Our 3rd Annual European Money Fund Symposium took place late last week in Dublin, Ireland, with an audience of about 110 attendees. Crane Data President Peter Crane, who served as the moderator and host, said of the conference, "With our European event, we've alternated between Dublin and London the last 3 years, and we enjoyed returning to Ireland, the largest money fund marketplace outside the U.S." The conference featured two days of discussions on the European money market fund industry, with pending reform regulations and negative yields receiving the most attention. Yet, the tone of the conference was not doom and gloom; rather it was optimistic as the industry remains resilient in the face of major challenges. Below, we briefly recap of two of the keynote sessions, specifically, "State of Money Market Funds in Europe and IMMFA Update," and "Money Market Funds in Ireland."
In the opening "State" session, Reyer Kooy, new IMMFA Chair and Head of Institutional Liquidity Management, EMEA and Asia, Deutsche Wealth and Asset Management, provided an overview of the key issues and regulations. He says, "This is a time of intense change in the capital markets and the European money market fund industry -- in fact change is the new norm. Some of it is disruptive, but some of this change is definitely needed so adaptation will be required. But I am fundamentally optimistic about the future of our industry. This sentiment starts with the belief that there is a need for a strong money market fund industry in Europe and this need has never been greater. Investors need the services that we provide and money market fund sponsors will continue to be of great use to investors in the future." (See too Thursday's "Sept. MFI Profile: New IMMFA Chair Reyer Kooy on European MMFs.")
Kooy adds, "However, the industry does face a number of challenges -- the low interest environment is clearly one and Europe has clearly gone to negative territory." On negative yields, Kooy states, "IMMFA members have actually been very well prepared, broadly implementing share cancellation strategies." So while there has been a degree of outflows as a result of negative yields in Europe, many investors have remained in these funds. Speaking of other challenges, he added, "We're increasingly seeing a paucity of supply of assets for money market funds to purchase and whilst this is a problem for us, one can only imagine how much more of a problem this is for our clients."
He continues, "It [regulatory reform] has been slow, but this has been okay, as it has allowed the stakeholders and the lawmakers to better understand the filings implications. I think the fact that the filing has been moving slowly has been a positive aspect of the debate.... Clearly one of the most glaring original proposals from the European Commission, which has since been softened, is the requirement for capital NAV buffers. So the good news is this seem to be off the table for now."
But he said there are a couple of areas where IMMFA does not support the current proposal. "We are very convinced that the differentiation of risk between CNAV and VNAV funds is misplaced. These two classifications of money market funds should not be treated differently under these regulations. We also believe there should not be a restriction on the use of amortized cost accounting. It is a reliable and accepted principle for short-term assets across the financial markets, so why should that not be the case for money market funds."
Kooy concludes, "Changes due to regulatory reform will, I believe, create opportunities, although we, as an industry, will need to remain nimble to be able to adapt." One of IMMFA's ongoing objectives is to "engage in the regulatory debates with decision makers and stakeholders to push for the best possible outcomes for ourselves, but more importantly, our investors."
Day two kicked off with a talk from Irish Funds' Chief Executive Pat Lardner, who gave an overview of the money fund industry in Ireland, the largest market in Europe (and second largest in the world) with $400 billion. Irish Funds' Regulatory Affairs Head Patrick Rooney went deeper into regulations, pointing out areas where the proposal could be improved.
Lardner says, "Net assets in Irish-domiciled money funds, notwithstanding some of the challenges that we've seen, have actually witnessed a growth in assets. Even over the course of the last 12 months through the end of June, we've actually seen a 4% rise. It's notable that the assets of MMFs are now beyond their previous peak in 2010." With two-thirds of the issuers located outside the Eurozone, Lardner says, "This is an international industry in its own right. When you look at the issuers, this is a key point to take away, a very significant portion (67%) of those are banks. It's been our suggestion in this reform package that you have to have something that allows the banks to get funding -- that's why there is a very much a joining at the hip of the interest of CNAV and VNAV parts of the industry when it comes to funding underlying entities."
Lardner continues, "Who are the investors? The investors in Irish domiciled money funds are typically in the financial intermediaries sector (67%) so there is a very institutional nature and feel to what we have here. There is virtually nothing in terms of a retail investment in the funds. The nature of the industry here is large, it's sophisticated, and it's very diverse."
He adds, "We have a very steadfast view that we must preserve the features of CNAV money market funds because they are valued by investors. If they are valued by investors, and they provide a source of funding into the economy, they have a legitimate reason to exist and continue. We think that a vibrant and a well-structured money market fund segment that continues to provide for CNAV is important. There have been difficult decisions and I do think those discussions have been moved to the point of pragmatism." He hopes that the outcome is a "viable solution."
Rooney dove deeper into the reform proposal, highlighting where they'd like to see changes. He comments, "The money market fund file has been highly controversial and there have been many twists and turns. Currently, we have 3 proposed alternatives to CNAV, the Low Volatility NAV (LVNAV) money market fund, the Public Debt MMF, and the Retail CNAV MMF. The problem is there something with each of those that needs to be addressed, so we're still in a difficult position. But if we look back to the Commission proposal -- the capital buffer proposal, which would kill CNAV funds -- I'd like to think that the debate is shifting to one around viable solutions for CNAV. So the road ahead is still very challenging."
He ran through the European Parliament's current proposal and the Irish Funds industry's positions on them, which, he pointed out, are aligned with IMMFA's positions. Rooney states, "Looking at the LVNAV, I think there are some appealing features here for existing CNAV managers -- the NAV may be rounded to 2 decimal places, amortized cost accounting may be used for assets with a residual maturity of less than 90 days, assets greater than 90 days must be valued at mark-to-market. There have indications to us from several promoters that they could live within those parameters if other aspects of the LVNAV could be addressed." If so, he said, "This could be where a large chunk of CNAV might go -- but that has to be heavily caveated."
Rooney says, "We certainly would like to see a higher basis point threshold [on the "shadow" NAV deviating by 20 bps]. I think 20 bps is already rock bottom -- below that you will get the fund flipping into VNAV far too easily. You can't have a situation where it's flipping back and forth; it's operationally just not feasible. We very much hope that we can come up with a reasonable number." The other caveat is the sunset clause. He adds, "An automatic termination of the product after five years is unacceptable. It sends the wrong signal to the marketplace -- we're going to tell the market that it's a product that's going to be phased out. We don't think that's appropriate."
On the Public Debt CNAV fund proposal, he comments, "First there is a lack of availability of sufficiently high quality EU government securities in the market. We need to include US securities in particular, given the makeup of assets in Irish MMFs.... We need a product that can invest in all types of high quality, eligible, government securities." Another challenge is the application of fees and gates on the Public Debt CNAV funds. "We see them as superfluous given the highly liquid nature of government securities."
Where does it go from here? The EP's proposal must be agreed to by the Council of Ministers then it goes to the "trilogue" phase. Rooney concludes, "So we have some road to travel yet on this and some very entrenched views to overcome. It's all about striking the right balance and the onus is on the industry to demonstrate to regulators how we have addressed the key risks and how far we have moved. We will continue to engage with all of the key stakeholders." (Note: Next year's European Money Fund Symposium is scheduled for Sept. 19-20 2016, in London.)
