Today, we go back to the well and quote from two more sessions from Crane's Money Fund Symposium, which was held last month in Atlanta. This time, we feature the end of Day Two, which included the segments: "MMFs in Ireland, France & China" with Reyer Kooy of IMMFA, Alastair Sewell of Fitch Ratings and Jonathan Curry of HSBC Global A.M., and "Brokerage & Corporate Sweep Options & Issues," with Ted Hamilton of Promontory Interfinancial Network, Jeff Avers of SunTrust Bank and Sunil Kothapalli of Wells Fargo Advisors. The former session discussed pending European money fund reforms and new products in detail, while the latter reviewed developments in FDIC insured brokerage and corporate sweep accounts. (Crane Data subscribers and conference attendees may access the recordings, Powerpoints and final binder via our "Money Fund Symposium 2017 Download Center.)
Fitch's Sewell tells us, "A few statistics on the rest of the world. First of all, there's roughly $5 trillion (US) worth of money funds assets globally, of which about $2 trillion of that total is in money market funds outside of the US.... In 2011 ... the US accounted for 60% of the total share of the money fund assets.... In 2016 ... that share falls down to 57% largely ... driven by developments in China. When you look at the world you can see that the reform calendar is somewhat out of synch. There's different jurisdictions in different stages of their regulatory development for the money market funds."
He continues, "You look at the US and see [that we] are almost complete. Whereas, you look to Europe, and there, the reform process [has] been going for some time. Let's just say we've had [some] pretty significant [developments] just recently. Then in China ... there's another round of reform on the way at the moment. Chinas has been developing very rapidly, continues to develop, and some of the reforms in China [will] start to bring closer ... to international norms."
Kooy comments, "Money Market Fund Reform in Europe will be completely different [than] what you have experienced in the United States. We're briefly going to look through a timetable and look at some of the constructs that we can expect as we start to work towards implementation.... [Previous reforms defined] short term money market funds and standard money market funds, ensuring that only funds that stuck to those definitions were allowed to call themselves money market funds. This was really useful because ... up to that point there were quite a lot of different products around Europe that called themselves MMFs."
He says, "After the credit crisis, the G20 and the Financial Stability Board decided that it was necessary for money market funds to be better regulated. This is one of the things the US and now Europe has gone through: a lot of regulations, 3 layers of regulations. So I just want to spend a few moments on the timeline here.... [With] European MMF reform, it's been very much a marathon.... It started with European Commission.... Sometime after that [in] 2015, the second step [was] the European Parliament made their comments and ultimately ... their own version ... which improved a little bit on the initial European Commission paper."
Kooy explains, "In 2016 ... these 3 policies then came together which is called a 'trilogue'.... We've been waiting for these policies to go through technical standards, amendments, legal fees and translations, and the House now says it's been finalized. We're actually waiting for the very final [version]. Existing money market funds need to compliant with the new rules in 18 months from that point, which is going to be the first month of 2019, and new MMF funds 12 months from that date.... What has been decided? Well you'll see here that ... the natural continuation where MMF has been to date and where things go in the future."
He states, "CNAV Prime funds will actually have a choice; they can go into low volatility NAV construct (LVNAV) ... or maybe go to a short term VNAV construct, and they'll have an optionality on that.... To reflect on the 4 types on MMFs, maybe just look at some of the rules.... Short term money market funds ... will have to apply consistent rules, like WAM, WAL, maximum final maturity [and] stay quite consistent with the rules today.... As I mentioned all of these funds are going to be aligned to the new construct by Q1 of 2019."
Kooy adds, "The industry worked very hard to educate, to consult, and try to influence the lawmakers in their decision making.... I think we did that with some success.... The 3% capital buffer against the entire fund [is gone]; we have now progressed. When the LVNAV construct was first released its concept was subject to a 5 year sunset clause, there was a discussion around the fact that public CNAV funds needed to invest 80% into paper, [and] there was a discussion on short implementation time frames when the European commission first started writing their suggestions." (Note: Kooy and Sewell will also speak at our European Money Fund Symposium, which will be held Sept. 25-26 in Paris, France.)
During the session on Brokerage Sweeps, Hamilton says of "Deposit sweeps on the retail side," "What we do [is] fairly common, a program sweeps cash balances out of a brokerage account into a series of banks, gets FDIC insurance, the customer gets a MM like rate and FDIC insured deposits, and the brokerage company takes a fee. We finance banks that way. Typically 25 to 40 banks." He estimates that the 10 largest deposit sweep programs in market [total] $1 trillion dollars.
He continues, "Broker banks are dealing with Basel III, broker dealers are dealing with 'DOL' rules and SEC fiduciary rules, bank capacity and pricing, and banks are looking for funding again. Deposit pricing is improving, rates are going up too, [and it's] all happening ... as a result of rates going up and spreads widening, broker dealers, after 25 basis points by the Fed, are dealing with how much to pay out in interest to customers through these programs because they control this.... One of the things we've been doing with broker dealers is creating new products to make sure we can comply with these new rules."
Hamilton states on the "DOL Rule and new rules," "Because of the new administration we are not 100% sure these rules are going to stick around, but a lot of the broker dealers have had to change they ways they deal with the ERISA accounts ... and we've been working with them.... We are [also] introducing a Yankee sweep program [which] we created for high net worth individuals, corporations and institutions. We put together this sweep program or this program where you are able to drop a ticket to invest in this. It's a synthetic MMF, made up of Yankee banks.
He adds, "[In] summary, retail demand for sweep options continues to grow, banks are better off than they were years ago, they're making more loans, demand for funding is increasing, spreads therefore are increasing as well, [and] short term rates are headed up. Broker dealers are changing their sweep programs to comply with MM reform rules. The new DOL and SEC fiduciary, the banks have changed a lot of their deposit taking to comply with these rules and Basil 3, new products help broker dealers and the banks to take advantage of the new opportunities is that are going in regulatory reform."
