There's been a lot of discussion in recent months on both negative yields and money market reform in Europe. Below, we review the latest statement from the Institutional Money Market Fund Association about the negative impact of negative interest rates in Europe. Also, in the March edition of Pricewaterhouse Coopers Ireland's Asset Management newsletter, authors Sarah Murphy and NJ Whelan recap the latest regulatory developments. We report too on a recent roadshow of the Irish Funds Industry Association in Boston where there was also some discussion of the proposed reforms. Finally, we also recap some recent statistics from our Money Fund Intelligence International and from our MFI International MF Portfolio Holdings dataset.

London-based IMMFA sent out a press release, "Negative Interest Rates and Euro-Denominated Prime Money Market Funds" in which it warns about the potential for negative MMF yields. It says, "Given the European Central Bank's policy stance on interest rates and its introduction of a minus 20 basis points deposit rate in September 2014, it is not surprising that many euro-denominated Prime MMFs are now yielding close to zero -- indeed barring some unexpected significant market change, it is highly likely that many funds will start to distribute a negative yield in the coming weeks. Euro MMFs' negative yields are a reflection of prevailing rates for short term investments generally. Indeed in moving towards negative territory, money market funds are simply following the trend in recent months of many banks and other investments in offering negative euro yields. This move in large part is due to the actions and policy stance of the European Central Bank."

It continues, "The value that investors place on MMFs is independent of the absolute level of return. IMMFA MMFs prioritise the preservation of capital, the diversification of credit risk, the provision of liquidity and they aim to generate returns in line with money market rates. In order to accommodate the possibility of unusual market conditions, many of our member firms have previously modified their fund structures to allow them to operate in a negative yield environment. Investors continue to value MMFs as a cash management tool and managers have sought to ensure that they are prepared to operate during these challenging market conditions. Informed investors appreciate that the continued focus by MMFs on the highest quality short term instruments is resulting in them returning a yield which, given the central bank's policy stance, may soon be negative."

The PwC report, "Money Market Funds -- The Ongoing Debate," examines where the proposal currently stands and where it might be headed. It recaps the initial reform proposal put forth by the European Commission in September 2013, which included the controversial 3% Capital Buffer on Constant NAV MMFs. The report says, "Since these draft proposals were issued there has been ongoing debate about the nature of the proposed reform and the impact on the industry. In early 2014 the ECON Committee failed to reach consensus on the proposals and over that summer with the European elections and a new presidency the process ground to a halt."

In October 2014, the debate resumed. "Following the formation of a new ECON committee in October 2014 progress has been made. In a first exchange of views the new Rapporteur stated that she would address the proposed MMF regulation in light of recent developments which included the SEC final rules that were issued in July 2014." In November 2014, the Rapporteur issued her draft report. "Her amendments in summary provided for the following: A carve out for EU public debt CNAV MMFs or retail CNAV MMFs; Buffer not on retail; Transition period of 3 months; Redemption gates and fees for all MMF other than EU public debt; Increased transparency and liquidity; Fees and gates."

It explains that, "In the meantime, the Italian presidency published a progress report and a further compromise text on the MMF proposed reforms before handing over to Latvia on 1 January 2015. This report set out the current position and acknowledged that while there was some "convergence" among the member states on some of the items under discussion, there were still "strong reservations" in relation to certain provisions. It also noted that "the definition of the scope and treatment of constant-NAV MMFs (was) the most disputed issue of this file" and given the difficulties of pursuing the approach based on NAV buffer, proposed -- through a non-paper -- an approach based on a mandatory transformation of CNAV funds into a new class of MMFs called Low Volatility NAV (LVNAV) MMF which would make use of the "penny-rounding method".... A further 704 amendments were submitted in addition to the 96 in November draft report and views were still divided and diverse on the main areas."

The report adds, "However on 26 February the ECON committee went ahead with the vote and adopted its position by approving a "draft law that would make MMFs safer, provide for more transparency, investor information and investor protection." In the draft report approved by the ECON committee, CNAV funds are limited to two types: I. Retail CNAV that would be available for subscription only for charities, non-profit organizations, public authorities and public foundations; and II. Public debt CNAV which would invest 99.5% of its assets in public debt instruments. In addition ECON proposed a new type of MMF -- a low volatility net asset value MMF (LVNAV) that might display a constant NAV but under strict conditions. Other matters included the following: I. Diversification of asset portfolios, strict liquidity and concentration limits and stress testing processes; II. Internal assessment procedures determining the credit quality of money fund instruments; III. Valuation of assets to be performed on a daily basis and published; IV. No external support from third parties, including sponsors; V. Application of fees and gates for public debt and retail CNAVs and LVNAVs in certain circumstances.... The plenary vote on the draft report issued by ECON is due to take place at the end of April, following which the Council must approve the Regulation before it becomes law."

The issue of European MMF reforms came up at the Irish Funds Industry Association's, recent "road show" in Boston, which updated attendees on developments in the European fund sector. Kevin Murphy, Partner at Arthur Cox, commented, "Money market funds, and CNAV in particular, make up a large portion of Ireland's funds industry. In reforming CNAV in the EU, the legislators need to be very careful that any changes they make to address their concerns are proportionate so that CNAV remains a viable product for investors who need a CNAV structure in Europe. A particular concern is the current proposal to have a five year sunset clause for certain CNAV funds which would mean those funds may not exist in five years unless the EU Commission determines otherwise. The problem with such a sunset clause is that fund promoters may decide not to launch new CNAV product in Europe if there is a risk the product cannot be sold after five years. Removing this sunset clause is a key priority for supporters of CNAV in Europe."

On another regulatory panel, one participant commented on money funds, "We're not there yet." He said of the recent amendments that "not all of them are appropriate," and told the gathering, "In Europe, we don't have [retail investors in money funds]." He added, "What we've done is informed our MEPs [and] had capital buffers [removed]." Finally, the panelist added, "We've got to address the source of the snowball and not wait for the avalanche." We must also "ensure the VNAV is understood."

William Fry's Cormac Commins said the issue is a key focus of the IFIA. The panel said the "voice of the investor" needs to be heard. "Too many times it's the last voice. We've got to make sure the investor's voice is heard." The regulations are headed to the EU Parliament in April to vote on the ECON proposal, and then they'll go to the Council for consideration. Once the Council agrees on a proposal, it will then go to "Trilogue." One panelist didn't expect the issue to be completed for at least a year, with the current Latvian presidency's time running out and Luxembourg taking over as head of the EU next. ("They won't touch it," he commented about Luxembourg.)

Note: Crane Data's Money Fund Intelligence International, which tracks European or "offshore" money market funds domiciled in Dublin and Luxembourg, currently shows Euro Money Fund 7-Day Yields Averaging -0.02%, USD Yields averaging 0.04%, and GBP (Sterling) Yields averaging 0.34%. Assets of Euro Money Funds have increased by E3.8 billion YTD through 3/19/15 to E94.5 billion, USD Money Funds have decreased by $11.1 billion to $372.7 billion, and Sterling MMFs have increased by L12.6 billion to L165.1 billion. Total assets tracked by MFI International have fallen sharply YTD in U.S. dollar terms, down $24.9 billion to $729.9 billion, due to the jump in the dollar.

Crane Data's latest MFI International Money Fund Portfolio Holdings collection, with data as of Feb. 28, 2015, shows the 5 largest Issuers to Euro Money Funds as: Republic of France (6.0% of holdings, or E5.5B), BNP Paribas (5.9%, or E5.4B), HSBC (4.2%, or E3.9B), Procter & Gamble Co (3.7%, or E3.4B), and Nordea Bank (3.7%, or E3.4B). The 10 largest Positions held by USD MMFs are: US Treasury (17.3%, or $77.5B), Credit Agricole (3.7%, or $16.8), BNP Paribas (3.3%, or $14.6B), Barclays PLC (3.1%, or $13.7B), Bank of Tokyo-Mitsubishi UFJ Ltd (2.5%, or $11.4B), Federal Reserve Bank of New York (2.5%, or $11.1B), Swedbank AB (2.1%, or $9.2B), DnB NOR Bank ASA (2.0%, or $9.0B), Sumitomo Mitsui Banking Co (2.0%, or $8.9B), and Lloyds TSB Bank PLC (2.0%, or $8.8B). And the 5 largest Issuers to GBP MMFs include: FMS Wertmanagement (4.4%, or L5.5B), Rabobank (4.0%, or L5.0B), HSBC (3.9%, or L4.9B), Sumitomo Mitsui Banking Co (3.7%, or L4.6B), Standard Chartered Bank (3.6%, or L4.4B).

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