ICI Responds to ESMA Consultation
We continue to read and quote responses to the European Securities and Markets Authority's (ESMA's) "Consultation on EU Money Market Fund Regulation - Legislative Review." Today, we cite ICI's letter. They write, "The Investment Company Institute (ICI), including ICI Global, appreciates the opportunity to provide its views on the European Securities and Markets Authority Consultation Report on EU Money Market Fund Regulation -- Legislative Review. Individuals and institutions rely on the $8.5 trillion global money market fund industry as a low cost, efficient, transparent, cash management vehicle that offers market-based rates of return.... The reform option presented in the consultation document that has the most potential for addressing ESMA and other policymakers' concerns while preserving key characteristics of money market funds is removing the tie between money market fund liquidity and fee and gate thresholds. The regulatory tie between liquidity and fee and gate thresholds made money market funds more susceptible to financial market stress in March 2020 and would likely do so in future periods of stress. ICI's data supports the conclusion that this regulatory tie was likely a dominant trigger for redemptions as opposed to the conditions or structure of the funds. On the other hand, reforms such as swing pricing or the option to eliminate constant net asset value (CNAV) funds (i.e., require all money market funds to float their net asset values (NAVs)) are reforms with significant drawbacks, ranging from potential detrimental impacts on money market funds, their investors, and the market to regulatory, structural, and operational barriers to implement." The letter continues, "ICI and its members are committed to working with international policymakers to strengthen the money market fund industry for the benefit and further protection of investors and the performance of broader financial markets and the economy more generally. Although many of our responses are mainly based on the experiences of US money market funds during the COVID-19 crisis, we hope they will still be helpful to ESMA as it considers how best to advance toward this important policy goal." On eliminating CNAV (constant NAV) funds, ICI responds, "ICI is highly skeptical that requiring all money market funds (such as retail prime in the United States and LVNAV funds in Europe) to float their NAVs would reduce risks in any meaningful way. A floating NAV did not stop heavy redemptions in March 2020 for US institutional floating NAV prime money market funds or certain European VNAV money market funds. Indeed, the other features of these funds and the nature of the short-term funding market itself still make certain money market funds susceptible to sudden, high redemption requests. First, a floating NAV does not alter investors' views about whether money market funds are low risk-investments. Under normal conditions, the shadow prices of stable (constant) NAV money market funds and the market prices of floating NAV money market funds' portfolios generally deviate very little from $1.00. This is simply a reflection of the fact that all money market funds invest in very short-term, high-quality, fixed-income securities and the price of these securities deviates little from their amortized cost value absent a large interest rate movement or credit event. Regardless of their valuation method, money market funds continue to be exposed to interest rate and credit risk. When risk intolerant investors seek to move away from certain funds or broad sectors of the markets during future crises, the transition would continue to be potentially disruptive." Finally, they comment, "Over ten years ago, ICI developed a preliminary framework for a private liquidity facility, including how it could be structured, capitalized, governed, and operated. Our framework also described many draw-backs, limitations, and challenges to creating a private liquidity facility, including its substantial initial and ongoing costs and vast regulatory complexity. In 2014, the SEC adopted different money market fund reforms, including a floating NAV requirement for all prime and tax-exempt money market funds sold to institutional investors and new fee and gate tools for all prime and tax-exempt money market funds, including retail funds. As a result of those reforms, the prime money market fund industry, including the number of prime fund sponsors, substantially shrunk.... Today, the US prime money market fund industry is vastly more concentrated -- with total net assets of $503 billion among just 26 sponsors as of April 30, 2021. Given the significant costs and other challenges of establishing a viable liquidity facility that could provide meaningful liquidity for money market funds in stress events, ICI members have indicated that they would simply stop sponsoring money market funds if membership to a liquidity facility was required."
