By Barb Shegog
Europe approves money market fund reforms that hew close to US rules.Â
Just when money market fund investors were getting comfy with US changes to the industry, they faced 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; this is about the same length of time 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’ peer group meeting (TIMPG).
We have heard this story before; and the reasons for EU money market fund reform are mainly 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 the new regime.
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.
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 the transition will not be as smooth, especially since the changes are less dramatic.