BNY Mellon's Liquidity Funds are the latest to formalize plans to operate under the EU Money Fund Reforms that take effect Jan. 21. The fund group revealed changes to its BNY Mellon U.S. Dollar Liquidity Fund and BNY Mellon U.S. Treasury Fund, which will actually occur seven days before the final deadline -- on Jan. 14. A number of firms have already converted their money funds to be compliant with the pending reforms, including Aviva (9/1/18), BNP Paribas (11/11/18), and JP Morgan (11/30/18). Several firms -- BlackRock, Federated, and SSGA -- will convert late this week, on Jan. 11, and Morgan Stanley and UBS will also convert on Jan. 14. We review BNY Mellon's move below, and we also look at "offshore" money fund assets, which have surged in recent weeks, contrary to expectations related to "repatriation."
Dreyfus/BNY Mellon writes, "The EU's new regulations are aimed at making money market funds (MMFs) more robust, ensuring the smooth operation of the short-term funding market. Regulators set out to maintain the essential role that MMFs play in financing the European economy and recognize the importance of providing short-term options for investors. The rules have received final sign-off by the European Parliament and were published in the Official Journal on June 30, 2017. They came into force on July 20, 2017 with the effective date for compliance January 21, 2019."
Their USD Liquidity Fund will operate as a "Short-Term Low-Volatility Net Asset Value" (LVNAV) product, allowing investors to purchase and redeem shares at a stable NAV to two decimal places, "provided the fund is managed to certain restrictions," involving use of amortized-cost valuation with limits based on its mark-to-market valuation. A deviation greater than 20 basis points would necessitate a switch to a market-to-market value to four decimal places as required by the new rules.
BNY's U.S. Treasury Fund, which will be classified as a Short-Term Public Debt (Government) fund, will feature a constant net asset value per share, based on amortized cost, and will be required to "invest at least 99.5% of the fund's assets in cash, government securities, or repurchase agreements that are fully collateralized," according to the company's announcement.
Each fund will continue to offer the same share classes as before, namely Participant Shares, Investor Shares, Institutional Shares, Service Shares, Administrative Shares and Advantage Shares. The Treasury Fund additionally offers Agency Shares. Such funds, of course, are not available for investment by "U.S. persons".
Crane Data's Money Fund Intelligence International statistics show that U.S. Dollar money funds jumped $29 billion in 2018 to $454 billion, with most of the gain coming in the last week of the year. Outflows had been expected from these funds as U.S.-based corporations began to repatriate cash following the U.S. tax-reform package approved in 2017.
Garret Sloan of Wells Fargo Securities sized up the approaching finalization of fund reform in Europe in his Jan. 3 "Daily Short Stuff," and provided his insights about asset flows impacting prime funds operating there versus those in the States. Sloan wrote, "The 'go-live' date for existing European money market funds to convert to the new fund categories: CNAV, LVNAV, and Short-Term VNAV, is Jan. 21. The question is how much have assets flowed, and how much do we expect to see going forward?"
We explained, "Thus far, the universe of assets in offshore USD denominated money market funds has actually been quite stable, showing a net increase since the time that European money fund reform was first implemented for 'new' funds in July 2018. Since July 31, offshore prime money market funds have risen from $318.4 billion to $335.9 billion in AUM, Treasury funds have increased from $100.4 billion to $111.2 billion, and government funds have increased from $5.2 billion to $6.8 billion."
Sloan continued, "In total, the IMMFA US Dollar Index of money fund assets has risen from $418 billion to $451.4 billion, an increase of $33.4 billion, or 7.9 percent. The rise has been concentrated in a few fund families, however. HSBC has added $5.4 billion, an increase of 20 percent. JPMorgan added just over $3 billion, an increase of 2.6 percent, and Morgan Stanley added $2.5 billion, an increase of 9.2 percent. But by far the largest increase in holdings has been by Western Asset Management's USD Liquid Reserves Fund, which has grown by $18.9 billion, a 181.4 percent increase."
Note that the WAMCO fund is domiciled in the Cayman Islands, so Sloan observed that "the growth of the fund is almost certainly disconnected from anything to do with European money fund reform, despite it being an offshore fund." He added, "Still, even after adjusting for Cayman-domiciled funds, the trend in European domiciled funds shows that they have added almost $15 billion in assets, or approximately 3.8 percent."
"This trend has run completely counter to the trend we saw in U.S. institutional money market funds, which lost more than 80 percent or just over $622 billion in assets under management in the 5 months leading up to U.S. money market fund reform implementation," said Sloan.
He concluded, "The takeaway, at least from this data point, is that European money market fund investors are just not that concerned with the changes that are coming to their funds, and that they will be able to live within the new framework just fine. Absent some dramatic last-second tsunami of fund flows, we anticipate that the overall impact of European money market fund reform will come with much less bluster than U.S. reform. Issuers and repo counterparties are likely relieved."
For more on European Reforms and fund transitions, see these recent Crane Data News stories: "Schwab USD LA Goes Govt Ahead of European Reforms; Weekly Holdings" (1/3/19); "Money Fund Average Breaks 2.0%, Yields Rise; BNP Splits European MMFs" (12/27/18); "Money Fund Assets Skyrocket, Break $3 Trillion; UBS on European MMFR" (12/14/18); "JPMorgan Now Live With European Money Fund Reforms; VNAVs SnP AAA" (12/4/18); and "Cash Will Be King in '19 Says GS; BlackRock Update; Europe Rejects RDM" (11/26/18).
