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Money Fund Reform: Contrasting Europe with the U.S.

  • By Andrew Deichler
  • Published: 5/18/2017

eu gavel
MANCHESTER -- During a panel session at the ACT Annual Conference Wednesday, experts compared and contrasted upcoming money market fund reforms in Europe with the ones that went into effect in the United States last year.

The reforms

Jonathan Curry, global CIO, liquidity/CIO USA, HSBC Global Asset Management Liquidity, began by giving a brief overview of the regulation. Just like in the U.S., the rules, which take effect next year, aim to make MMFs more resilient to market shocks. However, the reforms themselves don’t seem to change things all that much.

Post-reform, investors will have more choices of funds. Constant net asset value (CNAV) government funds and variable net asset value (VNAV) funds will remain, but a new type of MMF that is more resilient to runs by investors, called the low volatility net asset value (LVNAV) fund, will also be available. There will continue to be a distinction between short-term funds and standard funds; short-term funds have a lower risk profile, while standard funds have a higher one.

Another point of debate throughout the entire reform process has been MMF ratings. Investors will be pleased to hear that funds will still be rated. “There was a question after the release of the European Commission regulation back in 2013 whether providers of MMFs would be prevented from soliciting a rating—that will not be the case,” Curry said.

A key structural change is that it will be prohibited to give external support to MMFs in case of difficulties. However, Curry doesn’t see this as having a big effect. “Realistically, today, the cost of not only providing support, but of having to put the fund on the balance sheet and having capital and liquidity against it, means the economics don’t add up,” he said. “So, theoretically it could be done today, but in reality, it’s a fiction.”

Lastly, just like in the U.S., the European reforms will have liquidity fees and gates. Many funds today already have fees and gates, therefore, Curry does not believe that this issue will be as contentious as it was in the U.S. Additionally, there will be no optionality in Europe; in the U.S., fees and gates were applied to prime and municipal funds, but not to government funds—in Europe, they will be applied across the board.

Once the reforms kick in, existing MMFs will have 18 months to comply, while new funds will only have 12 months. Curry noted that there is still a good bit of time to digest the regulation, but he encouraged corporates not to leave any investment decisions to the last minute.

Next steps

As stated earlier, MMFs in Europe do not appear poised for as big a shakeup as their American counterparts given the lighter touch that regulators are taking here. As such, the response from investors is expected to be a bit more muted; Curry does not anticipate a major move out of prime funds into government funds, like what happened in the U.S.

Not that strict compliance with the regulation isn’t essential for MMFs. According to Jane Lowe, secretary general, Institutional Money Market Funds Association, “No one will even be able to use the title ‘money market fund’ unless they are fully compliant with this regulation.” She believes this will bring a greater sense of comfort to investors, because they will know that there is less of a risk of the fund being susceptible to market shocks.

As for what kind of impact Brexit might have on these regulations, Lowe admitted that no one really knows at this point. However, she doesn’t expect a huge shakeup because the majority of the funds are based in the EU, in Luxembourg. “So they’re going to be covered by the regulation,” she said. “The question is, will there be restrictions placed on the managers from selling any new funds into the UK? We don’t know the answer to that. But the probability is that they will not attempt to block that.”

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