JP Morgan Securities published a paper entitled, "European Money Market Reform: CNAV, LVNAV and VNAV," that "summarise[s] the main elements of the pending European Money Market Reform which will mostly impact short term European money market funds." It says, "The European Money Market reform (Regulation (EU) 2017/1131) is a set of regulations for Money Market Funds (MMFs) established, managed or marketed in the European Union. The reform applies to collective investment undertakings that 1) require or are authorised as UCITS or AIF, 2) invest in short term assets 3) preserve the value of the investment or offer returns in line with money market rates. It has become effective for new funds on 21st July 2018 and will apply to existing funds on 21st January 2019." We excerpt from this update below, and we also quote the first European money fund manager to be fully compliant with the new reforms, Aviva Investors. (Note: This week is last call to register for our European Money Fund Symposium, which is Sept. 20-21 at the London Tower Bridge Hilton. We hope to see you in London in 2 weeks!)
The JPM paper explains, "The purpose of this new set of rules is to preserve the resiliency of the money market funds to preserve the principal of the investment and the liquidity characteristics, thereby increasing the stability of these funds.... Short Term Money Market Funds are the ones that are going to be mostly impacted by the reform. At the moment most of the European MMFs are funds with Constant Net Asset Value (CNAV) while only a smaller proportion is with Variable Net Asset Value (VNAV). The new structure for Short Term Money Market Funds will include Constant Net Asset Value (CNAV), Low Volatility Net Asset Value (LVNAV) and Variable Net Asset Value (VNAV)."
It continues, "Standard Money Market Funds have a more relaxed mandate relative to Short Term Money Market Funds in terms of instruments and maturity spectrum of investments (up to 2 years), are already funds with a Variable Net Asset Value (VNAV) and are expected to keep the same VNAV feature after the reform."
Authors Fabio Bassi, et. al., write, "ECB aggregated data indicate that the overall size of money market funds in the Euro area is about €1.1tn (or $1.26tn), of which about 55% is in short term funds and 45% in standard money market funds. To estimate the size of the European money market fund we rely on the offshore data of money market funds from private sources (iMoneyNet). The AUMs of offshore funds in USD are $391bn (split $298bn in prime and $92bn in government funds), in GBP are $239bn (split $236bn in prime and $3bn in government funds) and in EUR are $91bn (split $91bn in prime and $0bn in government funds)."
The paper states, "Given the large size of European money market funds invested in USD or GBP assets it is worthwhile considering the potential impact of the reform on these funds. We note that USD offshore government money market funds are about 25% of the total USD money market funds and these are likely to be converted into public debt CNAV, whereas the current CNAV prime funds will most likely migrate into LVNAV funds, with an expected muted impact in terms of investment strategies and risk profile. The same dynamic is expected to apply to GBP money market funds, where the portion in government bond funds is much smaller."
On negative rates, JPM tells us, "Short term money market funds in the Euro area had to deal with negative rates since the ECB decided to put policy rates into negative territory around mid-2014. Money market funds under a CNAV framework are currently able to pass through the negative rates via the Reverse Distribution Mechanism (also known as share cancellation), by which investors are able to keep the value unit of the fund unchanged at €1, but the negative interest rate in the distribution mechanism takes place via a reduction in the number of shares or units in the funds."
Finally, they add, "The money market reform in US had a large impact on short rates and short term spreads, mostly because of the reallocation of money from Prime into Government funds.... [In Europe] we believe that the shift from prime to government is unlikely with flows expected to shift further out the curve and down the credit spectrum.... We have little visibility whether this reserve distribution mechanism will still be allowed in LVNAV. The European Securities and Markets Authority (ESMA) has written to the European Commission asking for more clarity on the reverse distribution mechanism (RDM) in the contest of the Money Market Reform, and more clarity is expected in the next few weeks."
In related news, U.K.-based Aviva Investors released a statement that says, "We are pleased to announce that as of September 3rd, 2018 the Aviva Investors Liquidity Funds range are fully compliant with the new EU Money Market Fund Reform Regulations." Aviva is the 7th largest manager of "offshore" money market funds with one of the largest pound sterling money funds, Aviva GBP Liquidity Fund.
Their announcement explains, "The decision was made to convert ahead of the January 21st, 2019 deadline as we have been running our AAA rated same day offshore Money Market Funds as a Variable NAV (VNAV) structure for nearly 10 years. We believe this puts us in a good position to convert to the newly created Low Volatility NAV (LVNAV) fund category ahead of our peers."
Aviva tells us, "Sterling Liquidity Fund has converted from VNAV to LVNAV; Sterling Government Liquidity Fund has converted from VNAV to LVNAV; and, EUR Liquidity Fund will remain VNAV for the foreseeable future." They add, "We do not operate share cancellations in this fund."
Lastly, they add, "In addition, while out of scope for the new regulations, we would also like to take this opportunity to announce the name change for our Sterling Strategic Fund, which as of September 3rd, 2018 will be called the Aviva Investors Sterling Liquidity Plus Fund." (See Aviva Investors' previous update on European MMF Reforms here, and see our March 1, 2018 News, "Aviva on EU MMF Reforms," and our March 14, 2018 News, "Aviva Investors Joins IMMFA.")
For more on European Money Market Fund Reforms, see these recent Crane Data News stories: SSGA Podcast on European Money Fund Reforms Discusses PM Strategies (8/29), Goldman on Repatriation, European Reforms; Federated Plans; Assets (8/24), BlackRock Details European Money Fund Reform Plans; Love the LVNAV (8/17), SEC Shows Private Liquidity Funds Up in Q4; HSBC's European MF Plans (8/14), Morgan Stanley European MMF Reform Plans; Offshore Port Composition (7/17), JPMAM European MMFs Plan for Nov 2018 Conversion; MF Assets Plunge (3/16), and JP Morgan To Offer All European Fund Options; ICI MMF Holdings Update (11/16/17).
