Fitch says Treasurers Divided on Impact of Potential Money Fund Reform

Money market fund (MMF) investors are split over whether a move to variable net asset value (VNAV) money funds from constant net asset value funds (CNAV) would have a major impact on their investments, a survey of European treasurers conducted by credit ratings agency (CRA) Fitch in conjunction with Treasury Management International (TMI) shows.

Fitch says the three areas that could be affected by a move to VNAV funds are the clarity of the investment product, the accounting and tax treatment and the risk profile of the fund. Such a move has been proposed by regulators on both sides of the Atlantic.

The CRA presents the results in its
‘European Treasury Survey 2013’
special report, with 68 European treasurers responding to the survey. The bulk of the respondents were corporate treasurers (76%), local authorities (9%) and banks (6%). Half of the respondents had more than US$250m of cash and a quarter of all respondents had more than US$1bn in cash.

According to the survey, the greatest concern for the industry is that 27% of respondents think moving to a VNAV product will result in a loss of clarity, with a further 42% undecided. Part of the problem here is the lack of VNAV funds in some regions, such as the UK, leaves investors unfamiliar with how the funds work.

On the accounting and tax side, 42% of respondents said the switch would have a significant or material change, while 47% said it would have a marginal or zero impact.11% were still unsure. This substantial split most likely reflects the users of the funds.

Corporate treasurers that have adopted a ‘deposit-like’ treatment of CNAV funds may experience problems by the change. For example, cash and cash equivalent accounting systems will typically use a minimum unit value of 1, which means negative values – caused by a drop in the net asset value (NAV) of a fund – will cause problems. Likewise, they won’t be able to record capital losses due to mark to market volatility in accounting and tax treatments. Fitch believes the problem will be muted by the accrual accounting rules applied to short-term assets as is the case with continental style VNAV funds, and which prevents the value of the short-term assets changing significantly unless there are credit events.

The third area is in the risk profile of the fund; 31% of respondents thought that an advantage of the CNAV style of funds was that it forced the fund manager to be prudent. Additionally 36% of respondents thought VNAV rules could be used to hide capital losses and 25% thought VNAV funds were less clear and generally more risky. This makes clear the need for a sound transition and the upholding of consistent risk profiles and self-imposed guidelines.


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