Insight & Analysis

Press release: Aviva Investors – EU money market fund reform

Published: Sep 2018

What is the regulation?

REGULATION (EU) 2017/1131 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL OF 14 JUNE 2017 ON MONEY MARKET FUNDS

This regulation sets out rules for money market funds (MMFs) established, managed or marketed in the European Union. It lays out provisions regarding the financial instruments eligible for investment by a MMF, the portfolio of an MMF, the valuation of the assets of an MMF, and the reporting requirements in relation to an MMF.

This regulation applies to collective investment undertakings that:

  1. require authorisation as UCITS or are authorised as UCITS under Directive 2009/65/EC or are AIFs under Directive 2011/61/EU;
  2. invest in short-term assets; and
  3. have distinct or cumulative objectives offering returns in line with money market rates or preserving the value of the investment.

Scope and intent

All money market funds established, managed and or/marketed in the EU. The regulation intends to provide investors with a wider degree of choice for investing their short-term cash, providing for two types of MMFs: Short-term MMFs and Standard MMFs.

In addition, three structural options:

  1. Public Debt Constant NAV (CNAV) MMFs
  2. Low Volatility NAV (LVNAV) MMFs
  3. Variable NAV (VNAV) MMFs

Timeline:

15 June 2016

EU ambassadors agree Council’s negotiating position

17 June 2016

Council confirms its negotiating position on money market funds

7 Dec 2016

Council agreement with the European Parliament confirmed

16 May 2017

Council adopts the regulation on money market funds

3 Sep 2018

Aviva Investors Liquidity Funds fully compliant ahead of the deadline

21 Jan 2019

Deadline for all fund managers to make the necessary changes

Why is the regulation changing?

Events that occurred during the financial crisis led to proposals from the European Commission intended to make money market funds more resilient. The regulation changes at European level were considered necessary to help provide:

  • Equal operating conditions for European money market funds across member states.
  • Equal protection of investors.
  • Provisions to ensure funds’ liquidity and stability.

“We believe the proposals limit contagion channels and render the financial system safer by working to forestall future asset runs.”

Caroline Hedges, Global Head of Liquidity Portfolio Management

What is changing?

  • Investment policies of money market funds

    Introduces conditions on the money market funds’ portfolio structure.

  • Categories of funds

    Most funds are currently Constant Net Asset Value (CNAV) or Variable Net Asset Value (VNAV) – in the future state CNAV will only exist for 100% Government debt funds. Most funds will convert to the newly formed Low Volatility Net Asset Value (LVNAV) category. VNAV will still exist.

  • Liquidity

    LVNAV MMF’s will need to hold at least 10% of assets maturing within one day, and 30% of assets maturing within a week to be able to meet sudden redemption requests and/or adverse market conditions. Up to 17.5% of assets held in sovereigns, supranationals or agencies can count towards the weekly limit. VNAV MMF’s will need to hold at least 7.5% of assets maturing within one day, and 15% of assets maturing within a week to be able to meet sudden redemption requests and/or adverse market conditions.

  • Diversification

    There will be a 5% limit per issuer, max 10%per deposit counterparty, max 15% limit on reverse repurchase agreements per counterparty, max 17.5% investment in other MMFs limited to 5% per fund. Max 15 % overall exposure to securitisation and ABCPs.

  • Review Rules

    After five years, the European Commission will provide a report on the functioning of the regulation.

  • Transparenc

    There will be rules on transparency in advertising MMF’s to investors and requirements on reporting to competent authorities.

Key changes for the new LVNAV fund category

For implementation by 21st January 2019:

  • Min. 10% daily liquidity.
  • Min. 30% weekly liquidity (17.5% of this can be held in highly liquid assets from sovereigns, supranationals or agencies with <190 days to maturity).
  • If weekly liquidity falls below 30%, or daily net redemptions exceed 10%, the fund’s board must meet and consider imposing fees or gates (suspend or limit redemptions for up to 15 days).
  • Liquidity fees “reflect the cost to the MMF of achieving liquidity and ensure that investors who remain in the fund are not unfairly disadvantaged”.
  • If weekly liquidity drops below 10%, liquidity fees and/or total redemption suspensions become mandatory.
  • If redemptions are suspended for more than 15 days over 90 consecutive days, the fund must float its share price.
  • Amortised cost accounting for sub 75 day assets
  • (previously 60 days) with gap to mark-to-market limited to 10bp.
  • Max. 15% exposure per repo counterparty.
  • Max. 15 % overall exposure to securitisation or ABCP.
  • Sponsors are prohibited from providing financial assistance to prop up the share price, guarantee principal or otherwise support a fund.

Contact us

Aviva Investors dedicated liquidity relationship team are committed to building long-term relationships and providing excellent service. If you would like to find out more please contact one of the team:

Contact details:
Tony Callcott
Head of Pan European, Liquidity
+44 (0)20 7809 6680
Beth Jones
Client Solutions Manager, Liquidity
+44 (0)20 7809 6281
Scott Playle
Client Solutions Manager, Liquidity
+44 (0)20 7809 6357
or visit:

www.avivainvestors.com/Liquidity

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (“Aviva Investors”) as at 20 August 2018. Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature.

This is not a guaranteed investment, an investment in a Money Market Fund is different from an investment in deposits and can fluctuate in price meaning you may not get back the original amount you invested. This investment does not rely on external support for guaranteeing liquidity or stabilising the NAV per unit or share. The risk of loss of the principal is to be borne by the investor.

Aviva Investors Liquidity Funds Plc (the “Fund”) is an umbrella open-ended investment company with segregated liability between sub-funds and with variable capital incorporated on 10 May 2002 and is authorised in Ireland as an undertaking for collective investment in transferable securities pursuant to the European Communities

(Undertakings for Collective Investment in Transferable Securities) Regulations, 2011 as amended. The Fund has appointed Aviva Investors Luxembourg S.A., with registered office at 2, rue du Fort Bourbon, L-1249 Luxembourg, as the Fund’s Management Company. The funds are sub funds of the Aviva Investors Liquidity Funds p.l.c. (ISIN: IE0031619269) and Aviva Investors Global Services Ltd has been appointed as the Investment Manager. The Subfund(s) are authorised in Ireland and regulated by Central Bank of Ireland. Copies of the Full Prospectus and Key Investor Information Document (KIID) together with the Report and Accounts for the Fund are available free of charge from Aviva Investors Global Services Ltd, St Helen’s, 1 Undershaft, London EC3P 3DQ. These documents are available in English.

The content of this document does not purport to be representational or provide warranties above and beyond those contained in the legal documentation and subscription documentation of the Fund. The legal documentation and the subscription document contain the full terms, conditions, representations and warranties in respect of the Fund. Nothing in this document shall be construed as forming any part of those terms, conditions, representations or warranties. Nothing in this document is intended to or should be construed as advice or recommendations of any nature. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of anyinvestment.

This document should not be taken as a recommendation or offer by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.

Issued by Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: St Helen’s, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Contact us at Aviva Investors Global Services Limited, St Helen’s, 1 Undershaft, London EC3P 3DQ. Telephone calls to Aviva Investors may be recorded for training or monitoring purposes.

J26438 – RA18/0814/15082019

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