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Opportunities from the new regulations in European money market fund reform

The new European money market reforms have been approved and apply from June 2018 when new types of money market funds will be available. All investment and cash management banks are publishing loads about the options and their favourites. 

Jane Lowe, Secretary General at the International Money Market Fund Association has been publishing many Insight Papers to help corporate treasurers understand what is happening, their briefing note circulated at the ACT’s Annual Conference on 16/17 May was particularly useful.

New product regulation

IMMFA explain that, “Under the new regulation, all existing in money market funds will face some change. However MMF defined in the new regulation nonetheless display a high degree of continuity with existing products, as illustrated in the chart below. The changes are greater for some funds, in particular those in which units/shares currently trade at a Constant Net Asset value (CNAV).”

Source & Copyright©2017 - IMMFA 

Timeline

The chart below shows the key dates, with the most important involving the deadline of 18 months for existing EU MMFs to be compliant with the new provisions:

Source & Copyright©2017 - IMMFA 

New money market fund categories

IMMFA have developed a table which lays out the new categories of MMF that may be set up and the key requirements applying to them under the new regulations:

Source & Copyright©2017 - IMMFA 

Risk and diversification constraints

All MMF players are focusing on the constraints across the new regulations and comparing them with their own internal investment guidelines and other analyst’s methods. In his important presentation at the ACT Conference, Jonathan Curry, Global CIO Liquidity and CIO USA, HSBC used two charts to show what is going on:

Key risk constraint comparisons - across the new regulation, our internal investment guidelines and Standard and Poor’s MMF method

Source & Copyright©2017 - HSBC 

Key diversification constraints - across the new regulation, our internal investment guidelines and Standard and Poor’s MMF method
Source & Copyright©2017 - HSBC 

Key take aways

HSBC’s key take aways on the new European MMF legislation are:

  • We believe LVNAV funds are a credible alternative to Prime CNAV funds
  • HSBC Liquidity Internal Investment Guidelines are roughly equivalent to this new regulation
    • In terms of risk profile and ability to manage assets, not much will change in HSBC AMG Liquidity funds
    • Relative returns to other short term cash investments such as deposits should be consistent with past experience
  • European MMF regulation is different in a number of key areas compared to the US MMF regulation. We do not expect the structural shift from Prime to Government MMFs as seen in the US.
  • This regulation is likely to further concentrate the MMF industry into a small number of players
    • The regulation is complex,
    • requires a lot of resources (credit analysts, risk monitoring, client analysis, etc…)
    • and put new responsibilities in terms of Governance on the Board of Directors (= FMC for FCPs)
  • We believe this new regulation will create a more level paying field in the industry
    • More focus and onus are put on local regulators
    • The devil is in the details though, particularly as far as the mark to market pricing determination is concerned.

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