It’s time to plan for European money market fund regulations
Published: May 2018
With just months to go until the new rules governing the money market fund industry in Europe come into effect, treasurers need to start preparing for the future. Kerrie Mitchener-Nissen, Head of Global Liquidity Product Development, International at J.P. Morgan Asset Management, provides a roadmap for the months ahead.
Head of Product Development, International, Global Liquidity
After nearly a decade of discussion and deliberation, the new rules governing European money market funds (MMFs) have come into effect, and managers will have until 21st January 2019 to comply. Designed to strengthen and bring more transparency to the money market fund industry, the new rules require asset managers to make changes to the funds they offer and how they operate. Although these changes are not as radical as many first anticipated, they will impact many corporate investors in European MMFs.
Take your pick
The first task at hand for corporate investors working through the impact of European MMF regulations on their short-term investments is understanding how it will affect the investment products they use. Those corporates invested in prime Constant Net Asset Value (CNAV) funds will be most impacted – CNAV funds are permissible in investment policies of 88% of European companies investment, according to the latest J.P. Morgan Asset Management PeerViewSM survey. This is because, under the new regulations, the traditional CNAV structure will be replaced with new Low Volatility Net Asset Value (LVNAV) or Variable Net Asset Value (VNAV) products.
“Many corporate treasurers currently invested in prime funds will likely find LVNAV funds to be the most natural replacement,” says Mitchener-Nissen. “This is because LVNAV funds will operate in a very similar way to current CNAV funds.”
That being said, the advice for all treasurers is to take the time to review the new range of funds asset managers will offer under the new regulatory regime. “The new regulations make available a variety of different short-term investment products, so treasurers are likely to find a product to suit their company’s requirements,” Mitchener-Nissen says. “To help decide, treasurers should ask themselves what type of exposure the company is comfortable with and whether they should invest in a stable or variable NAV product.”
J.P. Morgan Asset Management’s planned fund range options
Public debt CNAV
USD treasury CNAV
USD government CNAV
USD treasury VNAV*
USD government VNAV*
USD credit LVNAV
USD credit VNAV
GBP gilt CNAV
GBP gilt VNAV*
GBP credit LVNAV
GBP credit VNAV
EUR government CNAV*
EUR credit LVNAV
EUR credit VNAV
AUD credit LVNAV
SGD credit LVNAV
*Continuing to evaluate investor demand. Proposed product offering may be subject to change.
Source: J.P. Morgan Asset Management, as at 17th April 2018.
Ask the right questions
When evaluating the incoming fund range, Mitchener-Nissen suggests that treasurers engage directly with their asset managers to find out how their preferred funds will be managed under the new regulations. This is especially true for treasurers considering VNAV funds as the new rules are a little less prescriptive, giving more freedom for managers to generate yield in different ways. “Treasurers need to understand how yield is being generated by the fund manager and ensure they are comfortable with the risk exposure,” she says.
Treasurers also need to understand exactly when their existing investments will transition into the new fund range: whilst 21st January 2019 is the deadline, some fund managers may choose to transition earlier. J.P. Morgan Asset Management, for example, will transition its funds on 30th November 2018, subject to regulatory approval. “We will be writing to our clients after the summer to lay out their options and what steps they need to take,” says Mitchener-Nissen.
As treasurers work through this process with their asset managers, they should also engage tax and accounting advisors. This is because much like the current MMF regulations, the new rules are silent when it comes to cash and cash equivalents treatment. And whilst Mitchener-Nissen expects there to be no change under the new regulations – especially for AAA-rated funds like J.P. Morgan Asset Management’s funds – she advises that treasurers do ask whether this is the case. “All the information about the new fund structures is freely available, so this can be something that treasurers start doing right away,” she says.
Questions to consider when updating the investment policy:
Are the liquidity features and risk characteristics of the policy’s permissible investments understood by the treasury organisation, investment committee and board of directors?
When a security falls out of compliance with the investment policy, what happens? Are there procedures that outline who must be notified? What drives the decision to keep the security or sell it? Who makes the ultimate decision? If the security is kept, how is it tracked and monitored going forward?
Does the policy allow for fluctuation in principal in its money market investments?
Does the policy allow for the possibility of liquidity fees and redemption gates?
Is portfolio duration tracked? (Interest rate duration is a measure of risk that is typically defined as the price sensitivity of the portfolio to a given change in interest rates.)
Does the organisation’s reporting provide the necessary data to update financial reports and senior management on a regular basis?
Is diversification among different security types addressed within the portfolio?
How are pooled investment vehicles, such as money market mutual funds, evaluated?
Treasurers investing in MMFs under the new regulatory regime may also need to make some changes to the company’s investment policy before the rules come into effect. “These will likely be just tweaks rather than wholesale changes,” says Mitchener-Nissen. “However, treasurers will need to check that their chosen investment structures are permitted under their investment policies and amend if not.”
One area in particular that treasurers may need to pay attention to is whether the policy allows for investments to be made in funds that operate liquidity fees and redemption gates. “This has been an area of concern for a handful of clients,” notes Mitchener-Nissen. “However, these mechanisms are not new: they are a key protection for investors, and funds have always included provisions for fees and gates in their terms and conditions. The new regulations simply enhance these rules and put more structure around their usage.”
Whilst updating the policy should not be a laborious exercise, Mitchener-Nissen advises that corporates should not wait until the last minute, especially if approval from the CFO or board is needed. Treasurers can also reach out to J.P. Morgan Asset Management for assistance with this process. “We have produced a paper to help corporates update their investment policy,” she says. “Some clients have also asked us to review draft policies and we are more than happy to offer advice and guidance.”
Away from the investment policy, treasurers should review the operational procedures surrounding their short-term investment processes. “This could range from how their treasury workstation deals in and out of funds to their authorised signatory list,” says Mitchener-Nissen. “A shift in regulation provides a good opportunity to refresh processes and ensure everything is aligned with best practice.”
Countdown to transition
With this preparation complete, treasuries should be well positioned to transition seamlessly into their selected funds. However, Mitchener-Nissen recommends that treasurers remain engaged in the process as the transition deadline approaches. “We suggest that treasurers stay in close contact with their fund managers to ensure they are fully aware of when their investments will transition,” she says. “Treasurers should also ensure that there is no additional paperwork that needs to be signed to ensure a smooth transition.”
Ahead of the game
European money reform is coming – and it is clearly time for treasurers to think, plan, and act so that they can get ahead of the game and be ready to invest under the new regulatory paradigm. And whilst the next few months will require some extra work to be done by asset managers and treasurers alike, Mitchener-Nissen expects it to be a smooth process overall. “Yes, there are changes that are coming, but these are not radical,” she concludes. “It is our main aim to make this whole process as simple and seamless as possible for our clients and ensure that they meet their investment objectives for the years to come.”