We wrote extensively last week about our recent European Money Fund Symposium, an online event which focused on "offshore" USD, EUR and GBP money funds domiciled in Ireland and Luxembourg. Today, we quote from the opening session, "European MMF Update: Ireland, France and Lux." It featured Alastair Sewell of Fitch Ratings, Vanessa Robert of Moody's Investors Service and Emelyne Uchiyama of S&P Global Ratings. (Note. The replay of our European MFS recording is available here and the Powerpoints and materials are available here.)
Sewell tells us, "Assets under management in Europe are quite large at about 1.4 trillion euros in total, that's roughly $1.63 trillion U.S. dollars. So quite large but also quite stable. If you look back to March 2020 ... the assets were remarkably resilient. In terms of structure of the market, LVNAVs are the largest fund types in Europe and have been a significant part of time, followed by the standard VNAV, which Vanessa will talk about."
He continues, "The other point I would make [is about] the number of active money market funds in Europe. As you can see there it's around about 600.... There must be a significant long tail of small and relatively inefficient funds, which I think is a material issue for Europe.... We've been tracking the number of new launches of money market funds in Europe, and ... despite assets being really quite stable over recent years, new funds are being launched."
Sewell comments, "There are money market funds ... domiciled in almost every country in Europe. This is something you actually find in virtually every market around the world. You can go to almost any market and some of the frontier markets, and you will find money market funds. This is because money market funds have a central role in developmental economics in terms of being one of the first vehicles that could use sophisticated instruments like repos to engage with patchy or erratic government bond issuance and make an uninvestable asset class investable in the broad universe."
He tells us, "So they're everywhere, and they're almost everywhere in Europe, which I think is a critical problem for regulators as they think about money market funds in Europe. And that is because Europe is diverse. Europe has many different needs, has many different requirements. It has many different levels of credit quality.... [A] domestic fund with a domestic risk appetite is likely to be significantly riskier than a fund in another jurisdiction... So therefore it is incumbent upon European regulators to be able to regulate holistically, to be able to come up with a framework which enables these funds in in diverse markets, and yet recognizes and controls appropriately on the risks of funds in these different markets. That's a very significant challenge."
Sewell says, "This, of course, is not the entirety of the picture. One of the great success stories of Europe has been the UCITS, the undertaking for collective investment in transferable securities, or the mutual fund regulations.... UCITS funds can be sold into many, many jurisdictions around the world [and] money market funds are indeed sold into different jurisdictions around the world.... Regulation of money market funds not only have to accommodate the internal challenges and complexities, but it will also have an extraterritorial impact on all of these other markets.... [This] means that what happens in Europe will have frankly profound implications for cash investors all around the world."
He adds, "I wanted to talk a little bit about the structure of investment managers in Europe.... When you take into consideration the Standard money funds ... you get a rather different ranking.... Some of the domestic [French] European managers actually become rather more significant in terms of the asset mix.... So when thinking about Europe again ... you have layers of complexity. We have the international complexity, we have the internal complexity, and then we have the complexity of the needs, requirements of providers."
Moody's Robert explains, "French money market funds' assets rose to 358 billion euro as of June 2021 after shrinking in 2018 and 2019. France has a 26% share of Europe's MMF market, behind Ireland (42%) and Luxembourg (28%). EU regulations introduced in 2018/19 have increased compliance costs, triggering consolidation. France's large number of small MMF's, with assets as low as 200,000 euros, suggests consolidation will continue. French MMFs have 34 providers as of 2021 with the total number of funds being 108, with an average fund size of 3.3 billion euro."
She states, "Also, in line with what Alastair was saying, the French market is not homogeneous. You have the big players and ... you have also very small players... So, there is room for further consolidation, and there is also room for a further decline in the number of money market funds in France.... Just one figure, the size of the smallest money market funds in France is less than two hundred and fifty thousand euros. So Alistair was talking about inefficiencies at the European level, it's also true at the French level."
Robert also says, "The French market remains pure VNAV, pure variable net asset value money market funds, and there are several explanations behind that. Historical reasons of course in the VNAV space; the French money market is largely dominated by Standard money market funds because of their yield advantage versus Short-Term money market funds in France. And the other reason being that in France, even Standard money market funds benefit from cash and cash equivalents designation."
She comments, "The currency ... is [another] difference with Luxembourg or Irish money market funds. French money market funds are almost exclusively in the euro, and that's to do with their investor base. The investor base is largely domestic and insurance companies. French insurance companies and French corporates being the largest investors of French money market funds."
Finally, Robert adds, "Given what happened in March 2020, we would expect to see more regulation.... We all know that ESMA and the SEC published or launched consultations, and the FSB recently published its final report regarding policy to rectify the weaknesses in the money market fund sector.... French money market funds' ... risk profile will normalize and probably return to their pre-crisis level as spending increases. But if there is a new round of regulation with potential higher regulatory requirements in terms of liquidity, we might see substantial changes."
