European money market fund (MMF) reforms due to be introduced shortly are likely to imposed additional costs and may accelerate consolidation as fund managers seek to quickly build scale in new fund types, warns Fitch Ratings.
The credit ratings agency (CRA) has responded to the impending changes outlined in the European Union’s (EU) Official Journal on 30 June. These are now in their final stage, having been first proposed back in September 2013.
Fitch notes that MMF providers are faced with the costs and challenges of developing new products – or amending existing ones – to comply with the reforms, while corporate treasurers and other short-term investors are determining which best meet their needs.
Managers currently offering constant net asset value (CNAV) funds are largely focused on the new low volatility net asset value (LVNAV) fund type, but investor appetite for this new product is by definition untested.
“Providers unable to absorb the added costs of new products and investor education, or unable to differentiate themselves could look to exit the business, leading to more consolidation,” comments Fitch. “The industry has already been consolidating for some years, with more recent consolidation in the US in relation to US money fund reform.
The CRA adds that the timing of product launches and conversions may become an important competitive dynamic, as will effective investor outreach and education. Achieving efficient and early regulatory approval may provide an advantage, as funds are concentrated in just a handful of jurisdictions, creating the risk of approval delays and backlogs.
However, any advantage will depend on whether investors understand the new products and are willing to make the switch early, or will want to wait. “If the US experience with MMF reform is a guide, investors may wait as long as possible before exercising their option to move monies,” adds Fitch.
The reforms will become effective in 20 days. This will trigger an implementation period, with new funds required to comply with the reforms by 21 July 2018 and existing funds by 21 January 2019.
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