The U.K.-based Treasury Today published an article entitled, "European MMF regs: time to cut to the chase," which gives a brief update on pending European money market fund reforms. It says, "So much has been said about money market reform in the US and Europe over the past couple of years that it is difficult sometimes to know where we are. J.P. Morgan Asset Management's recent Global Liquidity Investment Forum 2018 in London offered a refreshingly brief update and call to action. Whether the money market industry needed reform or not, it is happening." We review the brief below, and we also excerpt from the session "Global & European Money Fund Issues" from our recent Money Fund Symposium. (Note: Crane Data will host its 6th annual European Money Fund Symposium at the Hilton London Tower Bridge in London, England on Sept. 20-21.)
The TT piece explains, "J.P. Morgan Asset Management set out its timeline for clients at its recent Global Liquidity Investment Forum 2018 and is aiming for transition at the end of November. Subject to regulatory approval around the first week of September, its clients will receive a letter laying out the options, mapping the most appropriate path to take under the new regime and establishing a transition programme."
Kerrie Mitchener-Nissen, Head of Product Development International, Global Liquidity, J.P. Morgan Asset Management, says, "If a client is happy with that mapping, there is nothing for them to do." The article explains, "After close of trading on Friday 30th November, clients will be shifted over the weekend to their chosen fund options to begin under the new regime on Monday 3rd December. This is all well in advance of 21st January 2019 regulatory deadline, notes Mitchener-Nissen."
Treasury Today quotes JPMAM Sterling PM Olivia Maguire, "Reform is not having an impact on the [portfolio] strategy.... The regulations do not bring in many fundamental changes as to how we manage a portfolio." Mitchener-Nissen adds, "For the major currencies (USD, EUR and GBP) this means clients will continue to have options of government funds and credit funds.... We will be looking to make available both in each space."
The article comments, "New rules include maximum percentages for holdings of asset-backed commercial paper, and some repo counterparty diversification limits, 'but all of these limits are generally what the funds are managed within today.' Although new regulatory mandated daily and weekly liquidity buckets will be imposed, Maguire says 'our AAA rated funds are already subject to a Fitch weekly minimum liquidity of 30%.' The funds will look to maintain a buffer over and above the weekly regulatory minimum but 'this won't be a significant change to how we need to run the portfolio.'"
It adds, "In terms of yield, where current credit funds will split into LVNAV and VNAV, the two new funds will be similarly rated and follow a similar strategy, confirms Maguire.... LVNAV funds need to hold a higher mandated minimum level of daily and weekly assets than the VNAV funds and the cost of liquidity to hold a buffer of daily/weekly assets may cause the yield to be slightly lower than where the credit fund is today, she explains."
Finally, the piece asks, "What to do now?" They tell us, "For treasurers, the transition should be 'fairly smooth,' says Mitchener-Nissen. For J.P. Morgan Asset Management clients, if the mapping offered is agreeable then nothing needs to be done.... However, discussions may be necessary regarding fund options.... Beyond fund choice, she suggests that now is a good time to look at portals and platforms to see if there is anything that needs changing to accommodate the transition.... Anecdotal evidence offered by treasurers at this event suggested that the conversations of the last few years around the transition will in fact culminate in very little difference for the investor. The views of J.P. Morgan Asset Management's own experts seem to concur."
In related news, our recent Money Fund Symposium in Pittsburgh featured a presentation on Global & European MMFs, which featured Jonathan Curry of HSBC Global Asset Management, Reyer Kooy of IMMFA & DWS, and Alastair Sewell of Fitch Ratings. Kooy explains, "We are now 7 months from the [reforms] finish, except for negative yielding funds where the situation is unclear." While there is "Limited guidance for the industry on how to implement [them], `nonetheless reforms will happen and MMF 'shadow banking' risks will be remedied in Europe."
He continues, "For years MMFs have successfully used an operational mechanism in which negative yield is 'distributed' through share cancellation: RDM [Reverse Distribution Mechanism], but the RDM [was] opposed in an ESMA Consultation of May 2017.... The ESMA view of RDM was upheld by the European Commission in January 2018." But he says we're awaiting final word from ESMA and "There's been no resolution yet."
Kooy concludes that the "New European MMFs will be in place January 2019 [and that] statutory regulation across the EU should boost product visibility." He expects "Funds under management to continue growing" and says that "IMMFA is committed to maintaining standards in the industry, so expect further changes to their Principles of Best Practice."
Finally, Sewell commented on French and Chinese money market funds. He says of the former, "France is a very large market, so I think they have E600B or so ... most of these [are] what we call standard money market funds. As such, they have a longer maturity profile than short term money market funds.... When yields went negative 7 years ago, investors responded [by shifting] from short term money market funds ... to standard money market funds.... A question here would be, if yields turn positive again [will they] move back to short term or stay in the standard funds?"
Crane Data's MFI International, which tracks "offshore" money market mutual funds domiciled in Ireland or Luxemburg and denominated in USD, Euro and GBP (sterling), shows assets falling year-to-date in 2017. Last year, assets of all three currencies combined increased by $100 billion, or 13.7%, to $831 billion. Year-to-date in 2018 (through 7/3/18), MFII assets are up $1 billion to $832 billion (due to currency moves), but USD assets are down noticeably. U.S. Dollar (USD) funds (158) account for about half ($415 billion, or 49.9%) of the total, while Euro (EUR) money funds (98) total E92 billion and Pound Sterling (GBP) funds (110) total L213 billion. USD funds are down $10 billion, YTD, but were up $27B in 2017.
Euro funds are down E6 billion YTD but were up E3B in 2017, while GBP funds are down L5B YTD after rising L29B in 2017. USD MMFs yield 1.84% (7-Day) on average (as of 7/3/18), up from 1.19% at the end of 2017 and 0.56% at the end of 2016. EUR MMFs yield -0.49 on average, up from -0.55% on 12/29/17 and -0.49% on 12/30/16, while GBP MMFs yield 0.39%, up from 0.24% at the end of 2017 and 0.19% at the end of 2016. (See also our June 19 News, "UK Prepares for European Money Fund Regulations," and our May 25 News, "Euromoney Cites Cross, Goldthwait on European Reforms.")
