Last week, Crane Data hosted its 8th annual European Money Fund Symposium in Paris, France. The record 160+ attendees discussed rising yields in USD, EUR and GBP MMFs, the potential for more regulatory reforms in Europe and in the U.S., and turmoil in the sterling money markets, among other things. Day 2 of the event began with a session entitled, "ICI Global & EFAMA Talk Regulatory Issues," which featured updates from ICI Global's Michael Pedroni and EFAMA's Federico Cupelli. We excerpt from Pedroni's segment below. (Note: Thanks again to our European MFS speakers, sponsors and attendees! Watch for more quotes in coming days and in our upcoming October Money Fund Intelligence newsletter.)
Pedroni explains, "I'm at ICI Global, which is a trade association affiliated with the Investment Company Institute.... We have longstanding expertise at ICI in the money fund space and my mandate as the new head of ICI Global is to grow and enhance our global, including European, presence. So, to that end, we're opening an office in Brussels.... What we're trying to do is bring in a mix of economists, analysts, lawyers, and really bring a kind of new approach to how we think about the regulatory space.... For our members, what matters is having a good cross-jurisdictional, inter-operable and predictable regulatory framework. So that's what we're all about."
He continues, "So, what I want to talk about today is two things. One is, I want to talk just very briefly about recent money fund flow trends. Then second, I want to get on to the regulatory pipeline.... I'll give you a lay of the land, and then I'll talk about the issues that have us concerned and one that we're actually supportive of."
Pedroni comments, "This [chart] basically shows is the flows into the various categories of money funds here, in Europe, since the tightening cycle began in in mid-July. [Y]ou can see ... very modest outflows, virtually unchanged flows.... In some cases, institutional investors prefer to own their euro denominated money market assets directly rather than through funds. And secondly, there's an interest rate differential between dollar funds and euro funds. You see a pretty significant inflow, to the tune of $90 billion, into U.S. dollar money funds here in Europe."
He states, "For U.S. [domestic] funds ... if you [look at] retail funds, though, you can see that there is a search for yield going on among retail investors. [We've seen about] $93 billion in inflows on a base of $290 billion. So, there's a pretty significant search for yield for among retail investors.... My key takeaway here is it's important to remind regulators that despite the current market strains that are out there, this product has been very steady -- there's no volatility."
Pedroni then says, "Now, I want to shift over to the regulatory update. What I'll do here is I'll give a quick lay of the land of what we see in the pipeline. My observations are really structured around two key considerations, as I mentioned. One is swing pricing.... We don't particularly like swing pricing, and I'll talk about that. But there is quite a bit of talk among regulatory authorities about implementing swing pricing for money funds. Then the second area is the elimination of the tie between the liquidity thresholds and fees and gates. And just to give a sneak preview, we kind of like that. So those are the two policy issues."
He tells the EMFS, "It's no surprise, I think, that after the events of March 2020, policymakers ... continue to be looking at reforms to money funds. But our sense is that that the review process is nearing an end now. So, I think we're about to get to a point where things are not being shaped so much anymore. They'll have recommendations and conclusions."
Pedroni says, "The first key player in this is the Financial Stability Board, and actually… the Financial Stability Board has had IOSCO [do] a lot of this work.... So, the FSB has signaled a couple of different policy options. It's looking at: swing pricing, as I mentioned, or other anti-dilution levies; minimum balance at risk, where you would have a certain amount ... of [investor's] money tied up and they could only withdraw it with a delay; capital buffers; removing the tie between fund liquidity and fees and gates; and, as I mentioned, eliminating the stable NAV and additional liquidity requirements. So out of all of those, there's only one that that we like ... removing the tie between funds, liquidity and fees and gates."
He continues, "The second key player in this, of course, is the Securities and Exchange Commission under Gary Gensler. Not to be outdone by their international counterparts, the SEC has proposed a pretty significant package of reforms through its proposed rule. We don’t know exactly when the final rule is coming. But it could be as soon as October, although we sense that that timetable may slip a little bit."
The ICI Global Chief comments, "The SEC is looking at very similar issues. On the positive side, ... removing the required liquidity fee and redemption gate provisions. On the much more negative side from our perspective, requiring swing pricing for money market funds, increasing the daily and weekly liquid asset requirements, stress testing, and then specifying being more prescriptive on calculations of your WAM and your weighted average life, your WAL, and then lastly, reporting requirements. There's a lot in this proposal and we wrote a pretty robust response pushing back on many of the things that the SEC is proposing."
He adds, "Then the third ... major creator of regulation is ... the European Commission, and they had a consultation earlier this year. I won't say too much about it. I'm sure Federico will. But they billed it as a targeted review. But in fact, it asks a pretty broad set of questions about the structure of the of the industry and the product. It asks, among other things, about the impact of the European Money Market Fund regulation on the industry in the EU. It asks, worryingly, ... about the impact of eliminating the LVNAV product. It asks about whether some of the liquidity management tools being proposed under the current AIFMD review.... They're asking whether those liquidity management tools would be useful to apply to money funds. And again, that's a back-door swing pricing point that they're making. So, we're anticipating that the commission is going to release a report based on this consultation. A report, though, that's the important [point]. We do not anticipate that they are going to propose a new regulation in the near term."
Pedroni states, "Swing pricing is not the right solution for money market funds. We recognize that in the EU, non-money market UCITS employ swing pricing and that that has worked. But we know for a fact that swing pricing is not used in money market funds.... Swing pricing, we believe, would actually strip money funds of some of the fundamental characteristics that customers of money funds value, and it would also introduce new operational challenges."
Finally, he tells us, "We know that IOSCO is very close to finalizing its paper. I think the paper is final and they're just waiting to issue it. This is the work that is the culmination of the post-March 2020.... We understand that what IOSCO is going to recommend is not specific to money funds, but to open ended funds in general.... The second thing, and I'm sure Federico will have some thoughts on this as well, is that we do not believe that the European Commission is going to propose a new rule for money funds in the next two years."
