Crane Data hosted its most recent virtual event, European Money Fund Symposium Online Thursday, which featured a series of discussions on European and "offshore" money market mutual fund topics. During our "Major Issues in European MMFs" panel, Veronica Iommi of the Institutional Money Market Funds Association gave a "brief 2020 update on money market funds in Europe from IMMFA's perspective with a "focus on the impact of the covid-19 pandemic [and] our role as a voice to the industry." We quote from her remarks below. (Thanks again to our EMFS Online attendees, speakers and sponsors! The replay is available here in case you missed it.)
Iommi says, "IMMFA is the Institutional Money Market Funds Association, originally formed 20 years ago. It's the only trade association in Europe dedicated to money market funds. Our core objective is to promote and support the development and integrity of the money market funds industry. We do this by engaging with policymakers and regulators, educating investors, providing regular data on members funds and overarching all of this, providing a centralized point of contact information and expertise for relevant stakeholders. Our members comprise full members, which are fund managers who manage at least one fund meeting the IMMFA criteria, and associate members which provide services to IMMFA managers or funds such as fund administrators or rating agencies."
She explains, "The primary objectives of a money market fund are the preservation of capital and the provision of liquidity; yield is a secondary consideration. They operate within a highly prescriptive environment. IMMFA funds specifically are triple-A rated and primarily low volatility funds known as LVNAV. Above all, money market funds perform a vital role in channeling liquidity into the real economy. They help businesses and institutions manage their cash more efficiently by creating a pool of cash, which in turn facilitates short term borrowing.... Cash rich investors put money into money market funds ... such investors include corporate pension funds, local authorities and development banks. [Issuers to MMFs include] highly rated and include large banks, corporates and sovereigns."
Iommi comments, "As we've heard from the previous speakers, the money market funds universe in Europe consists of the variable, VNAV, part and the constant net asset value, or essentially the LVNAV part. The VNAV industry is ... predominantly French funds, but also includes funds in places such as Switzerland.... The other large share consists of IMMFA money market funds ... 95% of these IMMFA funds are low volatility LVNAV funds with some public debt CNAV funds. Both types ... have constant net asset value as opposed to the variable net asset value. With regard to IMMFA money market funds, US Dollar funds are the largest, followed by Sterling and Euro. But what you will see is that both VNAV and LVNAV sectors have grown steadily over recent years."
Her slides show "Total assets under management reaching over E828 billion, having peaked in July at E890 billion," and the investor base for money market funds. She states, "Perhaps unsurprisingly, the UK accounts for a very high percentage IMMFA funds' distribution, 44%.... The number also reflects the size of the Sterling market money market funds, which I just mentioned, account for around one third of IMMFA funds. A third of a third is sold into the rest of Europe. And here we breakout just the larger areas of distribution, which include 12% sold into Benelux and 4% into Ireland.... Approximately 25% of funds are sold outside the EU."
Iommi continues, "The types of investors [include] corporates and funds, each account for just under a third each. Pension funds are a significant part of that fund category. Third party, 14%, is where money market funds are sold over platforms, which is quite common. And as you can see, insurance companies are also very active, constituting 8%, as are financial institutions, which could be entities such as private banks or securities lenders. And then, of course, we have public sector investors.... The 2017 EU money market fund regulation introduced new fund categories and enhanced investor protections, in particular with respect to new constant net asset value fund types, LVNAV and PDCNAV."
She asks, "What about Covid-19? How have money market funds fared during this storm? As we all know, the Covid-19 pandemic rapidly led to an unprecedented economic shock, which resulted in severe liquidity pressure in global financial markets. Like all financial markets, the money market funds sector was impacted. Unlike 2008, this was not a credit crisis but a liquidity crisis. The quality of money market fund assets was not affected since IMMFA money market funds own very high quality, high rated paper as we've discussed."
Iommi tells us, "Many money market funds initially faced increased redemptions, and these were driven by investors unexpected needs for cash as the impact of lockdown began to be felt, including financing needs and increased margin calls due to market volatility. This situation was exacerbated by challenging liquidity conditions in the secondary markets. We'll go on to show, notwithstanding these challenges, money market funds proved resilient. Once markets stabilized and investors had cash again, they returned to money market funds."
She explains, "In March ... assets under management dropped sharply; in the third week of March, they dropped 5%. But since then have recovered and continued healthy growth, reaching a peak of ... E890 billion in July. So, we feel that this shows continued investor confidence in the underlying money market fund operating model. And in this respect, this crisis was very different from the 2008 global financial crisis, where investors were worried about their credit exposure. In March, it was not about credit concerns, it was about investors needing their cash back for reasons that could not have been foreseen. As you can see here, once they had cash again, they very quickly resumed investing in money market funds."
Iommi also says, "Whilst there was a net outflow in March, experience varied by fund type and by fund currency. We can see the LVNAV funds by currency ... you have the U.S. dollar funds, which were the worst hit, dropping 22%. U.S. dollar funds tend to be more influenced by US norms and behavior because there's often a connection between the domestic and the offshore investor bases. And in the U.S. markets, some of these outflows were investors switching into other money market funds, which we'll look at in a moment. The sterling market ... reacted a little bit later, falling 8% over the course of a week before recovering its losses the following week. Euro was different again. Euros went into the crisis on a strong uptrend, so had a bit further to fall, 15%, but also recovered very quickly."
She explains, "As I just mentioned, U.S. dollar funds saw the most pressure. This was a reflection of the U.S. market where even the most liquid market in the world, U.S. Treasuries, were impacted. In the U.S. domestic market, there was a pronounced move out of prime funds and into government money market funds. And this shift was also reflected in Europe.... LVNAV U.S. dollar money market funds, so our equivalent of the U.S. Prime fund ... and PDCNAV, our equivalent of the Government fund in the U.S. As you can see, redemptions from LVNAV funds were mirrored by inflows into PDCNAV funds. This money was not leaving the money market fund sector, it was just transitioning to another fund type. This option was less viable for Sterling and Euro investors as PDCNAV funds do not exist at scale except in U.S. dollars."
Next, Iommi comments, "You may be asking, well, 'What about the various asset purchase facilities? Did they not help European money market funds?' ... There's no doubt that unprecedented central bank interventions in the third week of March helped to stabilize the global financial markets.... Offshore U.S. dollar funds were not included, but they did indirectly benefit from the mediazation of stress levels. However, although European money market funds also benefited from the broad stabilization of market conditions, the various asset purchase facilities established in Europe brought money market funds no direct benefit. The facilities were primarily targeted at corporate paper, and money market funds -- because of quality and supply constraints -- have the majority of their assets in financial paper, which didn't qualify. As volatility dropped the pressure on margin calls, which had been a factor in redemptions, was also nascent, and this also helped funds."
She also asks, "How did money market funds fare overall in the Covid storm? As explained earlier, the money market fund regulation in Europe introduced a number of more prescriptive protective measures designed to make funds more robust. Of course, recent events have put these mechanisms to the test, and we're pleased to report that money market funds proved resilient. Despite the exceptional and adverse market conditions, IMMFA money market funds were able to meet redemptions in full and on time, and no gates or fees were imposed. In other words, they continued to serve that purpose of protecting capital and providing liquidity. Furthermore, once markets normalized, assets under management increased again, reflecting investor confidence in the underlying structure, including the dominant LVNAV category. Indeed, that liquidity, combined with transparency, is particularly appreciated in the current environment."
Iommi states, "So, what has overall been identified and what have we been doing over this challenging period? ... As a voice of the industry, we've been actively contributing to the post-crisis analysis. In July, we issued a detailed in proposition paper setting out our assessment of the impact of the Covid-19 pandemic on the European money market fund sector.... Subsequently, we've produced some preliminary IMMFA recommendations covering areas which we feel merit further examination, and these are still being developed further with our members.... And, all along we've been continuing to engage with regulatory and policy stakeholders at a European national and international level, together with, of course, continuing to coordinate with other relevant industry associations such as ICI Global, Irish Funds and EFAMA."
Finally, she adds, "To conclude, EU money market funds regulation has brought greater transparency and consistency for investors. Although money market funds were stressed in the recent crisis, they were not the source of market dysfunctionality. Increased assets under management illustrate their continued appeal and growth, notwithstanding the pandemic. We as an organization are continuing our engagement with policymakers and regulators not only as we approach the European Commission's five-year review of the money market fund regulation, but also in contributing to some key overarching themes from a regulatory policy perspective, including, of course, the dreaded B-word, Brexit. As we do so, we'll obviously be keeping our investors and other stakeholders informed of developments to our series of insights available on our website."
