Europe’s Revised Money Market Fund Proposals ‘Still Revolutionary’

Money market fund (MMF) reforms proposed by the rapporteur for a European Parliamentary (EP) committee would provide some leeway for funds to continue operating under a stable valuation model, but would still lead to a significant shake-up of the sector in Europe, says Fitch Ratings.

The credit ratings agency (CRA) comments that proposed European rules would probably drive some outflows as corporate treasurers accustomed to constant net asset value (CNAV) funds looked for alternative places to park their cash. However, Fitch believes the impact may not be as dramatic as some participants initially feared, as its poll shows many investors won’t change their strategy and because alternatives are limited.

Some investors, particularly those that are unwilling to accept the small fluctuations in value of variable net asset value (VNAV) funds, will look for alternatives. However a poll of attendees at a recent

 
Fitch conference on cash management
suggested that investors may be getting more comfortable with the idea of VNAV.

In the poll, 57% of respondents said their allocation to MMFs would stay the same and 43% said it would fall if the market moved to a CNAV model. At the same conference a year earlier, 75% of participants said they would cut MMF holdings if VNAV were introduced.

The proposed regulation, which is due to be debated by the parliament’s committee on economic and monetary affairs (ECON), is an amended version of the European Commission’s (EC) original text. The main changes include allowing some MMFs that invest mainly in EU public debt or which are only available to retail investors, public authorities and non-profit organisations to continue to operate as constant net asset value funds without the need for a 3% capital buffer. The European Council is also reviewing the Commission’s original text and will propose its own amendments.

Retail investors are a small part of the European CNAV investor base and government debt funds account for no more than 12%, but the proposed exemption closely mirrors US reform, as does the ability of funds to apply liquidity fees and redemption restrictions in times of market stress.

Similar regimes in the US and Europe could make it easier for large multinational corporations (MNCs) to manage liquidity centrally. But the reforms would still require major operational changes from investors that currently rely on CNAV funds, as most funds would have to switch to a VNAV model. The accounting treatment of these holdings is unclear, adds Fitch.

The potential for corporate treasures to make the switch is supported by VNAV funds being already common in a few European markets, particularly France and the Benelux countries. Investors will continue to have access to CNAV public-sector focused MMFs and bank deposits, although there may be capacity constraints with public sector MMFs and bank wholesale deposits are less attractive under the Basel III capital adequacy regime.

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