The Dutch Presidency and a subgroup of the European Parliament's Council on Money Market Funds posted a "Presidency Compromise" draft on European money market reforms, the latest iteration of a long process that could bring changes to money funds domiciled in Ireland, Luxembourg, and France later this year. The text, issued on April 12, includes several key changes to a previous European Parliament proposal, including removing a "sunset clause" on Low Volatility NAV (LVNAV Funds), improved emergency gates and fees options and less onerous diversification requirements. Note, this is just the latest iteration of the reform process, and reforms in Europe are by no means a done deal. They still must go through the full "trilogue" process and will likely be revised further. Passage is uncertain, but this latest edition appears to be somewhat more palatable to MMF providers. We also discuss the latest on European or "International" money fund assets, yields, and portfolio holdings below.
The Council of the European Union's "Presidency Compromise" on Money Market Reform states, "Delegations will find below a Presidency compromise text on the above mentioned Commission proposal. With respect to the Commission's proposal, additions are underlined. The latest changes to the compromise text are denoted by bold underline for additions, and underlined strikethrough for deletions." Below, we highlight some of the changes.
Like some previous versions, the compromise explicitly bans any sponsor support from asset managers. The following text was stricken: "Asset managers, helped by sponsors, may decide to provide discretionary support to maintain the liquidity and the stability of their MMFs. Sponsors are often forced to support their sponsored MMFs when faced with declining value due to the reputational risk and fear that panic could spread into the sponsor's other businesses. Depending on the size of the fund and the extent of redemption pressure, sponsor support may reach proportions that exceed their readily available reserves. Therefore, it is important to provide for a framework of uniform rules in order to prevent the failure of the sponsor and risk contagion to other entities that sponsor MMFs." Later it says, "A MMF shall not receive external support." Language in the former proposal that provided exceptions was crossed out.
The following text, related to Low Volatility MMFs, was added: "It is therefore essential to adopt a uniform set of rules in order to avoid contagion of the short term funding market, which would put at risk the stability of the Union's financial market. In order to mitigate systemic risk, Constant Net Asset Value MMFs (CNAV MMFs) should, 24 months from the date of the entry into force of this Regulation, only operate in the Union as either a CNAV MMF that invests in public debt instruments or as a Low Volatility Net Asset Value MMF (LNAV MMF). Alternatively, existing CNAV MMFs would be able to choose to operate as variable net asset value MMFs (VNAV MMFs)."
The Draft says, "LVNAV MMFs are only allowed to use the amortised costs accounting method for assets with a residual maturity of up to 75 days where the underlying value of that asset does not deviate by more than 10 basis points from the value according to the amortised cost accounting method. CNAV MMFs and LVNAV MMF shall also have in place appropriate monitoring of mechanisms for credit risks and interest rate risks that could affect the difference between the constant NAV per unit or share and the value of its assets on the basis of the marking to market or marking to model methods."
It adds, "Investors should be clearly informed, before they invest in a MMF, if the MMF is of a short-term nature or of a standard nature and whether the MMF is of a CNAV type MMF, a LVNAV MMF or a VNAV MMF.... MMFs may be set up as (a) Variable Net Asset Value (VNAV) MMFs (b) Constant Net Asset Value MMF (CNAV MMF); or (c) Low Volatility Net Asset Value MMF (LVNAV MMF). The authorisation of an MMF shall explicitly state the type of MMF."
They also added some changes related to portfolio diversification. "A MMF shall invest no more than: (a) 5% of its assets in money market instruments issued by the same body, or (b) 10% of its assets in deposits made with the same credit institution. 1a. By way of derogation from point (a) of paragraph 1, a VNAV MMFs may invest up to 10% of its assets in money market instruments issued by the same body under the condition that the total value of the money market instruments held by the VNAV MMF in the issuing bodies in each of which it invests more than 5% of its assets shall not exceed 40% of the value of its assets." Furthermore, it says, "a MMF shall not combine, where this would lead to investment of more than 20% of its assets in a single body, any of the following: (a) investments in money market instruments issued by that body; (b) deposits made with that body; (c) OTC financial derivative instruments giving counterparty risk exposure to that body." The old proposal said 15%.
Also, the following was added: "All MMFs shall publish daily on the public section of their website the NAV per unit or share calculated in accordance with Article 27 and, where applicable, the difference between the constant NAV per unit or share and the NAV per unit or share calculated in accordance with Article 27a and 27b.... [T]he weekly maturing assets in the portfolio of a CNAV MMF or a LVNAV MMF shall constitute at least 30% of the assets of that MMF"
Similar to the U.S. rules, a breach of the 30% liquidity level would gives a board the option to implement: "liquidity fees of up to 2% on redemptions; (b) redemption gates which limit the amount of shares or units to be redeemed on any one dealing day to maximum 10% of the shares or units in the CNAV MMFs or the LVNAV MMF for any period up to 15 dealing days; (c) suspension of redemptions for any period up to 15 days; or (d) take no immediate action other than fulfilling the obligation laid down in Article 21(d) second sentence."
For more on European money fund reforms, see our March 2 News, "IMMFA on European Reforms; MFI Intl Review; European MF Symposium," our "Dec. 2 News, "FT Says Lux Blocking European MF Reforms; MFI Intl Update, Holdings," and our Sept. 23 News, "European Money Fund Symposium: Kooy, Lardner Push Viable Solutions."
European money fund assets domiciled in Dublin and Luxembourg and denominated in USD, Euro and Sterling are up $7.0 billion to $684.0 billion in the latest month (through 3/31) but are down $15.1 billion year-to-date, according to our Money Fund Intelligence International. U.S. Dollar (USD) funds (156) tracked by MFII account for over half ($351.6 billion, or 51.4%) of the total, while Euro (EUR) money funds (98) total just E75.5 billion (11.0%) and Pound Sterling (GBP) funds (108) total L167.4 (25.5%).
USD funds were down $17.0 billion in March and $40.5 billion, or 10.3%, YTD through 3/31. Euro funds were down E1.7 billion for the month and up E100 million YTD, while GBP funds are up L17.1 billion in March and up L16.9 billion YTD. USD MMFs yield 0.29% (7-Day) on average (3/31/16), up from 0.26% on 2/29 and up 13 basis points from 12/31/15. EUR MMFs yield -0.29% on average, down from -0.20% the previous month and down 10 basis points YTD, while GBP MMFs yield 0.41%, up 1 basis point for the month and 4 bps YTD.
European-domiciled US Dollar MMFs, on average, consist of 24.0% in Certificates of Deposit (CDs), 24.0% in Commercial Paper (CP), 24.0% in Treasury securities, 12.0% in Other securities (primarily Time Deposits), 11.0% in Repurchase Agreements (Repo), 3.0% in Government Agency securities, and 2.0% in VRDNs (Variable-Rate Demand Notes). USD funds have on average 28.6% of their portfolios maturing Overnight, 10.4% maturing in 2-7 Days, 20.7% maturing in 8-30 Days, 10.2% maturing in 31-60 Days, 11.0% maturing in 61-90 Days, 15.9% maturing in 91-180 Days, and 3.2% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (38.3%), France (11.1%), Japan (9.3%), Canada (9.0%), Sweden (6.4%), Germany (4.8%), Netherlands (4.4%), Australia (4.2%), Great Britain (3.6%), and Switzerland (2.1%), according to our latest MFII MF Portfolio Holdings report, with data as of March 31, 2016.
The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $102.9 billion (24.4% of total portfolio assets), BNP Paribas with $13.3B (3.2%), Bank of Tokyo-Mitsubishi UFJ Ltd with $11.1B (2.6%), Wells Fargo with $10.1B (2.4%), Bank of Nova Scotia with $9.8B (2.3%), Credit Agricole with $9.4B (2.2%), Svenska Handelsbanken with $9.2B (2.2%), Federal Reserve Bank of New York with $8.8B (2.1%), RBC with $7.7B (1.8%), Sumitomo Mitsui Banking Co with $7.4B (1.8%), HSBC with $6.8B (1.6%), Sumitomo Mitsui Trust Bank Ltd with $6.8B (1.6%), Rabobank with $6.6B (1.6%), Canadian Imperial Bank of Commerce $6.2B (1.5%), Bank of America with $6.2B (1.5%), Natixis with $5.8B (1.4%), JP Morgan with $5.8B (1.4%), Societe Generale with $5.8B (1.4%), Nordea Bank with $5.7B (1.4%), and Bank of Montreal with $5.4B (1.3%).
Euro MMFs tracked by Crane Data contain, on average 29.0% in CDs, 45.0% in CP, 17.0% in Other (primarily Time Deposits), 9.0% in Repo, 2.0% in Agency securities, and 8.0% in Treasury securities. EUR funds have on average 21.1% of their portfolios maturing Overnight, 7.5% maturing in 2-7 Days, 16.5% maturing in 8-30 Days, 14.3% maturing in 31-60 Days, 16.3% maturing in 61-90 Days, 21.2% maturing in 91-180 Days, and 3.2% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (33.9%), US (14.0%), Japan (10.8%), Germany (8.5%), Netherlands (7.1%), Sweden (6.7%), Belgium (5.9%), Great Britain (4.3%), Canada (1.8%) <b:>`_, and Switzerland (1.7%).
The 15 Largest Issuers to "offshore" EUR money funds include: Republic of France with E5.4B (7.4%), BNP Paribas with E4.3B (6.0%), Proctor & Gamble with E3.0B (4.2%), Rabobank with E2.8B (3.9%), Societe Generale with E2.8B (3.9%), Credit Mutuel with E2.7B (3.7%), Svenska Handelsbanken with E2.6B (3.6%), BRED Banque Populaire SA with E2.0B (2.8%), Nordea Bank with E2.0B (2.7%), Credit Agricole with E1.9B (2.6%), Mizuho Corporate Bank with E1.9B (2.6%), Sumitomo Matsui Banking Co. with E1.8B (2.5%), Dexia Group with E1.7B (2.4%), JP Morgan with E1.6B (2.2%), Bank of Tokyo-Mitsubishi UFJ Ltd with E1.6B (2.2%), and Kingdom of Belgium with E1.6B (2.2%).
The GBP funds tracked by MFI International contain, on average (as of 3/31/16): 34.0% in CDs, 24.0% in CP, 28.0% in Other (Time Deposits), 8.0% in Repo, 4.0% in Treasury, 1.0% in Agency, and 1.0% in VRDNs. Sterling funds have on average 22.6% of their portfolios maturing Overnight, 6.3% maturing in 2-7 Days, 15.3% maturing in 8-30 Days, 13.2% maturing in 31-60 Days, 16.3% maturing in 61-90 Days, 21.1% maturing in 91-180 Days, and 5.2% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (13.4%), Great Britain (13.6%), Japan (12.4%), Germany (9.9%), Australia (9.5%), Netherlands (8.4%), Canada (7.0%), US (7.0%), Sweden (4.8%), and Singapore (3.2%).
The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L7.4B (5.3%), Rabobank with L5.8B (4.2%), Bank of Tokyo-Mitsubishi UFJ Ltd with L5.3B (3.8%), Sumitomo Mitsui Banking Co with L4.4B (3.2%), Erste Abwicklungsanstalt with L4.1B (2.9%), Bank of America with L3.9B (2.8%) <b:>`_, National Australia Bank Ltd with L3.6B (2.6%), Toronto Dominion Bank with L3.5B (2.5%), BNP Paribas with L3.3B (2.4%), Nordea Bank with L3.3B (2.4%), Commonwealth Bank of Australia with L3.2B (2.3%), ING Bank with L3.2B (2.3%), Westpac Banking Co. with L3.0B (2.2%), and DZ Bank AG with L3.0B (2.2%). (E-mail us at info@cranedata.com to request a copy of our latest MFI International or MFII Portfolio Holdings. Note too that Crane Data will host its 4th Annual European Money Fund Symposium on Sept. 20-21, 2016 at the London Tower Bridge Hilton.)
