ICI Global, the international arm of the Investment Company Institute, released its 2014 Annual Report recently, which includes brief comments on the state of money market fund regulations in Europe, as well as U.S. reforms. ICI Global MD Dan Waters says in the introduction, "Helping regulators and member firms find common ground on issues important to funds is at the heart of ICI Global's work. Throughout the year, ICI Global met with policymakers to help them better understand the nature of funds and why some proposed regulations -- such as the potential designation of funds as global systemically important funds, or the European Union's proposed 3 percent capital buffer on certain money market funds -- would inadvertently harm funds and their investors." (Note: The Federal Reserve Bank of New York also released an "Expanded Reverse Repo Counterparties List late Friday, which included the Additions of several banks, GSEs and money fund managers.)
On proposed European money fund reforms, the report comments, "While money market fund reforms have moved forward in the United States, the European Union's proposed money market fund rule is still pending. Much of the debate surrounding the rule has focused on the feasibility of imposing a 3 percent capital buffer on constant NAV (CNAV) funds, with some policymakers suggesting alternatives to capital requirements. In meetings with EU policymakers, ICI Global explained why the proposed capital buffer is impractical and not economically viable for member funds. It also stressed that any additional regulation should be designed both to strengthen money market funds in the European Union and ensure a continued robust and competitive money market fund industry."
On the SEC's reforms in the U.S., ICI Global offers a recap. "After six years of deliberations and extensive analysis, the US Securities and Exchange Commission (SEC) released its final money market fund rule in July 2014. According to the rule, by October 2016, institutional prime and institutional municipal money market funds must maintain a floating net asset value (NAV), so that sales and redemptions are based on the current market value of the underlying securities. These funds no longer will be allowed to use amortised cost (for securities with maturities greater than 60 days) to maintain a stable NAV of $1.00 per share. However, government money market funds and retail money market funds -- which account for nearly 80 percent of US money market fund assets -- may continue to maintain a stable NAV using amortised cost valuation and/or penny rounding."
They continue, "The rule also provides money market fund boards with new tools to stem heavy redemptions by giving them discretion to impose a liquidity fee or gate if a fund's weekly liquid assets fall below a specific threshold. In addition, the rule requires all nongovernment money market funds -- including floating NAV money market funds -- to impose a liquidity fee if the fund's weekly liquid assets fall below a designated level, unless the fund's board determines that imposing such a fee is not in the best interests of the fund."
Finally, ICI Global's report adds, "Many European policymakers are interested in understanding the changes and effects of the new US rule. To that end, ICI Global met with numerous EU policymakers, including members and staff of the Parliament and the European Council, to explain the SEC's analysis, the resulting rule, and what it means for funds and their investors."
In other news, Fitch Ratings published an interesting piece on its "Why Forum" blog entitled, "Investors Share Views on 5 Money Fund Alternatives." It features survey data from Fitch's European Cash Management Conference in November, where attendees were asked how their MMFs allocations would change if the VNAV was adopted in Europe. About 58% said it would stay the same, while roughly 42% said it would decrease. The survey also asked investors where they would invest the money if the allocation to MMFs decreased. Most, about 30%, said "Cash Alternatives."
They write, "Many providers are launching "cash plus" funds (or equivalent - nomenclature varies) with either more duration risk or more credit risk or more of both. As investors segment their cash more and take a longer-term view on some parts of their cash allocation, the different profiles offered by these funds may appeal, albeit while incurring greater risk than in an MMF. Some investors may also consider repo-backed products. These could include pooled funds investing in repos or notes backed by repo contracts or other collateral pools.... Some providers may launch derivative-based funds that manage cash through the purchase and sale of, for example, interest rate derivatives. However, these funds may be too complex for many cash investors and will inevitably incur counterparty risk."
Roughly 22% said "Direct Investment in Money markets." Fitch explains, "Probably reserved for the largest and most sophisticated cash investors only, direct investment in money-market instruments is now a less popular alternative than last year. Instead of investing in an MMF, investors would simply acquire money-market instruments directly: certificates of deposit, commercial paper, repo agreements, etc."
Approximately 17% said "Unregulated Pooled investments." "Interestingly, this relatively new cash-management tool is the only one that saw growth in our survey year over year. Pooled products could include funds comparable to existing CNAV MMFs available in the U.S. or Europe, but fall outside the scope of money-fund regulation.... [T]hese funds may be able to retain a CNAV structure. With VNAV firmly on the table in the U.S. and proposed in Europe, some investors with an operational attachment to CNAV funds may opt to invest in such products anyway," writes the piece.
The same amount said "Bank Deposits." Fitch comments, "If investors can't use MMFs anymore some may consider sticking with bank deposits instead. However, doing so will be a challenge as Basel III has substantially reduced bank demand for wholesale deposits. In Europe, deposit rates are negative for short-term deposits at higher credit quality banks, and the pool of eligible banks is shrinking as they are downgraded."
Finally, around 13% of Fitch respondents said "Segregated Accounts." They add, "These have been around for a long time, are typically reserved for the largest investors only, and were also less popular in our survey in 2014 than in 2013.... This set-up provides flexibility, as the portfolio is built to investors' specifications in terms of timeframe, liquidity needs, and risk profile, while leveraging the management firm's operations and resources."
