We learned from ignites Europe that a new "European Commission Letter on Money Market Fund Regulation" appears to deny the fund industry's plea to allow "reverse exchange mechanisms" or "share cancellation" schemes (to deal with negative yields) once the new European money fund regulations go live later this year and in early 2019. The EC's release says, "The European Securities and Markets Authority (ESMA) has published a reply received on 19 January from the European Commission (EC). The letter is in response to ESMA's cover letter that accompanied the publication, in November 2017, of its final report on Technical advice, draft implementing technical standards and guidelines under the Money Market Fund (MMF) Regulation." (See our Nov. 24, 2017 News, "ESMA Final Report on EU Money Fund Rules Sheds More Light on Changes.")

It continues, "ESMA, in its cover letter, noted that the views of the Legal Service of the Commission had been sought on the compatibility of the practice of share cancellation, also known as reverse distribution or share destruction, with the MMF Regulation. On 19 January ESMA received the European Commission’s reply, which indicates that this practice is not compatible with the Regulation. ESMA is now assessing the consequences of the letter and considering possible next steps with a view to promoting convergent application of the Regulation across the EU."

The letter itself, on the Subject, "Implementation of the Money Market Fund Regulation," is from the EC's Directorate-General for Financial Stability, Financial Services and Capital Markets Union and addressed to Mr Steven Maijoor, Chairman of the European Securities and Markets Authority (ESMA). It states, "I would like to thank you for the draft implementing technical standards for the Money Market Fund (MMF) Regulation that we received 13 November last year. To ensure proper implementation of the MMF Regulation, it will be important to achieve supervisory convergence between the different approaches currently taken in Member States. The MMF Regulation has been introduced in order to preserve the integrity and stability of the internal market. The Regulation is intended to make MMFs more resilient and limit contagion channels. Uniform rules and supervisory practice across the Union are necessary to ensure that MMFs are able to honour redemption requests from investors and to enhance financial stability."

It explains, "This is why the MMF Regulation fully harmonises the activities and models of MMFs and limits them to only three types of MMFs with specific safeguards. In consequence, based on your mandate to ensure supervisory convergence, it is important that those safeguards should not be rendered inapplicable by the continued use of practises that are not in line with the Regulation."

Finally, EC Director General Olivier Guersent writes, "Regarding the question that you raised in your cover letter on the use of the reverse distribution mechanism (RDM, often referred to as 'share cancellation' or 'share destruction’) under the MMF Regulation and the need to have legal clarity, our analysis confirms the view expressed by ESMA in their public consultation that this mechanism is not compatible with the MMF Regulation. In consequence, in the light of the current divergent practices in Member States before the application date of the MMF Regulation, we share the view expressed in your letter that ESMA should take action to ensure the consistent, efficient and effective application of the MMF regulation. To that end, ESMA could provide guidance to market participants to secure converging supervisory approaches."

In response to an inquiry from ignites Europe, Crane Data's Peter Crane wrote, "It looks like, unless this opinion is overturned or altered, it could be the kiss of death for the bulk of the E90.8 billion in Euro denominated money funds registered in Ireland and Luxembourg. These funds would likely have to convert to variable NAV funds, which are unpopular with institutional investors, or they would have to wait until short-term Euro interest rates move solidly out of negative territory. Most France-domiciled funds won't be impacted because they are already variable NAV funds (and primarily retail). US dollar-denominated and GBP (sterling) denominated funds, which make up the lion's share of Ireland and Luxembourg's money fund assets, won't be impacted because these offer positive yields and don't have to worry about negative yields "eroding" their NAVs. (Reverse exchange mechanisms or share destruction schemes were created to prevent the NAV from eroding. They would take fees from shares instead of from NAVs.)"

For more on pending European Money Fund Reforms, see our Jan. 25, 2018 News, "U.K.'s FCA Posts Paper on European MMF Regulations;" our Oct. 5, 2017 News, "European Money Fund Symposium II: French MF Update; VNAV, Standard;" our Oct. 4, 2017 News, "European MFS Recap: IMMFA's Lowe Says EU Reform Finish Line in Sight;" and our Aug. 23, 2017 News, "Dillon Eustace Reviews European Money Market Reforms; Disclosures." (Note: Crane Data's next European Money Fund Symposium is scheduled for Sept. 20-21, 2018, in London.)

In other news, the Association for Financial Professionals (AFP) published its latest "AFP Corporate Cash Indicators" late last month. Its "January 2018 Results" state, "Fourth quarter results of AFP's Corporate Cash Indicators (CCI) report that businesses continued to accumulate cash and short-term investment holdings, but at a lesser pace than the previous quarter. Treasury and finance professionals continue to be skeptical about the economy but are showing some signs of optimism. Business leaders anticipate that there will be some cash deployment in the first quarter of 2018."

The update explains, "The indicators measure recent and anticipated changes in corporate cash balances by calculating the percentage of survey respondents reporting an increase (or expected increase) in cash holdings minus the percentage reporting a decline (or expected decline). Declining indicators are indicative of increasingly confident businesses. Conversely, rising indicators suggest growing pessimism."

Finally, AFP asks, "Why you should care about corporate cash holdings and the AFP Corporate Cash Indicators?" They tell us, "The reason is simple: all other things held constant, optimistic companies are more likely to deploy their cash holdings. Confident companies use their cash to make growth-orientated expenditures (e.g., increased capital expenditures, merger & acquisitions and hiring) and to increase dividend payouts and share repurchases. Conversely, pessimistic executives are likely to retain their cash holdings."

Email This Article

Use a comma or a semicolon to separate

captcha image