Fitch Ratings and Morgan Stanley Investment Management recently published brief updates on European Money Fund Reforms, which caused a series of lineup changes and disclosure tweaks among funds domiciled in Ireland, Luxembourg and France. Fitch's "European MMF Reform: March 2019 Dashboard" tells us, "European money market fund (MMF) reform formally concluded on 21 March 2019, two months later than originally anticipated, following the last-minute European Commission ruling that reverse distribution mechanisms (RDMs) would not be permitted." We quote from both updates below. (Note: Crane Data has also posted the preliminary agenda and we're taking registrations for for our 7th annual European Money Fund Symposium, which will be held Sept. 23-24 at the Hilton Dublin.)
Fitch authors and analysts Cedric Verone and Abis Soetan write, "The low volatility net asset value (LVNAV) fund type has become the largest fund type in Europe by assets under management (AUM), accounting for 71% of converted short-term funds. On 15 March 2019, LVNAVs accounted for EUR560 billion, while Public Debt constant net asset value (CNAV) and short-term variable net asset value (VNAV) funds accounted respectively for EUR79 billion and EUR21 billion."
They explain, "Euro funds represented 56% of the AUM converted in March. Most delayed conversion until as late as possible. Negative yields only affected euro funds, and RDMs were necessary to pass these yields on to investors while maintaining stable prices on individual fund shares. Sterling and US dollar funds, unaffected by RDM issues, mostly converted earlier in 2019. Euro funds have seen outflows, decreasing by over 12% from January to mid-March. This was partly seasonal, but some investors appear unwilling or unable to accept varying share prices."
Fitch comments, "Average overnight and one-week liquidity of rated funds are at around 30% and 40% respectively as of end-February. This is markedly higher than regulatory and rating criteria levels, likely the result of increased investor sensitivity to the new liquidity limits, and a desire to mitigate the risk of redemptions during the conversion period.... Fitch believes liquidity levels will decrease from those seen during the conversion period, but that the average weekly liquidity level will settle at between 5% and 10% above pre-conversion levels in the post-reform era, especially for LVNAV funds."
They add, "The reform includes a five-year review, due in 2022. Work on that review could begin as soon as this year. The review will include the possibility of setting an 80% EU public debt quota in Public Debt CNAV and evaluating LVNAV as a potential alternative.... Fitch has affirmed the ratings on all funds converted to date, because all the main rating metrics have remained broadly within criteria limits. Any outflows have been managed with funds meeting redemptions and maintaining sufficient liquidity."
In related news, Morgan Stanley recently distributed a "Frequently Asked Questions" brief to European investors entitled, "European Money Market Fund Reform: MSLF Euro Liquidity Fund." On "What has changed?" They say, "Our 14 December announcement notified shareholders of our intention to convert the Morgan Stanley Liquidity Fund (MSLF) Euro Liquidity Fund to a Low Volatility Net Asset Value (LVNAV) Fund as at 14 January 2019. The Fund intended to utilise the Reverse Distribution Mechanism (RDM) based on prior discussions with our Luxembourg regulator, the CSSF. As communicated on 10 January, we were instructed at short notice by the CSSF that we should not proceed with the planned conversion on 14 January, as they would not authorise money market funds (MMFs) that utilise the RDM."
The update explains, "The MSLF Euro Liquidity Fund will still convert to the LVNAV structure. However, all investors currently in distributing share classes will be converted to an equivalent accumulation share class." Among share classes, Institutional converted to Institutional Accumulation D, Institutional Select converted to Institutional Select Accumulation D, MS Reserve converted to MS Reserve Accumulation D, and Qualified converted to Qualified Accumulation D.
It continues, "Accumulation share classes differ from distributing share classes in that they retain and effectively reinvest the income earned and this is reflected in the value of the accumulation shares. In a negative net yield environment, this equates to a reduction in share value. This proposal is subject to final approval by the CSSF. At the time of conversion, any holdings of distribution shares that are below the minimum holding amount will be liquidated and the proceeds paid to the Shareholder's bank account."
MSIM adds, "All MMFs must comply with the MMF reform (MMFR) regulatory obligations by 21 March 2019. We plan to undertake the proposed MSLF Euro Liquidity Fund changes on 18 March 2019. It is important to note that because of our decision to delay the conversion of all MSLF Liquidity funds, all of the MMFR changes that were previously notified to investors on 14 December 2018 will now also become effective on 18 March 2019."
They also tell us, "The fund will maintain intra-day liquidity and continue to rely on historic pricing. Each day's net income will be incorporated in the calculated NAV per share. De minimis investment unrealized gains and losses will be included in the calculated NAV per share. The end-of-day dealing cut-off time will remain the same, 13:00 GMT, and investors will continue to be able to transact in both cash and shares."
Finally, Morgan Stanley writes, "We have taken the opportunity to align the implementation date of a change in our administrator's operating entity with our MMFR effective date of 18 March 2019. The Depositary, Administrator and Transfer Agent will be The Bank of New York Mellon SA/NV, a bank incorporated under Belgian law.... This change in operating entity requires investors in all funds to use new bank instructions when paying for subscriptions. There is no change in any currently available method of submitting dealing requests." (Note: These funds are not available to U.S. investors.)
For more on European Reforms, see the following Crane Data News stories: "MFI International: Euro Assets Down; Holdings; Wells Offshore Goes Govt" (3/15/19), "Aberdeen, Fido Make European Reform Changes; Oppenheimer Merging" (3/1/19), "Not Done Yet: European Money Funds Continue Adjusting to Reforms" (2/6/19), "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). Finally, let us know if you'd like to see our latest Money Fund Intelligence International, which tracks the European money fund marketplace.
