We learned from website Law360 that the U.K.'s Financial Conduct Authority, which regulates conducts for U.K. financial service firms, has issued a consultation paper entitled, "CP18/4: The European Money Market Funds (MMF) Regulation." It says, "We are consulting on changes to our Handbook in relation to the European Money Market Funds Regulation, and on our approach to FCA fees to meet the cost of authorising and supervising funds under the Regulation." Law360's article, "FCA Seeks Fee System For Regulated Money Market Funds," explains, "The Financial Conduct Authority outlined plans Wednesday to impose fees on money market funds so that it can supervise the industry as required by new European rules designed to make sure the funds remain stable during another financial crisis." We review the FCA paper, as well as a MarketWatch article, "Time for cash?" below.
The FCA paper's summary tells us, "This CP sets out our proposed Handbook changes and approach to FCA fees in relation to the European Money Market Funds Regulation (the MMF Regulation, or the Regulation).... The MMF Regulation is directly applicable under European Union (EU) law and does not require implementation by individual Member States. However, the FCA and the Treasury have identified areas of the UK regulatory framework that require changes so that the MMF Regulation can work properly in the UK. The Treasury intends to give us certain powers to ensure that we can supervise firms' adherence to the requirements of the Regulation."
It continues, "This CP on the MMF Regulation will be of interest to: UK fund managers which already manage and/or market funds as money market funds (MMFs), or funds that are substantially similar to MMFs as defined in the MMF Regulation, in the UK or another Member State, or intend to do so; European Economic Area (EEA) fund managers which already manage and/or market MMFs in the UK or intend to do so; MMF depositaries; intermediaries advising on and distributing MMFs; and, investors in MMFs."
The FCA paper explains, "[O]n 4 September 2013, the Commission adopted a proposal for a Regulation on MMFs. Following negotiation between the Council of the EU (the Council) and the European Parliament (EP), the final text of the Regulation was published in the EU Official Journal on 30 June 2017. The Regulation will subject MMFs -- and any funds which are substantially similar in character -- to authorisation and supervision. It aims to preserve the internal market's integrity and ... aims to ensure that MMFs are able to meet redemption requests from investors, especially under stressed market conditions.... Taken together, these changes will support the operation of the short-term funding market for financial institutions, corporate issuers of short-term debt and governments."
It states, "The Regulation came into force directly in every EU Member State on 21 July 2017, and will take effect on 21 July 2018. From that date, new MMFs will need to be authorised as an MMF by their National Competent Authority (NCA). In practice, this means that new MMFs will need to seek authorisation before that date. Existing funds that are already branded as MMFs and operating under the regime set out in European Securities and Markets Authority (ESMA) guidance, and any existing funds that are substantially similar to MMFs as defined in the MMF Regulation, will have to comply with the new Regulation by 21 January 2019."
The FCA comments, "The Regulation establishes a framework of requirements to improve the liquidity and stability of MMFs. Most existing MMFs operate under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive.... The key provisions of the Regulation: Define three types of MMF (see Annex 3), each of which may be a short term MMF or a standard MMF: Variable NAV (VNAV) MMF, Public Debt Constant NAV (CNAV) MMF, and, Low Volatility NAV (LVNAV) MMF. Each type of MMF has a different set of risk characteristics."
They also "Set out the eligible assets that MMFs can hold; Set minimum liquidity requirements; ... Require MMFs to conduct regular stress tests....; Ban external support for MMFs by third parties, such as cash injections or buying assets at inflated prices; and, Ensure market transparency.... All MMFs must make key information about their portfolios available each week, and Require MMFs to report to the relevant NCA quarterly.... NCAs are required to provide ESMA with regular reports based on their authorisation activities and the reports they receive from MMFs." Finally, they add, "`You are invited to respond to this paper by 23 March 2018. We will consider the responses received and publish the final rules as soon as possible after the end of this consultation."
In other news, MarketWatch recently wrote the piece, "Stocks look pricey, bonds look pricey. Is it time for investors to consider cash?" Subtitled, "Will cash be king in 2018?," it tells us, "The best investment idea of 2018 may also be the market's least exciting. Cash, long ignored by investors amid a multiyear bull market in stocks, as well as a decade-long rotation into bonds, has found some supporters who view it as one of the few risk-free options in a market that otherwise seems to offer nothing but risk and lofty prices."
The article explains, "The views come at a time when valuation concerns are growing around both stocks and bonds. Equities have been on a tear for years, and last year major indexes hit a record number of all-time highs amid a backdrop bereft of volatility or significant pullbacks. Although few are forecasting a bull-market-killing recession, the current environment suggests less upside potential in stocks, along with the potential for more downside. At the same time, bond prices are expected to extend their downtrend, pushing yields which move inversely higher, as the Federal Reserve raises interest rates."
MarketWatch says, "[INTL FCStone's Vincent] Deluard called 2018 'the year of cash' and said 'from a strategic allocation perspective, the most important decision for investors in 2018 may be to overweight cash, at the expense of fixed income.'" They also quote Morgan Stanley Wealth Management's Lisa Shalett, "It's increasingly important for investors to build hedges into their portfolios that could cushion a normalization of volatility.... Aside from the obvious advantage of cash in providing instant liquidity, an ability to take advantage of correction and portfolio ballast against rising volatility, we note that after a long and frustrating decade, cash yields are more attractive in an absolute sense."
They add, "So far, investors don't seem to be taking these views to heart. According to the latest BofA Merrill Lynch fund manager survey, the average cash position in portfolios fell to a five-year low of 4.4%. Equity allocation hit a two-year high of 55%. Such positioning has been echoed across Wall Street: TD Ameritrade recently reported that its clients ended 2017 with market exposure 'at all-time highs,' while cash balances for Charles Schwab clients reached their lowest level on record in the third quarter, according to Morgan Stanley, which wrote that retail investors 'can't stay away' from stocks."
