With U.S. money market reforms now on the books and pending, the global money fund industry's attention turns to European reforms, first proposed by the European Commission in September 2013. The European Parliament has not acted on the proposal yet, postponing a vote this past March. But the expectation is that Parliament will act at some point in coming months. The issue will be front and center at Crane's European Money Fund Symposium, which takes place next week (Sept. 22-23) in London. But in advance of that, we have come across some good articles written about European reforms in the past week. The first, called "Money Market Reform: Keeping Your Eye on the Ball," was published by Treasury Today, and quotes Euro Symposium keynote speaker and IMMFA Chairman Jonathan Curry. (We also "profile" IMMFA Secretary General Susan Hindle Barrone in the latest issue of our Money Fund Intelligence newsletter.)
The Treasury Today piece focuses on where the proposal stands and how it differs from US reforms. It says, "It has been a long time coming for the US and it will be a while yet for Europe, but the full extent of money market fund (MMF) reform is slowly being realised. However, with the US having shown its hand and Europe still debating the issue, it may seem like a two-part play; either way reform is coming and investors need to understand what the changes mean to be able to make the most of them."
The article continues, "The new parliament is yet to commence its deliberations on MMF reform but progress is nonetheless being made, notes Curry (Jonathan Curry, Global Chief Investment Officer – Liquidity at HSBC Global Asset Management). Membership of the Committee on Economic and Monetary Affairs (ECON) has already been agreed. This is an important step as ECON bears responsibility for MMF reform from a European Parliament perspective. This committee had previously seen a fairly balanced set of views with support for both the European Commission's key proposals and for an alternative approach to these key proposals focused on the use of liquidity fees and redemption gates."
It explains, "The loss of certain key figures, including the Chair of the ECON, the rapporteur (the person appointed as the lead Member of the European Parliament [MEP] on the 'file' and the official report author) and three out of the four shadow rapporteurs (the persons appointed to assist the rapporteur) has led to a significant loss of knowledge of this file in the Parliament. The new cohort will need to get up to speed with the issues before making any pronouncements. The expectation, says Curry, is that the work will commence in earnest sometime in September 2014."
Further, "Discussion has recently got underway within the European Council which brings together the heads of state or government of every EU country. It requires input from representatives of all 28 member states; coming up with a united position on the proposal will take time as all stakeholders will seek to air their voice in the light of analysis by bodies such as the European Systemic Risk Board (ESRB) and the International Organisation of Securities Commissions (IOSCO). The seemingly glacial movement of the overall debate means there is still a lot of work to be done by interested parties in this debate, notes Curry."
The article tells us, "With a new European Parliament now in situ there will need to be considerable engagement on behalf of the industry with the yet-to-be announced rapporteur and his or her shadows. "I can see the second half of this year being very busy for all those wishing to have their opinions heard," he comments.... Once the proposals have been accepted there will be a transition period for all concerned. Whereas the US is allowing two years, the European Commission's proposal is for six months. "Our view is that this is significantly shorter than it needs to be for all parties," states Curry, suggesting that a minimum of 18 to 24 months may be required for migration. "It is unlikely we will see a conclusion before the first half of next year."
The Treasury Today piece expounds on the key differences between the US and European proposals. "There are a number of similarities between the changes now set for the US market and those proposed for the European industry. The switch to VNAV for part of the US industry and rules around diversification and transparency are, for example, broadly in line with European Commission thinking. But major differences also exist. The SEC makes no provision for the use of capital buffers for funds whereas the EC is proposing a 3% buffer for funds not switching to VNAV. To date there are no plans in Europe for liquidity fees and redemption gates. And where amortised cost accounting for assets with maturities shorter than 60 days is permissible for US MMF investors, there will be no such cost accounting at all in Europe."
It goes on, "Regardless of similarities or differences, there does not appear to be any statement of intent by the regulatory bodies on either side of the Atlantic to align their respective approaches to MMF reform. However, Curry suggests that as the US has been the first to break cover, it will now give one side or other of the debate in Europe "some ammunition." Although convergence is unlikely, he believes that it would be "unhelpful" for the industry if the two sets of reform diverge substantially. "Obviously we need a situation where both regulatory bodies implement reforms that are necessary; we would not support consistency for consistency's sake. But we want the right reforms to be in place and if that only happens in one jurisdiction then that is preferable to consistency that is consistently wrong."
It concludes, "Asset managers will continue to play a vital role in delivering information and offering informed views on actual and proposed market changes. In this respect, HSBC Global Asset Management has a number of educational approaches including one-to-one sessions, group meetings, 'treasury breakfasts' and articles in the industry press. "We have a clear view on these reforms and we are sharing that with our investors," states Curry. By encouraging investors to understand the impact of MMF reform, and by individually helping them to formulate the most appropriate response, key players such as HSBC Global Asset Management are offering a solid foundation upon which investment strategies can be built. Ultimately, with the protection that these reforms are designed to offer investors, they are also helping to deliver the industry safely into the next phase of its development."
Also, in its September issue, Treasury Today penned an editorial on reforms called "Beginning of the End for CNAV Funds." The editorial says, "[T]he odds are now heavily stacked in favour of similar legislation being adopted in Europe." They go on, "When polled, corporate treasurers say they like CNAV funds and will not use VNAV funds, but alternatives will be limited. Before dismissing the VNAV option, the wiser treasurer will investigate and understand the impact of the new legislation.... Any new money fund legislation must be accompanied by realistic rules on tax and accounting treatment of VNAV funds.... Providing this happens as new legislation is adopted in Europe, corporates will find VNAV funds are an attractive short-term investment. They will educate their treasury committees and amend their treasury policies accordingly. Our bet is that the MMF industry we know today will survive and may well, over time, see higher volumes than today. This may the beginning of the end of CNAV funds but it is also the beginning of VNAV funds becoming an investment in which corporates should and will invest."
Another update, this one from the Financial Services Team at Irish law firm LK Shields, focuses on the European Central Bank's position on the reform proposal. "The ECB notes the importance of achieving "substantial convergence at international level" in order to avoid the regulatory arbitrage which has the potential to arise were there to be different MMF regulatory regimes in the most important MMF markets; the EU and the United States. In relation to the controversial proposal that all CNAV MMFs hold a NAV buffer of 3%, the ECB notes that the proposal runs contrary to the recommendations of the European Systemic Risk Board and notes that were such a provision to be introduced, the European Commission would be mandated to review the adequacy of the rules three years after the implementation of the Proposed Regulation. The ECB highlights what it sees as two weaknesses with the NAV buffer proposal; the fact that the NAV buffer is not proposed to be risk-based, i.e. that for MMFs needing to build up or replenish the buffer, there may be an incentive for such MMFs to take increased risks in their investment policies; and the short period of time within which it is proposed the NAV buffer would need to be replenished were the buffer to fall below 3%."
LK Shields continues, "The points raised by the ECB in relation to the proposed NAV Buffer and the need for substantial convergence at international level are interesting when the new US rules on MMF reform are taken into consideration. The US MMF Rules distinguish between MMFs on the basis of the types of investors investing in the MMFs. The EU's MMF reform proposals do not follow the US approach. Instead, the EU rules focus on the liquidity profile of an MMF. Under the Proposed Regulation, only Short-Term MMFs (MMFs holding portfolios of assets with short-term maturities) will be able to use a CNAV. Standard MMFs (those MMFs with a portfolio of assets with a weighted average maturity of between 60 days and 6 months) will be required to use a VNAV."
The firm goes on to say, "Furthermore, if there was to be a run on a CNAV MMF, the purpose of the proposed reforms is to ensure that MMFs have sufficient liquid assets to enable them to meet investor redemptions, while the NAV buffer provides a backstop to protect investors by acting as a source of funds to compensate redeeming investors for any shortfall between the published CNAV and the actual value of the MMF's net assets. However, the combined costs of complying with the proposed rules and of maintaining a NAV buffer in what is a low-margin industry, throws doubt on the viability of CNAV MMFs in the EU. It is possible that MMFs could choose to convert to VNAV MMFs to avail of a lighter regulatory regime, a scenario which would achieve through the backdoor, what was originally advocated for at the height of the economic crisis; that all MMFs should publish VNAVs." LK Shields concludes. "As previously noted, the ECB thinks it crucial that differences in MMF regulation in the EU and the US do not create regulatory arbitrage. The EU authorities will need to be very careful of their next steps."
