US treasury consulting firm Treasury Strategies has made public a letter that it recently submitted to members of the European Parliament (EP) regarding its proposed legislation affecting European domiciled money market mutual funds (MMFs).
“Since the debate has now moved from the regulators and into Parliament, we considered it important to share with the members of parliament [MPs] our work pertinent to the issues,” the firm comments.
In the letter, dated 30 January 2014, Treasury Strategies partners Tony Carfang and Cathy Gregg write: “As you know, MMFs are an important tool for corporations and institutions to effectively manage their daily cash flows. They also provide critical short-term credit to borrowers in the financial markets.”
The letter is accompanied by copy of the firm’s publication ‘European Money Market Mutual Fund Survey on Regulation – February 2013’. Carfang and Gregg write: “Our survey findings raise a serious concern that we bring to your attention:
“If proposed regulations restricting the operation of constant net asset value MMFs (CNAV) are enacted, corporate treasurers will greatly reduce their investments in these funds and transfer their cash into already swollen deposits at commercial banks. This will lead to increased concentration and risk in the banking sector while also depriving investors of an important liquidity management tool.”
The letter continues: “The MMF industry in Europe is a significant one, and includes both CNAV funds and variable net asset value (VNAV) funds that fluctuate in value each day. Together these account for 25% of total corporate cash investments in Europe.”
It highlights the survey finding that 61% of corporate treasurers invest company cash in CNAV funds only, while 30% use a combination of VNAV and CNAV funds. However, the EP’s proposed regulations “will diminish the viability of the CNAV Funds.”
Among the survey’s other findings that are highlighted to MPs:
- If CNAV funds were impaired by the proposed regulations, 69% of investors who invest only in CNAV funds would reduce or discontinue using MMFs. These investors represent 91% of the portfolio value reported in the survey.
- Seventy-two per cent of CNAV investors would substitute European bank deposits as an alternative to some of their investment in MMFs.
- Thirty-nine per cent of CNAV investors would substitute bank deposits in other jurisdictions as an alternative to some of their investment in MMFs.
Carfang and Gregg conclude that “the survey results further support the conclusions that MMFs have become a significant cash management tool for European institutions, that CNAV MMFs represent a large portion of MMF holdings by European institutions, and that changing European MMF regulations to require VNAV would significantly reduce investment in European MMFs.”
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