Europe gets the measure of money market funds

After years of fierce debate, the US agreed new rules in April for the future regulation of money market funds (MMFs). The new rules, which include increased disclosure, are scheduled for implementation from October.

How are similar efforts in Europe progressing, particularly following the UK’s recent decision to exit the European Union (EU)? Jane Lowe, secretary general of the Institutional Money Market Funds Association (IMMFA) provided an overview at GTNews’s recent Treasury Innovation Forum (TIF) held in London.

As the industry’s trade association, IMMFA members offer constant net asset value money market funds (CNAV MMFs) providing same-day liquidity, with the funds regulated under the EU’s single market legislation. The three main – and separate – elements are the fund itself, into which investors subscribe; the management company that looks after the fund day-to-day; and the investment manager.

Lowe said that subject to any post-Brexit deals struck by the UK, all non-European Economic Area (EEA) funds and services will be what is known as “third country”. While nearly all IMMFA member funds are located in Ireland and Luxembourg and will remain within the EU, many of these funds have their assets managed by firms based in the UK, which are now likely to become third country managers once the country’s exit strategy is completed.

Europe’s MMFs have been under EU regulation – the Undertakings for Collective Investment in Transferable Securities (UCITS) – since 1983, which outlines the requirements for fund structure, governance and investment controls. The IMMFA drew up its own code of conduct in 2003, while the European Securities and Markets Authority (ESMA), the body comprising all EU securities regulators, issued its own MMF guidelines in 2010.

For the past four years, Brussels has been directly negotiating the Money Market Fund Regulation (MMFR), which will apply to all EU member states and extend to all MMFs either domiciled or promoted in the region. Ultimately it will be part of the EU’s capital markets union (CMU) action plan launched last September and Lowe stressed that the process would not be slowed or halted because of Brexit.

The European Commission proposed a European framework for MMFs in September 2013, when it said that its remit was to “introduce new rules that will make MMFs more resilient to future financial crisis and at the same time secure their financing role for the economy”. Lowe said that the first quarter of 2017 could see a final agreed text produced and translated into various languages ahead of implementation sometime in 2019.

The Council of the European Union recently set out some of the key features that have so far been agreed for reform. Lowe described the proposed future product structure for MMFs as “quite tough and with a lot of controls”, but one that was nonetheless workable and with which the industry was “reasonably happy”. The three basic types will be government-only constant net asset value (CNAV); low volatility net asset value (LVNAV); and variable net asset value (VNAV).

However further work remains to be done in areas such as the liquidity requirements and Lowe said the process is likely to be concluded before mid-2017, following which “there will be certainty around this product.

In the meantime CNAV MMFs had demonstrated their ability to weather the global financial crisis and its aftermath well and assets under management had continued to grow. More recently, the industry had also dealt successfully with negative yields; however Brexit poses a challenge and the final shape of MMFR has become less certain.

The aims of IFRS 9

Also on the treasury agenda and among the sessions at TIF was a status report on preparations for International Financial Reporting Standard (IFRS) 9, the International Accounting Standards Board’s (IASB) replacement for IAS 39.

As presenter Jacqui Drew, directions, solutions consulting at software-as-a-service (SaaS) provider Reval noted, work on the new standard began in the wake of the 2008 global financial crisis although it wasn’t until July 2014 that the IASB issued the final version of IFRS 9.

Early adoption of IFRS 9 in the European Union (EU) rests on when the EU issues its endorsement, which had initially was anticipated in the first half of 2016. However, in February the European Financial Reporting Advisory Group (EFRAG) indicated that it would come later and Drew said that it is now expected in the fourth quarter.

The objective of IFRS 9 is to better represent an entity’s risk management activities in its financial statements and achieve the following benefits:
• Reduced complexity in accounting for risk management activities.
• More hedging activities should qualify for hedge accounting than was allowed for under IAS 39.
• Aligning accounting to economic risk management should make it easier for users to understand the entity’s risk management activities.

“The adoption date for IFRS 9 is January 1 2018, but it’s time to start planning and to review your risk management activities now,” Drew told her audience. While it builds on many of the concepts that were part of IAS 39, the new standard should be particularly welcome to any company that hedges a commodity, by reducing volatility and providing better hedge accounting results.

Co-presenter Sangdeep Bakhshi, senior manager at accounting group EY, added that IFRS 9 is also better considered than the “poorly-written” IAS 39, which required regular short-term fixes.

“We’re already starting to see treasury departments move into this new world and using IFRS 9 to reduce risk,” said Drew. “It’s an opportunity for companies to examine their risk management policy and strategy.”

Companies in the airline and mining sectors are among those that have opted to switch over to the new standard ahead of the January 2018 adoption date. Accounting for the cost of hedging is part of IFRS 9 and some were even able to it to hedge against Brexit. However, those companies that have not been early adopters should now be making their preparations for parallel testing during 2017.

Challenges experienced by the early adopters include getting treasury teams communicating regularly with their colleagues in accounting and risk management; ensuring that treasury management systems (TMSs) are supportive of IFRS 9; addressing the lack of clarity that still surrounds certain elements of the new standard when accounting; and the interplay with other standards such as revenue recognition and leasing.

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