When Fitch Ratings issued a statement in December 2019 that forecast broad stability for the global money market fund (MMF) sector and ratings in 2020, it underpinned what many investors already knew: the industry’s conservative credit, market and liquidity risk profile continues to provide excellent short-term security.
The Institutional Money Market Funds Association’s (IMMFA) founding goal was to preserve constant net asset value for the MMF industry in order to meet investor demand. Its broader aim today – as it heads towards its 20th anniversary – is to promote and develop the integrity of this industry “to the benefit of investors”, says Veronica Iommi, IMMFA’s incoming Secretary General (she assumed the role in August 2019).
With this in mind, IMMFA’s aim for the future will see it engaging further with policymakers and regulators, and acting as a primary point of contact for all stakeholders, including investors and corporate treasurers, as well as industry associations such as the ACT.
As part of the remit to provide market clarity for investors, all IMMFA members are required to deliver weekly statistical data. This is aggregated within the IRIS funds database, an extract of which is published on IMMFA’s public website. Aside from the size of the funds, this data includes the latest metrics specified in the EU regulation that are particular to MMFs – primarily measures of daily and weekly liquidity.
The database, along with an annual industry survey, also helps IMMFA inform its own evidence-based policy work. Data-driven engagement played a critical role during the recent regulatory reform debate of the MMF sector in Europe. The EU’s Money Market Funds Regulation (MMFR) went live in January 2019, following similar reform of the US market by the SEC in 2016 (the US and EU are by far the world’s two largest MMF markets). Over coming years, IMMFA looks forward to working closely with EU policymakers on any regulatory review of the MMFR to explore any areas where better outcomes for investors might be achieved.
With these monumental reforms in place, one of the main objectives of IMMFA in its 20th year will be its approach to the upcoming review of the EU’s MMF Regulation. This is part of a standard EU five-year review process, due for completion by the European Commission in July 2022.
“It seems a long way off, but work will commence early 2020 and IMMFA will need to ensure that we are actively engaged from the outset, contributing to any research that may be commissioned in the EU’s preparatory phase for setting the regulation,” comments Iommi.
“The MMF industry in Europe has overall, been a success. It has provided and maintained important optionality for investors, and our objective now is to maintain the various categories of funds allowed in the regulation, thereby safeguarding choice for investors.”
In the coming year, Iommi anticipates other regulatory developments that will impact funds and investors, in which IMMFA is set to play its part. Key initiatives such as the Capital Markets Union initiative (which will further integrate EU member markets in this space) will also be under IMMFA’s close scrutiny.
“With MMFs playing a key role in the real economy of the region, especially in terms of growth, it is vital to ensure that, in the evolution of the Capital Markets Union, their role is taken into account to the benefit of investors and the wider economy,” states Iommi.
With the EU in the throes of a new legislative cycle, IMMFA (and many other representative bodies) will need to be fully engaged with the new regulatory and policy-maker stakeholders in Brussels who will be shaping future regulation.
Much of the engagement with these new stakeholders will be educational, and, says Iommi, IMMFA will be seeking to raise their awareness and understanding of the importance of the MMF industry to the real economy and to treasurers seeking a home for their short-term cash.
In broad EU terms, Brexit could overshadow much of this in 2020. So what of Brexit for the MMF space? With negotiations ongoing, uncertainty still rules. However, IMMFA has been preparing its members for a range of potential outcomes, including a ‘no-deal’ exit (where the UK departs without a formal agreement in place with the EU). This is still a possibility given a self-imposed deadline for a trade agreement with the EU has been set by the newly elected British government.
From a MMF perspective, the main issue with Brexit relates to the domicile of a fund and its investors. “We expect little to no disruption to European and other non-UK investors in MMFs should there be a ‘no deal’ Brexit,” says Iommi. “All member funds, bar one, are already domiciled in the EU with appropriate local infrastructure.”
For UK investors, she reports that IMMFA has been working closely with HM Treasury since the referendum in 2016. The focus here has been on the Chancellor of the Exchequer’s commitment to ensure continuation of existing arrangements for UK investors in MMFs in the event of a ‘no deal’ exit.
The result, says Iommi, is that statutory instruments have now been established to keep money market fund legislation in place after Brexit. A temporary ‘permissions’ regime has also been created by the Financial Conduct Authority so that EU-domiciled funds which have registered under this regime have up to three years to continue promoting their funds to UK investors exactly as they do now.
IMMFA will continue to engage with UK authorities on Brexit related developments including in the development of a new framework for inward passporting of EU27 domiciled funds to UK investors beyond transition.
Reference rate risk
Whilst Brexit may not concern some European investors, the timetabled reform of interest rate benchmarks is something that will impact many. This will see the transition away from LIBOR/EURIBOR and EONIA to replacement risk free rates, including SONIA and ESTR by the end of 2021.
Whilst MMFs do not typically link their fees to a benchmark level, or track specific IBOR benchmarks, their underlying portfolios will likely contain instruments referencing these rates. Iommi says that IMMFA’s asset manager members have been communicating to their investors any changes that need to take place in their documentation as a result.
Although IMMFA does not expect benchmark reform to impact the operational utility of MMFs per se, Iommi says treasurers “need to be aware of those underlying portfolios, and should likewise communicate with their investment managers about the exposures they think their organisations may have to LIBOR beyond 2021”.
Few industries will have failed to respond in some form or other to the call for sustainable practices; MMFs have been working towards an industry fit for the future too, says Iommi. With many investors, including institutional and corporate, demanding clarity on their portfolios, Environmental, Social, and Governance (ESG), Socially Responsible Investing (SRI), and sustainability, MMF providers are looking for ways to incorporate sustainable investing within their funds, she says.
Although she reports that a number of providers are working with their data providers, investors and other industry partners to ensure MMFs answer investor demand in this regard, the response is “still at a nascent stage”.
Indeed, she continues, while the EU framework is in the process of being finalised and there are no European or global-level regulations or standardised rules it remains an industry “in flux” on the topics of ESG, SRI and sustainability. “This is why it’s so important that investors carefully analyse any offering to ensure it meets their internal requirements, and for them to take care when reporting on any ESG, SRI or sustainable investing.”
With so many changes afoot, IMMFA’s 20th anniversary year will see it remain highly active. Treasurers involved in the MMF space should feel free to engage with it to ensure their voice is being heard.