Insight & Analysis

Europe decides on money market reform

Published: May 2017

The Council of the European Union confirms the rules governing Europe’s US$1trn money market.

Last week, the Council of the European Union formally adopted the new set of rules that will govern Europe’s money market fund (MMF) industry. This comes after the European Parliament voted overwhelmingly in support of the proposals in April.

Luxembourg, where many MMFs are domiciled rejected the proposals.

The long-awaited confirmation comes after years of political negotiation and lobbying and will see some sizeable changes in the industry; most notably the introduction of Low Volatility NAV (LVNAV) funds.

Elsewhere, the new rules state that “in order to be able to mitigate potential investor redemptions in times of severe market stress, public debt CNAV MMFs and LVNAV MMFs should have in place provisions for liquidity fees and redemption gates to ensure investor protection and prevent a ‘first mover advantage’”.

MMF providers will also no longer be able to rely on sponsor support from third parties “including credit institutions, other financial institutions or legal entities in the same group as the MMF”.

Commenting on the Council’s decision, Edward Scicluna, Minister for Finance of Malta, which currently holds the Council presidency said: “These rules will go a long way in improving supervision and regulation of a largely unregulated sector. “Whilst money market funds are vital to investors and issuers alike, the crisis showed us that they can also be vulnerable to shocks.”

Many of the new rules will come into force in 12 months.

LVNAV: a reminder

Sitting somewhere between CNAV Government funds priced to two decimal places and VNAV funds that use mark-to-market or mark-to-model pricing to four decimal places, LVNAV funds seek to provide many of the key attributes that compel corporates to use CNAV MMFs but with the extra safety sought from the EU lawmakers.

There are some notable differences between CNAV funds and LVNAV funds that investors must be aware of, however. These include the introduction of a strict portfolio fluctuation band that will see funds able to retain a constant share price as long as shares do not deviate from the actual NAV by more than 20 basis points – CNAV funds currently are permitted to deviate by 50 basis points.

Industry comment

“Although finalisation of the rules is a formality in the process, this degree of greater certainty sheds light on what we think are two important aspects of the new regulations: firstly, the proposed new regulations provide a level of optionality which will ultimately allow money market funds to continue to offer investors the advantages of MMFs that they currently enjoy,” says Jim Fuell, Head of Global Liquidity Sales, International, J.P. Morgan Asset Management.

“In addition, the new regulations draw together elements of oversight which have previously been afforded not just by preceding regulations, but by industry codes of practice, rating agency requirements and prudent practices embedded within individual asset management firms; the new MMF regulations therefore present clarity, consistency and certainty for investors,” adds Fuell.

So, what does this mean for corporate investors? According to Fuell “many investors are still evaluating the options available under the new regulations”. However, he believes that at this stage the LVNAV money market fund option is expected to be the likely choice for many corporates.

“Thus far, this option is being viewed by investors as most akin to the CNAV short-term money market fund in which they are currently invested,” he adds.

Corporate comment

Treasury Today is interested to hear what the corporate treasury community thinks of these proposals.

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