecured instruments issued in materialized or dematerialized form with a maturity of 12 months or less. This broadens the definition which, under the commercial paper regime, was limited to unsecured short term debt. The minimum size of the issue has also been reduced from MUR 100 million to MUR 50 million. The draft guideline has not introduced any changes on the maximum size of the issue. This remains limited to the amount approved by the board of directors of the issuer and in accordance with the credit rating assessment made by the external credit assessment institution.
The draft guideline maintains the role of various parties involved in the issue of money market instruments. The issuer is still required to appoint an issuing and paying agent to facilitate the issue of money market instruments and carry out the various payments due to the investors throughout the term of the money market instruments. In addition, there is no change to the requirement for the issuer to appoint an external credit assessment institution recognised by the Bank of Mauritius who will be responsible to provide a credit rating for the money market instruments. The money market instruments must also be deposited (in materialized or non-materialized form) with a custodian who will hold such instruments on behalf of the investors.
The rules applicable to eligible issuers under the commercial paper regime have been re-looked at by the Bank of Mauritius in the draft guideline. Under the rules for commercial paper, the criteria to determine the eligibility of an issuer was based on the number of years that the issuer was in existence as well as the number of years during which the issuer made a profit. This is no longer taken into consideration; instead, the draft guideline emphasizes the net asset value and operating cash flow of the issuer. For an issuer to be eligible to issue money market instruments, the draft guideline requires that its operating cash flow be at least equal to the size of the issue of the money market instruments. It also requires that the issuer has a net asset value exceeding MUR 300 million at any point in time not earlier than 12 months prior to the proposed issue.
Procedure for issuance
The process for the issue of a money market instrument starts off with the issuer’s board of directors approving the size and term of the money market instruments to be issued. The money market instruments may either be issued pursuant to an annual programme or on a discretionary basis. Once the size and term are established, the issuer can apply for a credit rating from a recognised external credit assessment institution. In a departure from the rules relating to commercial paper, the draft guideline no longer requires the external credit assessment institution to analyse the impact of the issue of money market instruments on the financial situation of the issuer.
A credit rating is valid for two months and as a result, obtaining the ratings letter sets the timetable during which the issuance should take place. Once the ratings letter is obtained, the issuer will appoint an issuing and paying agent and a custodian before applying to the Bank of Mauritius under section 14E of the Banking Act 2004 for a money market instrument licence. The licence will be valid for one year.
The draft guideline also places increased responsibility on the issuing and paying agent. While it was always responsible to notify the investors, the external credit assessment institution and the Bank of Mauritius of a default, the time period of 3 working days under the previous regime no longer applies. Instead, the issuing and paying agent must do so immediately upon the default having occurred.
The objectives of the rules on commercial papers were to provide the opportunity for larger companies to diversify their source of funding and to provide a supply of short term and liquid financial instruments for investors. The expectation from the Bank of Mauritius was that larger companies would soak up the excess in liquidity that has recently been a concern in the Mauritian economy. Yet, the commercial paper regime that the Bank of Mauritius introduced was not adopted by large companies as anticipated. Instead, it was seen as introducing additional layers of regulation which would increase transactional costs. The consultation process open to all stakeholders closed on 31 December 2018, so the Bank of Mauritius is due to publish the guideline on money market instruments in its final form. It will remain to be seen whether the new regime of money market instruments can address the concerns of issuers generally.