Our 5th Annual European Money Fund Symposium took place early last week in Paris, France, with a record audience of 125 attendees. Crane Data President Peter Crane, who served as the moderator and host, comments on the conference, "Our European event had alternated between Dublin and London the past 4 years, but we decided to try Paris this year. We were thrilled with the results." The conference featured two days of discussions on the European money market fund industry, with pending reform regulations and negative yields again receiving a lot of attention. Below, we recap the keynote session, "IMMFA Update: The State of European CNAV MMFs," which featured IMMFA Secretary General Jane Lowe. (Note: Watch for more excerpts and recaps of our European event in coming days, and in the October issue of our Money Fund Intelligence, which ships on Friday.)
Lowe says, "I'm going to say a little bit about the scope of regulatory reform, and then move on to ... some of the cultural differences that I think trick people up if they come from one side of the pond or the other.... The first thing is, the new regulation in Europe it does introduce a completely new reality for money funds. So, at one level, everybody is just struggling with the changes required operationally and the timing. It changes how your funds look. From an investor perspective once you are through the regulatory change period, it becomes part of your selling strategy or selling point."
She explains, "Rather than having what you've got at the moment, which is a regulated product where all the investments controls are kind of backed up by what the rating agencies do, the IMMFA Code, etc., it will be imbedded in law, common across Europe, which is game changing in ways that you probably won't notice at first but will change over time. In a way that the people in the US totally understand the SEC's [Rule] 2a-7, for example, they know what it is and that will happen here. Even though the regulation has many bits in it that are difficult, not well done, etc., overall it will probably be pretty positive for the industry. That's my prediction. Also, I should mention that we have a Code that will not be needed once this reform comes into place, [though a] reduced form of code may very well be needed."
Lowe continues, "Looking at the CNAV [industry], it has been pretty steady, even including across the crisis. When you reach the period of negative yield, it is a little bit choppier on the Euro. The VNAV has had a much more dramatic set of changes, but also showing quite a steady picture. I think the drop off after the crisis, which you can see pretty clearly there, had to do with money funds that I think left the market. I think in Germany there are relatively few money funds relative to pre-crisis. Whereas, the French money fund industry is a very big one and has shown very obvious growth.... Obviously with the Euro going into negative yield that sort of really dampened down activity. But it hasn't disappeared, and it is in a modest upswing. And I would say a very fair face to take things forward on after the regulation, because if this industry has done as well without a regulation on its own it is very likely to continue for the future."
She tells the Paris audience, "The other thing I would mention is that in Europe there are two types of money market funds. That has actually been the case since 2010 when the European Security regulators set up a set of guidelines.... The big centers of money market fund domiciles, France, Luxembourg, and Ireland, cover the CNAV and the VNAV. You can see how heavily represented they are.... That is split between standard and short-term money market funds.... [In] Ireland and Luxembourg, there is still this huge bulk of constant funds, whereas in France, which is much more of a domestic market, you see a very large number of [VNAV, standard] money market funds."
Lowe states, "I'll move on to regulatory reform.... Well, it's been a marathon. I think everybody can agree with that. We are at the finishing line. We are not through it yet but we have reached that point. For those of you who don't spend too much time with European institutions, it has taken so long because there are 28 countries involved, actually only about 16 that really get involved in the negotiations.... It was particularly difficult for this regulation because it has been categorized as 'shadow banking.' And that meant that banking regulators were a bit overinvolved in the early stages ... but it got better as process went along.... Between now and July 2018, quite a lot of work has to completed."
She says, "The deadlines on the secondary legislation are not hard.... But the process can go in several different ways depending on what decisions are made. It is quite difficult to predict the actual timing, because if it all goes smoothly it will be one date.... [The regulation] was published on the 30th of June came into effect on the 20th of July this year. [The date] existing funds [are] mostly concerned about is January 2019.... If you are setting up new funds, they will have to be compliant with the new authorization process. [There is] a lot of focus on product structure and some focus on the liquid assets requirements.... There's also a ban on sponsor support."
Lowe tells us, "The product range is pretty recognizable, old to new. There is not a direct carry across, but any investor would find it quite easy to follow which is helpful. Requirements for the constant NAV ... have had a lot more scrutiny, but actually most of it is recognizable. It has reduced limits, quite a lot of that came through the credit rating anyway. So, it has just kind of crossed over into the legislative field. And, as mentioned, we still have secondary legislation to go, which is ongoing at the moment."
On mapping the old to new types of funds, she comments, "At the top you have the government funds, and the bottom are the standard funds. Both of those are pretty much a no brainer. In the middle you have prime CNAV, and VNAV. And the clear successive product to the CNAV fund is the LVNAV. But actually, its not to say VNAV will go to CNAV, and it's also not to say that some CNAV wouldn't go into LVNAV. It does vary quite a bit from the U.S. reforms, where the new product range looked quite different from the old. [This] no doubt caused but more trouble for investors."
The IMMFA leader states, "There is also a 5-year [LVNAV] review clause. It's not the sunset clause that was originally in place for the LVNAV product. But on the other hand, it is still there. And with the UK out of the EU, it could slightly change the time limits of how its approached. Generally speaking, with a review clause, it is rare [that they] overturn what is already in place. We are fairly optimistic that the [regulators] will review the products, and that nothing [will have] gone wrong in the meantime. These are the various challenges that have been faced."
She adds, "Just to remind everyone that the European funds were already being regulated under something called UCITS.... UCITS are very similar to [US Investment Company] '40-Act' funds ... the U.S. were very specific about dealing with money market mutual funds.... This never really happened in Europe, so the framework remained was set up for bond funds, which was not appropriate.... This is why IMMFA set up its code, and it's also why the credit rating agencies became so involved with the funds, because without that you didn't have the framework."
Lowe told the Paris crowd, "What this new regulation does is 'levels up' the EU funds. [It's] not quite same regulation.... There are these obvious differences and less obvious ones. One is to do with how they go about it. Thousands and thousands of words in the U.S. ... whereas in the EU it is quite 'waffle-ly'. Some of it is vague. You have to do a purposeful reading.... The other thing is there are multiple countries, multiple currencies and multiple governments."
She continues, "We don't expect the same things to happen here [that happened in the US with the huge shift to Govt MMFs]. There are reasons for that. They have to do with the fact that the investors come from a different place and have slightly different expectations. People in the US wanted to avoid fees and gates. But here you don't have the same set of choices. The only choice in the U.S. was to move into Government funds. But here the only way to avoid fees and gates is to move into a VNAV, that some people may choose to do. But if you actually want to keep CNAV pricing, whether you are in a government fund or LVNAV, you are going to have to expect fees and gates. In the CNAV funds, people already have mechanism to put fees and gates in, they are just not mandatory.... The only other thing is in the future they [gates and fees] will be mandatory ... when you are below 10% liquid assets.... I just make the point that the set of options will be quite different."
Lowe concludes, "We've got the reform legislation, so everybody can start to plan. It doesn't help that the secondary legislation is still outstanding, but I don't think that should prevent planning. That's for both firms and investors, although investors usually come in very late. I think it's fair to say that LVNAV is the lead product, the lead solution to replace the existing CNAV. But there may be some who go a different route, and this is clearly an option.... The other thing that is probably worth mentioning is that I think the regulators will struggle a bit too. They have got quite a lot of requirements imposed on them in terms of collecting information and going through an authorization process."
Finally, she adds, "This statutory regulation will definitely give comfort to investors. It has in every other field, so there's no reason why it wouldn't here. We are committed to maintaining standards in the industry. We have had a Code for a long time that has been a huge focus of the organization. I just don't see the code continuing in its present form, because much of what is in it is going into regulation.... That is not to say there may not be gaps in the legislation that we can't choose to fill as an industry group. Money market funds are part of the solution.... So, I think it offers a lot of opportunity on both ends of the spectrum. Both the funding and investor end. I'm sure all of you will step up to that. The only outstanding issue is cash and cash equivalents. It's a pretty big issue for investors. The SEC, for everyone in the US, wrote it into the rules. It'd be nice if that happened here. But it is much less likely because [that isn't] what has happened in the past.... That will eventually be something between the investor and the auditor."
