Crane Data hosted its 6th annual European Money Fund Symposium [last month] in London, and European Money Market Fund Reforms took center stage. Below, we highlight from one of the keynotes, "Irish & European Fund Issues," which featured Patrick Rooney, Senior Regulatory Affairs Manager at Irish Funds. He presented a number of statistics on money funds domiciled in Ireland, the largest segment of the European money fund industry, and gave an Irish take on the new regulations and the fate of the RDM, reverse distribution mechanism. (Note: The following article is reprinted from the October issue of our Money Fund Intelligence newsletter. Contact us at info@cranedata.com to request the full issue or the binder from European Money Fund Symposium. Next year's show will be Sept. 24-25, 2019, in Dublin.)
Rooney says, "Firstly, the MMF industry in Ireland is one of very significant scale.... We're talking about €490 billion in terms of assets ... the largest domicile by quite some margin in Europe, followed by France and Luxembourg. There has been significant growth ... in the past 5 years, with 77% growth [over this period]. So it is a very strong and growing industry in Ireland."
He continues, "The number of funds stands at 115 today; that is down slightly from 122 in 2012. So while assets have been growing, there has been a slight amount of consolidation in the industry. This is an industry of scale.... We have quite a few big players with very big funds, so there is a lot of concentration. But there is still broad diversity, too. We count 48 MMF managers ... from 11 countries."
Rooney explains, "Predominantly the managers in funds of scale are coming from the U.S., the U.K. and Germany. This industry [MMF] accounts for 20% of our [overall fund] assets. So it is an industry that is vital to Irish Funds and one that we have fought vigorously to defend throughout the MMF reform, which hasn't been easy, in order to ensure that this is a sector that can continue to thrive."
He also comments, "Looking now at the profile of the types of funds that are in Ireland, they are predominantly, overwhelmingly short-term and they are predominately CNAV, as I'm sure you're aware. In terms of the currencies offered, the currencies are Euro, GBP, and USD. The Euro is currently standing around €70 billion, or around 14%. USD and GBP are neck in neck at around 43% each."
Rooney continues, "In terms of the issuers, they are predominantly banks, followed by government. So I think that speaks to a significant LVNAV offering and significant government fund offering, as well. The investor base is heavily concentrated in Europe ... and there's quite a few multinationals.... Of course, the U.K. is a big portion of the investor base... We do have a significant investor base outside Europe, as well."
He adds, "All of these statistics point to the global scale and international nature of the money market funds sector in Ireland. I think it is very important for us to maintain that international, outward-looking perspective in the ongoing EU dialogue."
Rooney states, "Looking at money market fund regulation implementation in Ireland, 'What has the public sector been doing?' We have the European Union Money Market Funds Regulations, which apply MMFR in Ireland. MMFR does of course have direct effect as an EU regulation.... The [Irish] Central Bank [has been designated] as the competent authority in respect to MMFR."
He says, "The central bank has also issued application forms in respect to MMFR, and they follow the usual kind of checklist format ... dealing with the constitutional document, the prospectus and various confirmations, referring back to the regulations in terms of compliance and statements that must be included in those documents. You also need to file your depository agreement with the application forms. The central bank filing deadline for 1 September for applications for those existing MMFs that need to transition by 21 January 2019 in order to ensure an orderly managed transition. Obviously that filing deadline has gone and managers will need to file their applications. It is a very structured process and one that is well underway."
The Irish Funds manager also comments, "[Here is] an overview of project planning for MMFR implementation and it is actually one we provided to ESMA back in March on the back at a meeting we had with them. (See the chart at right.) In response to their comments that there was no hurry in closing out on RDM … this was just to demonstrate the amount of project planning that goes into a comprehensive, regulatory change such as this, which should be obvious. But I think sometimes the obvious needs to be stated. In terms of what a manager needs to do, there are a lot of moving parts there. You've got the scoping and analysis, internal decision making, the board approval aligning to your products.... A shareholder vote as well is required in many cases. And all the while of course you need to communicate with your shareholders and they will have their own internal decision-making processes to go through."
He explains, "In terms of the key compliance areas ... it is wide-ranging. But the good news is managers are able to carry over their existing strategies and existing holdings.... We're looking at tighter limits, but managers by and large would be operating within those parameters.... I think one of the biggest changes is really the scope ... around the product categories themselves, assessing those products and aligning your offerings to those products, deciding which ones suit your investors and business model [such as the LVNAV]."
Rooney also comments, "There is already a lot of transparency in the IMMFA Code and the CNAV area, and what we're seeing is the standardization [of this].... There will be plenty of regulatory reporting. ESMA has fortunately listened to many of our comments and pared back some.... To recap, I think the key changes and areas of focus are: the product categories, valuations, liquidity, and escalating procedures."
On the RDM, "which is the key outstanding issue," he tells us, "Unfortunately, there has been a fundamental misunderstanding on what RDM is.... RDM is an operational mechanism which is there literally to pass along negative interest to investors by cancelling the appropriate quantity of shares.... It is a part of the separation of capital and yield, which forms the basis of maintaining a stable NAV. For 20 or more years before this ... capital and yield have been separated, with income distributed … in order to maintain the stable NAV. RDM is simply the inverse.... It's based on a standing instruction to redeem shares."
Finally, Rooney adds, "Unfortunately, we are dealing with a predisposition against RDM, which is very hard to counter. There is persistent uncertainty.... It remains to be seen if the Commission will respond and how it will respond. We’re not sure.... The backdrop is not good, and we don't know how this will end.... We are reaching an end-game pretty soon because time is running out."
