Today, we highlight another key session from last week's European Money Fund Symposium, which took place in Dublin, Ireland. The segment, "IMMFA Update: The State of MMFs in Europe," featured Institutional Money Market Funds Association Chair Kim Hochfeld (also an MD at Morgan Stanley I.M.) and new IMMFA Secretary General Veronica Iommi. The two discussed the transition to LVNAV money funds in Europe following MMF reforms, the current state and investor base of the funds and the evolving mission of the London-based money fund trade group. (Mark your calendars for next year's European MF Symposium, which is scheduled for Sept. 21-22, 2020, in Paris, France. Let us know too if you'd like to see the conference binder.)
Hochfeld told the EMFS, "I don't think I need to introduce to this audience the different money fund types that were introduced by the regs. We obviously have three types in the short-term money fund universe -- public debt CNAV, the LVNAV and the VNAV funds. The standard money funds still have a VNAV structure as they always did. The new funds all had to have ... required regulatory investment parameters and liquidity and reporting requirements. But the LVNAV structure really preserved the attractiveness of the product, the broad base of investors that we have here in Europe."
She explained, "Looking at how the funds all converted, there were really no surprises here, which is very encouraging to us as an industry. The old-style Treasury funds all pretty much converted to a public debt CNAV structure, and the vast majority of prime funds switched into the LVNAV structure, with a small 25 billion euros moving into a short-term VNAV structure.... The vast majority of assets just transferred over as expected. We didn't see any surprises like we did in the U.S. during money market fund reform in 2016."
The IMMFA Chair continued, "There was a small amount of AUM that was lost. We think that was due to the fact that some of the large sweep custodians were unable to process an LVNAV accumulating structure due to the abolishment of their reverse distribution mechanism at the last minute by the regulators. But as you'll see, those funds have actually come back into our universe. I'm happy to say that AUM is actually up, post conversion, very slightly, but it is most definitely up. On March 22, AUM was E639 billion, and on Sept. 6 IMMFA AUM was E701 billion. The increase has largely been in the dollar space.... So, [this is] hugely encouraging and obviously a stamp of approval from investors.... They still like the product and it still works for them. It's a very encouraging initial result post-conversion."
She explained, "When we look at the total money fund universe in Europe, so this is not just IMMFA, this is the majority of the French and German money fund industry as well, you can see that IMMFA AUM ... is actually still over 50% of the total 1.2 trillion euro AUM money fund industry.... The vast majority in currency terms of the overall industry is in euros. That is mostly down to the French industry. In the IMMFA universe ... the vast majority of assets is in dollars. Just looking at money funds by domicile, again we see the vast majority of the total European industry domiciled in Ireland which is 40%. France is 30 percent and Luxembourg is 25 percent of European funds."
Hochfeld added, "Each investor type has pretty much grown along with the overall growth in the industry. Corporates still form a large chunk of our overall AUM. The sector that's actually grown quite a lot with the money fund industry is what we classify as 'Funds' and this is actually the buy side fund industry. That's asset managers using money funds to manage excess cash. We really ascribe the rise in that investor base due to Basel III, which makes leaving cash at the custodian more and more expensive and a drag on return. As well as the fact that from a technical perspective, it's much easier to sweep assets into money funds from some of the large custodians."
She also said, "In terms of the location of our investors again, not a huge amount of change. We still see a vast majority of our AUM coming from the U.K. at around 40%. We have seen an increase in the non-E.U. portion of our investor base.... It grew by 50% to about 25% of the total. That's up from about 15% the year before. So non-E.U., the way we classify that in IMMFA is U.S., Switzerland, Channel Islands … Bermuda. Also some investors coming from Asian domiciles. That investor base has grown quite significantly."
The IMMFA Chair told the conference, "The strengths at the moment for the IMMFA universe: we have seen a strong and consistent growth in assets which is great news for most of us in the room. Money fund conversion was really a non-event here in Europe which is hugely encouraging. IMMFA has been going for 20 years and I hope we have another 20 happy years in front of us. We clearly have an investor base that likes the product that we offer. They’ve used it very consistently over the last 20 years and we hope to continue to see growth from our investors. The strong risk and credit management that we demand from our IMMFA funds, which has now been supplanted by the EU regs, is highly prized by cash investors and that has continued to be important."
Finally, she commented, "Clearly there are lots of weaknesses that we face as an industry. Negative yields in euros and potentially, maybe in Sterling coming up doesn't help us. That feeds into the fee compression that the whole industry is seeing…. Brexit is going to make it much more challenging for all of those funds which have distribution teams domiciled in the U.K. but have funds domiciled either in Dublin or in Luxembourg. That's putting increased costs into the business. Lastly but by no means the least, the money fund review in 2022 could turn out to be a threat for that industry, or it could turn out to put to bed the nervousness around the continuity of the LVNAV structure."
IMMFA's Iommi commented, "IMMFA is the only trade association in Europe which is actually dedicated to the money market funds industry.... It was originally formed over nineteen years ago to preserve CNAV for money market funds, and next year will be important because we’ll be celebrating our 20th anniversary.... Since the inception of IMMFA, as we all know, a lot has happened in the money market funds space. As we've heard today, our most notably changes were brought by money market fund reform and it's in light of these changes that we're currently reviewing our mission statement in conjunction with the board and our members. In particular, how we might be more inclusive, potentially embracing a broader membership. This does not however, change our core objective, which is to promote and support the development and integrity of the money market funds industry. We do this by informing and influencing policy makers regarding money market fund issues, educating investors about money market funds and providing regular data on members funds."
She stated, "Apart from money market funds regulation itself, IMMFA is also involved in other regulatory developments that may have an impact on money market participants. Current areas of focus here include obtaining greater regulatory clarity and consistency with respect to cash equivalents, status of short-term money market funds to improve certainty for investors, benchmark reform and the use of money market funds as collateral. Overshadowing all of these of course is Brexit which we'll continue to follow closely as the next chapters of the thriller unfold. Contributing to work on Brexit impacts, on current arrangements and future opportunities are a key focus for us. Of course, the biggest Brexit impacts for money market funds relates to where a fund is domiciled and where the investors are based."
Iommi added, "To conclude ... the EU money market fund regulation has provided greater consistency and transparency in the short-term money market funds space, and these changes as we've seen, have been generally very welcomed by investors. IMMFA funds under management are growing. But we cannot be complacent, we also need to be nimble and our governance structure does help us to be nimble. In addition, as I indicated at the outset, we are currently reassessing our primary mission as a trade association in preparation for how we position ourselves for the five year-review of the money market funds regulation and beyond."
