The September issue of our flagship Money Fund Intelligence newsletter features an interview with the new Chair of the Institutional Money Market Funds Association, Reyer Kooy. Kooy, the Head of Institutional Liquidity Management, EMEA and Asia business for Deutsche Asset & Wealth Management, replaces Jonathan Curry, who served as IMMFA Chair for the past three years. Kooy comes aboard in a challenging environment for money funds in Europe, as the industry faces negative yields and the likelihood of substantial reforms. But he remains optimistic about the future. We excerpt from our interview below. (Note: Kooy will also give the opening speech at this morning's European Money Fund Symposium, which takes place Thursday and Friday in Dublin, Ireland at the Conrad Hotel.)
MFI: When did you become Chair? Kooy: I was elected to become Chairman of IMMFA in June of this year for a two year term. Previously I was an IMMFA board member and Treasurer of the association for the preceding three years. IMMFA has been around for more than 15 years and is focused on the European CNAV money market fund industry specifically. I've personally been involved with the money fund industry twelve years.
MFI: What has been IMMFA's main focus? Kooy: Regulation has been the main focus of the association over the last two to three years. We focus on making the case for money market funds in general, but also for constant NAV. We are keen to share our knowledge and insights with the decision makers of the European regulatory process. Regulations will be a prime focus going forward as well as the yield environment. These two key items are of crucial importance to our members and therefore to IMMFA.
MFI: Given the potential for regulatory changes, will IMMFA expand its focus? Kooy: For now the focus of the association is on constant net asset value money market funds and, hopefully, carving out a future for constant net asset value money market funds in Europe. That's really the sole focus at this point. As the regulation becomes clear, we can start to speculate about what that means not only for money market funds but also their users, the providers, and IMMFA. But at this point it's too early to say. Currently, European providers of constant NAV money market funds are members of IMMFA as are service providers, which include fund administration companies, rating agencies, and accounting firms. There are about thirty members in total. It's very much a committee based structure. The elected board is the main driving force, along with our full time staff, of the association's activities.
MFI: How are members dealing with negative yields? Kooy: Negative yield is a challenge for our clients as well as our members. IMMFA money market funds are highly transparent in their holdings and in their activities, so if the short term euro money markets are negative then money market funds must be too. So clients are accepting that to be invested in highly secure, highly liquid Euro denominated securities comes at a cost. The negative yield in a money market fund may be better than what's on offer in banks in the same liquidity bucket. Even though we have seen some reduction in the assets under management in euro CNAV money market funds, we still see actually quite a strong demand for euro denominated money market funds. Providers have been able to operate in this negative yield environment. Most if not all providers have implemented a share cancellation structure whereby a very small number of shares is cancelled on a daily basis to reflect the negative yield in the fund. We are also seeing a broadening of use of accumulating share classes, which gives the same economic gap impact but just in a different format.
MFI: What is the status of money fund regulations in Europe? Kooy: The regulatory debate in Europe continues. It has been rightly identified as a very important and technical file. The general consensus on the European side of things is still to be reached. The European Commission and the European Parliament have made their recommendations, and now it's time for the Council of Ministers also to review the file. Progress depends also on the presidency. The Latvians didn't look at this file because of resource constraint, and Luxembourg is under some pressure to do so. But it is not clear yet whether the file will progress under their presidency. Whatever the timing, as an industry we are hoping for a healthy transition timeframe to allow the clients, ourselves as providers, but also the whole European money markets to prepare themselves fully for whatever changes may ensue. All the parties need to look at the file and there is then a "tri-logue" process which effectively draws together the European Commission, the European Parliament, and the Council of Ministers to agree at final compromise. Until all of the steps are taken, it's unclear what the final outcome will be.
MFI: What's the position on fund ratings? Kooy: The most recent drafts we have seen do not specifically address the point <b:>`_. It seems like the banishment of fund ratings have been withdrawn, so it looks as though there will be a possibility to continue to use ratings. It's important to point out that in general terms, the rating agencies are actually very important to the users of money market funds perhaps more so than the providers of money market funds. A good money market fund house will be in the business of providing independent and primary research to support its investment decision process. It is an additional comfort to the users of money market funds to see the outcome of that process results in the purchasing of highly rated securities, which allow the fund to get an AAA rating.
MFI: Who are the users of IMMFA money market funds? Kooy: The answer actually is anyone who has cash. The nice thing about money market funds and IMMFA-style money market funds is that the user base is extremely broad. Corporates, insurance companies, pension plans, local governments, hedge funds, asset managers, private wealth, and, in some cases, possibly even retail through intermediaries are all making use of money market funds. As far as what they are looking for, capital preservation and liquidity are the key drivers for the users and often yield is a lesser consideration.
MFI: Bank deposits are facing challenges, too, right? Kooy: This is a very important point. If you ask money market fund investors what they worried about today, they will talk about regulation and they will talk about yield. But these issues are not only prevalent in money market funds, because bank regulations are impacting, in some cases, the ability for these banks to take balances from customers and impacting their ability to pay yields. Banks and investors therefore have a keen interest in solutions to help them with their liquidity needs. The European Commission's Capital Markets Union initiative is actually discussing promoting alternative sources of financing to the economy and money market funds should be an important part of the story.
MFI: Are providers facing fee pressures? Kooy: In general I would say that there is still an element of fee waiving taking place in most AAA-rated euro-denominated funds. This has been the case during the ultra-low yield environment which preceded the now negative yield environment. But waiving is less prevalent in the other currency funds to which we alluded, namely Sterling and U.S. dollar, where the rates are a little higher.
MFI: Have U.S. MMF reforms had an influence on European regulations? Kooy: Of course. There's a lot of activity on fund restructuring in the U.S. arena as providers prepare themselves and their clients for the effective date of S.E.C. reforms in October of 2016. However, money market fund reform and European money market fund reform are quite different, mainly because these are very different markets and quite different client bases. I hope and expect the European process will take account of the unique perspectives of the European market. For example retail uses of constant net asset value funds in the U.S. would have been a big consideration in the setting of U.S. rules. In Europe, it should not be as big a factor, so I'd expect this to be taken less into consideration in any final law making in Europe.
MFI: What's your outlook in general for CNAV money market funds? Are you optimistic about the future? Kooy: Yes, I'm fundamentally optimistic. Regulation and low yields are posing some challenges for investors and providers of money market funds alike, but I do believe that there is a strong role for CNAV funds, specifically. I'm hopeful that this will be recognized in the final lawmaking in Europe. But more generally, money market funds have a vital role to play in the capital preservation of liquid balances through diversification and it is important that the services remain accessible to investors, particularly in the context of more broad based banking regulation.
MFI: Has IMMFA had an influence in the regulatory debate? Kooy: We certainly think that we have. We have maintained an extremely consistent story throughout the entire process in terms of feeding the process with information to help with the decision making process. We're also very proud as an association to have been able to get a good consensus around those positions within the membership. I think those two items have allowed us to be very strong in informing the regulatory debate.
