Treasury Today Country Profiles in association with Citi

What will the EU MMF changes mean for you?

Glass globe next to fallen line of dominoes

Following years of negotiation, European money market fund reform is close to being finalised. Here is what a handful of the world’s top Asset Managers believe the changes mean for you, the corporate investor.

An end is in sight for European money market fund (MMF) reform, with the regulation set to enter into force in the coming weeks.

Under the new rules, three types of short-term money market fund will be available in Europe: Variable Net Asset Value (VNAV) MMFs, public debt Constant Net Asset Value (CNAV) MMFs and Low Volatility Net Asset Value (LVNAV) MMFs. In addition, there will be one category for standard MMFs, the Standard VNAV MMF.

As Jim Fuell, Managing Director, Head of Global Liquidity Sales, International at J.P. Morgan Asset Management, notes, “At this stage, LVNAV is expected to be a likely choice for many clients and is being viewed by investors as the option most akin to short-term CNAV money market funds.”

LVNAV funds will be able to use amortised cost accounting for assets which have a residual maturity of up to 75 days, with mark-to-market or mark-to-model valuations required for longer dated instruments. Funds can issue shares at a price equal to the fund’s CNAV per unit or share as long as the constant NAV does not deviate from the actual NAV by more than 20 basis points.

At the same time, funds will be required to maintain minimum weekly liquidity of 30%. If liquidity falls below 30% and daily net redemptions exceed 10% of the fund’s total assets, measures may be put in place including liquidity fees, redemption gates and suspension of redemptions.

Response from fund providers

Fund providers have welcomed the changes. “It has taken a long time to get to this point, but the reforms are generally prudent and sensible,” says Jonathan Curry, Global Chief Investment Officer, Liquidity at HSBC Global Asset Management.

A key question is whether the new rules could result in an exodus of cash similar to that seen in the US, where significant outflows followed the introduction of new rules last year. James Finch, Head of Liquidity Management, EMEA at UBS points out that many of the reforms are already in use within existing CNAV MMFs through UCITS and ESMA guidelines, external rating agency restrictions and adherence to the Institutional Money Market Fund Associations (IMMFA) code of practice. Consequently, he says, “I don’t see why the new regulation will make MMFs less attractive.”

Fuell concurs: “We are not expecting to see the same significant movement of money market fund flows that we saw in the US following their regulatory reform.”

Market consolidation on the horizon?

According to ratings agency, Fitch, the incoming European MMF rules may spark further consolidation in the industry due to the additional costs required to adapt to the new rules.

In a note to editors, Fitch said: “Providers unable to absorb the added costs of new products and investor education, or unable to differentiate themselves could look to exit the business, leading to more consolidation. The industry has already been consolidating for some years, with more recent consolidation in the US in relation to US money fund reform.”

It added that the timing of product launches and conversions may become an important competitive dynamic, as will effective investor outreach and education. “Any advantage will depend on whether investors understand the new products and are willing to make the switch early, or will want to wait. If the US experience with money fund reform is a guide, investors may wait as long as possible before exercising their option to move monies.”

Adopting the new rules

For fund providers, a key question will be whether to create new funds or convert existing CNAV funds to the new models. In the first instance, it is likely that many will opt for the latter. “We will look to convert our existing funds,” says Natalie Cross, Client Portfolio Manager at Invesco. “Looking forwards, once the regulations go live, as clients get more comfortable with the different fund types we will then look to see if there is room in the market to consider different products.”

It is worth noting that in practice, many fund providers already follow many of the guidelines that will be formalised under the new regulation. “We will need to do some back testing and scenario testing to find out what sort of situation would lead you to invoke the 20 basis point collar,” says Paul Mueller, Senior Portfolio Manager at Invesco. “But to be honest, we’re already operating under a similar regime collar on our S&P rated fund(s) to be consistent with a AAA rating.”

For treasurers, there is still some time before the new funds will become available: existing funds will not need to comply with the new regulation before early 2019. In the meantime, providers remain optimistic that money market funds will continue to meet treasurers’ needs once the new structures come into effect.

“What the regulations have brought about is a coping mechanism for funds to be able to continue operating in times of market stress,” concludes Cross. “Those going down the LVNAV route should continue to operate in a similar manner as they currently do, which means there will hopefully not be too much disruption to the industry.”

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