There seems to be some confusion about whether indeed European Money Market Fund Reforms will go live on Monday, January 21. Following a letter from the Irish Central Bank (and comments from fund managers), we wrote on Jan. 14 that "European Money Market Funds [Were] Granted [an] Extension for Reforms, March 21." But after hearing (and participating in) the session on "European MMF Reforms & Offshore Funds" at our Money Fund University in Stamford on Friday, we learned that Irish and Luxembourg regulators meant to only allow the extension until March 21 for Euro funds and funds using the RDM, or reverse distribution mechanism. We review the latest on European reforms below, and also quote from a new Economist article on the subject. (Note: Thanks to those who attended and supported our Money Fund University last week! Attendees and Crane Data subscribers may access the Powerpoints and recordings via our "Money Fund University 2019 Download Center.")
In our Jan. 7 News, we published, "BNY Mellon Converts for European MF Reforms; USD Assets Rise in 2018," which explained, "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."
Our Jan. 14 News explained, "Money market funds in Europe, which had been scheduled to submit to new regulations starting January 21, have been given a 2-month extension by Irish and Luxembourg fund regulators. A press release entitled, "Statement on the treatment of share cancellation under EU Regulation" explains, "The Central Bank of Ireland ('Central Bank') and the Commission de Surveillance du Secteur Financier ('CSSF') are issuing this joint statement in the interests of supporting the orderly implementation of the Money Market Funds Regulation (MMF Regulation) by converging their respective supervisory approaches to share cancellation and advising the market accordingly." (See also, the Financial Times article, "Fund groups gain reprieve from EU money market rules.")"
The Economist writes in "Europe's safest funds lose a tool to cope with negative interest rates" that, "January 21st should have been a momentous day for the European Union's money markets. A package of reforms five years in the making, designed to make the bloc's safest funds even safer, was due to kick in. Blue-chip firms like BlackRock and Morgan Stanley, anxious to meet the deadline, planned to switch their funds to compliant structures a week early. Yet on January 11th regulators announced a surprise delay. Money-market managers, which together oversee €1.3trn ($1trn), now have until March to put their houses in order. The delay stems from a row between national regulators over whether managers should ditch the 'share-cancellation mechanism' (SCM), a tool that helps them deal with negative interest rates."
The article explains, "Money-market funds invest in very short-term safe assets, like government bonds and top-notch corporate debt, to provide clients with a liquid alternative to cash. They play a key role for pension funds and large companies, which need to park their cash somewhere safe before paying pensions or wages at the end of the month. The aim is to maintain their capital at a stable value, often €1 per share. Any interest on portfolio assets is distributed to investors on the day via dividend payments, leaving the share price unchanged."
It continues, "But the system does not work when interest rates are below zero, as they have been in the euro zone since 2014. Negative yields cannot be distributed. So in Ireland and Luxembourg, home to most European money-market funds, regulators allow funds to cancel shares to get around the problem. The assets of the cancelled shares are split among the remaining ones, ensuring that their value per share remains at par. The share price does not budge."
The Economist article explains, "The European Commission dislikes SCMs. Although most experts disagree, it reckons 'share destruction' can be used to mask a capital loss in the fund. After a long silence the European Securities and Markets Authority (ESMA), which co-ordinates regulation across the EU, eventually sided with the commission, confirming that SCMs would be stopped. It had initially hinted that national authorities could decide how to phase out SCMs, which led managers to expect a long transition period. But on Christmas Eve managers were told that no grace period would be allowed."
It adds, "When managers fumed at the lack of notice, regulators delayed the reform. But the two-month reprieve does not help much. Managers are scrambling to restructure funds -- without an obvious solution to the negative-yield headache. Most are likely to move to accumulative structures, where share prices fluctuate along with the yield. Some worry investors could move their money to bank deposits, depleting funds. That may lower demand for the safe short-term debt issued by banks and states."
For more on European Reforms, see the following 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).
