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Capital Markets

MMF Regulation 2.0 About to Hit

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July 25, 2017

Europe approves money market fund reform that hew close to US rules. 

EU FlagJust when money market fund investors were getting comfy with US changes to the industry, they face another round of reform. The Council of the European Union, one of the EU's main decision-making bodies recently approved money market fund reforms that impose stricter liquidity requirements and limit redemptions on funds. The notification time frame mirrors the time US investors had to prepare for similar Money Market Fund Reform, eighteen months. The new regulations are set to take effect at the end of 2018, the same timeframe US investors had to prepare

After the global credit crisis, the industry came out with definitions for how money market funds needed to look. A framework was then built in Europe for what these funds should look like. Deutsche Bank Asset Management outlined the reasons behind the reform at the most recent NeuGroup Treasury Investment Managers' meeting (TIMPG).

We have heard this story before. The reasons for EU money market fund reform are thus:

  • Redemption pressure in stressed market conditions (run on the fund)
  • Lack of investor disclosure warnings
  • Lack of information available
  • Risk to Money Market Fund sponsors

Although both the US and European markets will experience similar regulation changes, the Euro market dislocation should have less of a market impact than the SEC regulation changes to the US market. That's because the European regulation changes are not as extreme, the European market is familiar with pieces of the new regulation, and the implementation phase is being managed like the US transition.

Been there done that

Fees and gates are not new to European fund investors. The current fund structure gives European money market funds the power to suspend redemptions in case of very large outflows and investors have already decided to accept the possibility of gates. It seems the changes in European funds are less dramatic to the European investor as investors that use money market funds already understand that gating was always possible and will continue into new regime. 

The Deutsche Bank team does not expect the same big swing from prime funds to government that occurred in US funds. The Deutsche Bank team does not expect the same big swing from prime funds to government that occurred in US funds. The US rules triggered over one trillion in assets to move from prime to government funds, which are not subject to fees, gates, and floating NAV rules. This mass exodus not only closed or reduced the size of prime funds but resulted in a dislocation of yields in the short-term fixed income market.

One significant difference between US and new European reg changes is the European regs force investors to choose either a floating NAV or a fund with specific redemption criteria (redemption gates and liquidity fees). In the US, prime funds are now subject to both a floating NAV and redemption criteria. 

Smoother transition than expected

Market uncertainty always results in a bit of market disruption but the extended time frame for US implementation resulted in an unexpectedly smooth transition. Given the time-frame for the European MMF reform, there is little reason to think it won't be any different. Although TIMPG members just went through the 18-month countdown in the US, a new countdown has begun. The reasons for reform are similar, and the result will provide more transparency in the market. There will be an impact to the cash market albeit not as large as in the US, time to start preparing again.

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