Money Fund Talk in London: Three Key Issues

In the US, many fund companies are building out business cases on the feasibility of developing new funds or share classes in response to the new retail MMF definition and operational changes from the regulations. Much discussion at the symposium was about identifying concerns about liquidity and supply, support of the repo market, the Federal Reserve’s Reverse Repo offering, negative deposit rates in Europe, and responding to clients’ inquiries on the various regulation impacts.

In Europe, the focus is on the capital buffer proposal by the European Union (EU). The overall sentiment was that it wouldn’t pass since the US Securities and Exchange Commission (SEC) didn’t use the mechanism in its final regulations issued in July. Also discussed were the international financial reporting standards (IFRS) accounting treatments for MMFs in Europe.

A presenter from PwC expects money funds in Europe to maintain the cash/cash equivalent classification under IFRS. The Financial Accounting Standards Board (FASB) has yet to rule on regulatory reform in the US and more information is to follow. There could potentially be differences in accounting treatment if they aren’t aligned with generally accepted accounting principles (GAAP) and IFRS.

China’s largest MMF, Yu’e Bao, has over US$90bn of assets and continues to grow, as it is operated by Alipay.com, the payment service for Alibaba. The development of the Chinese economy and the appetite for liquid investments in the fast growing area will be something to watch going forward.

Unanswered Question

Each of the three major rating agencies provided their insights into the regulatory marketplace. What was missing from each of their presentations – and also from those of the fund companies – was the potential impact of the SEC’s proposal to remove the reliance on credit ratings in assessing the credit worthiness of underlying securities in a fund. Under the proposal, the fund board would have the discretion to determine the creditworthiness of each security.

When asked about the potential impact this proposed regulation might have on funds, the global head of fund ratings for one of the three major rating agencies told gtnews that he does not expect much to change from the investor standpoint. Rather, fund companies’ credit research departments will need to document their process and the board will ultimately have more responsibility to maintain their credit research process. It remains to be seen how the rating agencies will respond to the change, which is most likely to pass since it is in compliance with the US Dodd-Frank Act.

Key points taken away from the symposium:

  • Watch for FASB’s ruling on floating net asset value (FNAV) MMFs – will there be a mismatch to IFRS?
  • CME Clearing Collateral – it has yet to be determined if FNAV funds will be allowable per the interest earning facility 2 (IEF2) programme.
  • Continue to monitor China’s largest money fund, Yu’e Bao. Alibaba is China’s largest e-commerce business along, with being one of the largest initial public offerings (IPOs) issued. The fund is heavily weighted in Chinese bank deposits and is experiencing enormous growth from its inception in June 2013.

October 2016 is still some way off, but with many developments happening currently, there’s much on the horizon in terms of development ahead for money market funds both domestically and globally.

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