The US money market reforms came into effect in 2016 and are already dramatically shaping US fund industry with investors flooding out of prime funds and into government securities. Europe is hot on the US’ heels (about a year later) with European money market fund reforms becoming legally effective in July 2017.
This was the start of an 18-month transition period for existing funds to comply. Full compliance with the regulation will be required by January 21 2019.
The European reforms preserve Constant Net Asset Value (CNAV) for government funds, and introduce a new type of fund, the Low-Volatility NAV (LVNAV) fund. LVNAV is intended to replicate some of the utility of CNAV funds, with greater sensitivity to market pricing, and extra controls built into the fund structure.
What has Europe learnt from the experience of the US and how do the rules differ? And what should treasurers be doing about it? GTNews sat down with Gunjan Chauhan, head of cash at State Street Global Advisors, EMEA, to ask her what the reforms mean for today’s treasurer in Europe.
GTNews: Are you in support of the European MMF reforms?
Chauhan: My view is that the MMF regulation is a good bit of reform. Sometimes regulation comes into play and you sit there wondering how it’s really helping, whereas, what this piece of regulation is doing is building more visibility and transparency in the market. The regulation has taken out the ambiguity and given it more visibility, instead of it having been buried on page 37 of the ‘Undertakings for Collective Investment in Transferable Securities’ (UCITS) regulations, which some clients may not even read.
The reforms bring these topics to the forefront, making it far more visible to clients for all funds to be under the same parameters. Under low volatility NAV (LVNAV) for instance, if any single fund provider broke their 20-basis point collar on the NAV (net asset value) valuation of the fund, they will be subjected to potential switching off the fund from constant NAV (CNAV) to a variable NAV (VNAV), upon which point the fund board might decide to begin to put into place liquidity fees and redemption gates.
Under the reforms, that is far more visible to every investor that is going into these products. That is an example of the improvement in the transparency and the clarity.
How aware of the money market reforms are treasurers?
When we polled treasurers on this in Q2 2017, 90% of corporate treasurers told us they were aware of the reforms but over 70% of them were unaware of any of the details. Many treasurers seemed to know the reform was coming, but when we looked in more detail they were unsure of the specific decisions that they would be required to make.
“Many treasurers seemed to know the reform was coming, but when we looked in more detail they were unsure of the specific decisions that they would be required to make.”
Treasurers need enough support and information, otherwise there is a danger of getting to Q4 of 2018 and making panic decisions. SSGA and other asset managers have been taking on this responsibility over the last 12 months, to help ensure that clients understand how these regulations will impact them.
What advice would you give to treasurers?
The advice that I would give to the corporate treasurers as they are navigating their way through this is that you can’t remain in the vehicle that you’ve already invested in because, under the new reform, that vehicle will not exist. Every vehicle must switch to one of four options that are going to be available. That’s a key difference between what is happening in Europe and what has happened in the US.
Much of the industry is leaning towards switching today’s traditional MMFs that are CNAV into an LVNAV fund which essentially has very similar underlying credit exposures with a shorter maturity profile in some cases and greater liquidity buckets in the front end of the curve and more restrictive parameters in terms of asset price variation moves. Today there is a 50-basis point collar. The reform will mean that there is only a 20-basis point collar, so the tolerance of the volatility of the underlying market to market moves of the securities is going to be significantly narrower. This gives an investor a greater degree of protection.
“When beginning to make decisions around which funds to invest into, treasurers should pay close attention to the operational framework of the funds and how they will operate.”
Furthermore when beginning to make decisions around which funds to invest into, treasurers should pay close attention to the operational framework of the funds and how they will operate. We believe clients will be looking for simplicity, and clarity in a post-reform world, therefore operational details will factor into this as result.
What advantages do the European reforms have over what has happened in the US?
I think rather than advantages and disadvantages, they are just different.
In the US reforms, US prime fund providers were moved towards offering a VNAV rather than a CNAV shown to 4 decimal places. That meant that a dollar in the fund today, didn’t always mean a dollar tomorrow. It might have meant $1.0001. There was that potential room for a price change on the NAV. Plenty of clients were concerned by that and didn’t even want to jeopardize any exposure to any kind of variation to their dollar price that they are used to seeing.
There was a huge outflow from prime funds into government securities because, in the US, government strategies were the only ones that remain what they would call a CNAV. The whole market shifted out of short duration credit.
“Every client is going to have to make an informed decision to move money somewhere”
Every client is going to have to make an informed decision to move money somewhere. There’s a little bit more work for clients to do in Europe than the US, which is why it is important for them to be as informed as possible on their options.
In Europe, if you want to be in a CNAV there will also be a government option. The key distinction between the European government and the US government option is that they will be subject to liquidity fees and redemption gates in Europe, whereas these products were not subject to liquidity fees and redemption gates in the US.
Some will argue that is pretty reasonable and it treats all funds fairly. Again, it is to bring things such as UCITS guidelines to the forefront so that every client can go into these products completely informed with those investment decisions.
Europe will have an LVNAV which will be the closest thing available in Europe to what the US has in their prime strategies – their traditional strategies. The underlying credit profile is similar, but the key difference is that we are holding more liquidity in Europe, meaning we’re holding more assets in a shorter maturity bucket. It is truly more liquid.
The second component that is fundamentally different in Europe, is that product starts as a CNAV product. If it breaches certain criteria then that product will convert from CNAV vehicle to the fund provider having to use a VNAV valuation model. They don’t have anything like that in the US.
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