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Regulatory Watch

Ennui Ahead of European MMF Reform

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September 27, 2017

European MMF reform isn’t generating too much concern at the moment, according to State Street Global Advisors.

EU FlagWhile the run up to US money market reform generated lots of press and a lot of frenzy ahead of the changes, similar European reforms aren’t generating any pre-rules angst. That’s the conclusion of a survey conducted by State Street Global Advisors.

“[R]esponses suggest that many are not yet feeling the deadline pressure,” SSGA says in its report. “Of the survey participants, 79% indicated that they either have not considered the reform in any great detail or that they see no urgency in doing so.”

This sentiment was notable at a recent NeuGroup Treasury Investment Managers’ Meeting where many members attending revealed they were still putting cash into European prime MMFs, despite the looming reform. Still, at least one member is planning on exiting the European MMFs ahead of reform and going toward separately managed accounts.

For SSGA, it suggests that investors, although claiming to be familiar with the reform details, aren’t really familiar with the minutia, which could prove problematic. “For instance, investors expressed a strong preference for the Low Volatility NAV (LVNAV) fund class, despite the fact that this category carries the attributes with which they most frequently express ‘concern’ – that is, liquidity-based gates and fees.”

At the same time, survey respondents were less enthused about European variable NAV products, even though these VNAV funds don’t have the burden of mandatory gates and fees.

The lackadaisical attitude could be a result of the US rules implementation, which was ultimately a blasé affair. And most investors realize that even VNAV MMFs don’t stray very far from their old dollar peg. Further, companies are getting back to their bucketing ways. That is, getting more specific about the liquidity bucket, the preservation bucket and the return bucket. The other issue is that there it’s still all nearly a year or more (for some funds) away.

After the reform, SSGA makes the following recommendations:

Operating cash. SSGA believes LVNAV funds “offer potential advantages that make them an appealing option for cash investors. The segment is expected to most closely resemble pre-reform constant NAV prime funds, trading with a stable NAV calculated to two decimal places under normal market conditions.”

Core and strategic cash. “For core and strategic cash with an investment horizon of greater than 6 months, we think investors should consider Standard VNAV funds. This segment offers a highly conservative option and is regulated by the European Securities and Markets Authority (ESMA).”

The European Union’s MMF reform goes into effect July 21, 2018 for new funds, and January 21, 2019 for existing funds.

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