The European Parliament approved a law Wednesday that would reform money market funds in Europe and retain constant NAV funds, though with severe restrictions. It's a major step forward in the reform process, but not a done deal. The legislation must clear at least one final hurdle. A press release entitled, "European Parliament Plenary vote on EU Money Market Fund Regulation," from the U.K.-based Institutional Money Market Funds Association, which represents CNAV, "U.S.-style" money funds in Europe, says "Today a full plenary session of the European Parliament (EP) agreed its position on Money Market Fund Regulation (MMFR). This report is the Parliament's response to a legislative proposal put forward by the European Commission (EC) in September 2013. The agreement by Parliament is another milestone in the EU 'codecision' process. Separately, the Council of Ministers (CoM), senior representatives from the 28 EU Member States, is still debating its own position on MMF. Once both the EP and the CoM have agreed their respective positions on the MMFR, the final legislative stage, the Trilogue negotiation with the European Commission, takes place." Irish MEP Brian Hayes, who represents Ireland, the largest money fund market in Europe, also released a statement more supportive of the legislation, but IMMFA has some concerns with the law and supports a more feasible solution.
The IMMFA statement explains, "It is a positive development that the EP report recognizes that the capital buffer originally suggested by the EC was not a viable proposal for an investment product. It is also worth noting that many of the good market practices which IMMFA funds already adopt voluntarily under the IMMFA Code of Practice, such as credit diversification, prescribed levels of liquidity and a high level of transparency, have been incorporated into the future regulation of money market funds in Europe. Overall, however, the political compromise that has been reached by Parliament does not augur well for the European capital markets."
It continues, "AUM in European MMF stands at approximately E1 trillion. If implemented, the changes suggested by the EP would have wide-ranging and long-term ramifications for both the constant net asset value (CNAV) and variable net asset value (VNAV) sectors of the money market fund market. The impact on many everyday businesses, local authorities, charities and other MMF investors should not be underestimated. The EP's proposals reflect the political agenda of various MEPs rather than a serious attempt to reduce systemic risk within the European money markets."
IMMFA adds, "The options presented to the CNAV industry, which makes up >50% of AUM, are severely limited under the Parliament's draft. The Retail CNAV and EU Public Debt CNAV options are restricted in scope, and under current market conditions together account for less than 10% of the CNAV AUM. The shortcomings of these two options were clearly identified in the impact assessment commissioned by the European Parliamentary Research Service (EPRS) but do not seem to have been taken into account by MEPs. The proposed LVNAV structure is not an adequate substitute for the CNAV product. Only a very small proportion of the current CNAV market would be able to transition into this new MMF formulation. Furthermore it is unclear how useful this construct would be to investors. Even then, under a so-called 'sunset clause' the authorisation of these funds would lapse five years after the Regulation comes into force. These measures have potential to destabilise the short-term capital markets for years to come."
Finally, the release tells us, "IMMFA remains confident that through the ongoing negotiation a more feasible solution for the MMF industry will be found -- that promotes financial stability whilst preserving efficient short term capital markets in Europe. IMMFA remains committed to working with all parties involved in the regulatory debate and hopes that in the long run an approach which is both practical and effective will prevail."
Irish MEP Brian Hayes, a member of the EU's Econ Committee who helped craft the bill, called it "an important development in legislating the shadow banking sector in Europe." In a statement Hayes says, "As lead negotiator in Parliament for the European People's Party (EPP) on this file, I believe a balanced compromise has been agreed. This is a crucial first step before Parliament enters negotiations with the European Council for a final decision on the EU Money Market Funds Regulation. The file still requires more work but the Parliament text recognises that both parts of the MMF industry -- Constant Net Asset Value funds (CNAV) and Variable Net Asset Value Funds (VNAV) -- will continue into the future. Ireland is a leading European domicile for Money Market Funds with over E300 billion worth of assets held in CNAV Money Market Funds in Ireland."
Hayes continued, "The Parliament's agreement has replaced current CNAV funds with three new types of funds -- Government CNAVs, Small Investor CNAVs and Low Volatility NAV funds. Additional safeguards will be applied to these funds to ensure that they can cope with market shocks. I have always taken the position that new financial regulation must not disproportionately affect a small number of small Member States. There has been a push from various EU lawmakers to completely eliminate CNAV funds as they consider them a threat to financial stability. Yet no CNAV fund in the EU has ever 'broken the buck' or returned less than its share price to investors. These funds are very important to the financing of large businesses, charities, local authorities and pension funds."
The Irish Times broke the news with its story, "European Parliament Approves New Law on Money Market Funds." It says, "It is understood that Ireland, along with Luxembourg and Britain which also offer CNAV funds, came under significant pressure from other member states including France which dominates the Variable Net Asset Value Funds (VNAV) market and favoured phasing out CNAVs. The European Commission had also proposed that CNAVs be phased out when it first announced the new Money Markets legislation in 2013."
The article continues, "The European Council, the EU institution which represents member states, must now formulate its joint position on the proposed legislation before entering negotiation with the European Parliament. `With Luxembourg due to assume the rotating presidency of the EU in July, it is hoped that progress may be made on the legislation before the end of the year."
The Econ Committee originally detailed the proposed changes in a February 26 news release." It says, "Under the draft law, ECON committee MEPs proposed to limit CNAV MMFs to two types: Retail CNAV that would be available for subscription only for charities, non-profit organisations, public authorities and public foundations; Public Debt CNAV which would invest 99.5% of its assets in public debt instruments. There would be a new type of MMF: Low Volatility Net Asset Value MMF (LVNAV MMF) that might display a constant net asset value but under strict conditions."
It adds, "The draft law should also require MMFs to diversify their asset portfolios, investing in higher-quality assets, follow strict liquidity and concentration requirements and have in place sound stress testing processes, MEPs decided. MMFs would have to have in place a rigorous internal assessment procedure to determine the credit quality of money market instruments. The assets of a MMF would have to be valued at least once a day and the result should be published daily on the website of the MMF. As the discretionary nature of external support contributes to uncertainty in times of instability, MEPs decided that a MMF should not receive external support from a third party including from its sponsor, if any." The MEPs also tightened the transparency rules in the draft law. MMFs would have to report weekly to investors: liquidity profile, credit profile and portfolio composition, WAM, WAL, and concentration of the top five investors. Finally, "Public Debt and Retail CNAVs and LVNAVs should apply "liquidity fees" "redemption gates" in circumstances to help stem sudden outflows."
