Recent news reports and comments from industry insiders indicate that the 3% buffer proposed by European regulators last year may finally be dead and that EU regulators are seeking a compromise similar to those passed in the U.S. An article in the Financial Times this week said the European parliament's new rapporteur charged with overseeing money market reform, Neena Gill from the UK, said she does not want to see the CNAV industry destroyed by reforms. Below, we review the FT piece and recent press reports, and we also quote from some of the regulatory talk and sessions from last week's European Money Fund Symposium in London.
The FT piece states, "Neena Gill, a UK Labour MEP, who will now attempt to broker a deal on money market these reforms in the new parliament, said: "I want to ensure there is a format there that enables these funds to continue to exist. I do not think it's the job of the parliament to define what sort of investments you have or not." The CNAV funds, like Stable NAV funds in the U.S., maintain a fixed E1 per share. The EU Commission proposed last September in its reform package that CNAV funds should hold a capital buffer equal to 3 percent of their assets to help avert runs. Critics say the proposal would effectively kill CNAV funds in Europe. The EU Parliament postponed a vote on it last April.... Gill ... is proposing to hold a roundtable to help find potential solutions in November, with a vote likely to be held in January."
Gill is not alone in her opposition to the capital buffer. MEP Brian Hayes from Ireland, the new shadow rapporteur on money market reform, is also against it. A September 18 article in the Irish Times says, "The [Irish] Government is pushing for a rethink of a European Commission plan to impose capital buffers on money market funds. It believes that the move could damage the International Financial Services Centre. Brian Hayes MEP met the new EU Financial Services Commissioner, Jonathan Hill, this week in Strasbourg to set out Ireland's position on the issue and on other financial services priorities. Mr. Hayes (FG), a former junior finance minister, was appointed earlier this month as the main negotiator for the European People's Party on the Money Markets Funds proposal, a key piece of EU legislation. It is due to come before the European Parliament and Council in the coming months for fresh negotiations."
Bloomberg's Businessweek also covered Ireland's opposition. Wrote Bloomberg on September 17, "Ireland, home to almost a third of the European Union's $1.3 trillion money-markets industry, is set to oppose European Union plans to make funds build up cash buffers against future crises. The proposal could force European funds, an important source of short-term financing for banks, companies and governments, to shut down, said Simon Harris, a junior Irish finance minister. Ireland seeks support from other EU states against the plan to enforce "crude" cash buffers, which may have "horrendous" unintended consequences, he said. "Ireland shares the EU view and the commission's view that we have to better regulate shadow banking," Harris said in an interview in Dublin. "To go ahead with a capital buffer structure as a regulatory instrument would damage the industry here, but also throughout the EU, and could lead to an outflow of investment from Europe.""
European money market reforms were discussed during several panels at Crane's 2nd Annual Money Fund Symposium in London Sept. 22-23. The session, "Regulations in Europe: Bullet Dodged?" featured Dan Morrissey, partner and head of asset management, William Fry, and Paul Wilson, co-chair of IMMFA's Regulatory Committee and head of sales at Aberdeen. Morrissey said the debate that's going on now between the industry and regulators, and the regulators themselves, is a good thing. He commented, "It was important that there wasn't a quick solution because the news could only have been very bad, certainly from where we are standing today. If we have another year or 18 months of this before we get there, I think it would be a worthwhile investment. The faster we move, the worse the solution is likely to be I would think." He added, "There's quite an amount of emerging debate and you can certainly sense that, as time has gone by, all the efforts that industry have made to try to bring all of the politicians up to speed on this has really worked."
Morrissey continued, "The concern of the buffer obviously is it will essentially shut down the CNAV industry -- sponsors withdrawing from the market and concentration risk. The move would remove an awful lot of players. Failure to have that vote meant that it gave people more time to work with the industry and try to explain the consequences, unintended consequences, and concerns."
Wilson added, "At the start of all this there was the perception that we were more like a bank than we were an investment provider. The reason why we had an improvement in the debate in Europe I think, is because the industry has stuck to its guns about how we are a provoider of investment services, highlighting the fact that the way we manage them is to achieve objectives. When regulators first looked at them, they talked about guarantee, they talked about the promise, and related that to a CNAV when actually what CNAV is is an objectiove by the fund management company."
Kevin Murphy, partner at Arthur Cox and chairman of the Irish Funds Industry Association task force on MMFs, was hopeful given the efforts by the industry to inform and the changes that have taken place. IFIA is a strong advocate for CNAV as 85% of the MMF industry in Ireland is CNAV. He says, "I do hope that we find an elegant solution. I'm confident that, in fact, we will. There have been significant changes in all of the key players in the Pariliament, within the commission, within Econ, and even in the Council of Ministers. We were in a dire position last March. I think we're in a very different place today, and I think it behooves all of us to get out there and lobby to protect this side of the industry."
Murphy added, "There is a massive difference between what is happening in the U.S. and what's happening in the EU. That's probably the absolute core of our message for the EU." The U.S. rules related to banning CNAV impact less than 25% of the market, while the EU proposal would hit 100% of the European CNAV market, he said.
Going forward, the "X Factor" said Murphy, is which presidency is going to move MMF reform to trilogue -- the Italians, the Latvians, or Luxembourg. The current Italian Presidency of the EU Parliament runs through December, followed by the Latvian Presidency from January to June 2015, and the Luxembourg Presidency from July to December 2015. "If the file is not finalized before Luxembourg gets it, then CNAV should be well-represented in the debate. I don't know what the position is with the Latvians, and the Italians are listening ... that's a very positive start."
Two recent headlines that could potentially present challenges for the industry are South African CNAV funds breaking the buck and the negative yield environment, said Murphy. The former is a "red herring" said Murphy because those funds that broke the buck wouldn't have met the requirements oif being a CNAV fund in Europe. [There is also a question as to whether any of them did actually break the buck.] The latter could lead to funds switching to VNAV or use of reverse share splits, he said.
Finally, the Telegraph writes "Europe's E500bn money funds risk AAA downgrade if they 'break the buck'". It says, "Europe's giant money market funds are struggling to stay afloat as negative interest rates drain the industry's lifeblood, with many at risk of crippling downgrades by the rating agencies."
