The Money Market Funds (MMFs) Regulation has now been agreed by both the European Parliament and the Council, but a number of questions remain as to how some of the rules will operate in practice or what the impact on the sector and MMF investors will be.
The MMF Regulation covers both UCITS and non-UCITS MMFs, and both CNAV and variable NAV (VNAV) types. From the outset, there was division within the industry about the relative merits of CNAVs versus VNAVs and about many of the proposed requirements. That division was reflected in the early debates in ECON, in which allegiance to party political groupings came second place to national interests.
Importantly, the corporate investor voice was heard more clearly only in the latter stages of the debate. In contrast to the US MMF market, and although most EU MMFs are UCITS, they are largely not marketed to individual investors. However, the EU MMF investor base does include non-profit organisations and municipalities (which are classified as “retail” investors), as well as large corporates and banks.
The Regulation includes provisions on eligible assets, diversification requirements, prescribed liquidity ladders, disclosures to investors, a documented internal assessment procedure, valuation, accounting methodology and stress testing.
During political negotiations, the 3% capital buffer for CNAVs was first replaced with a rather complex set of provisions, which defined three types of permissible CNAVs, all of which are subject to additional provisions on liquidity fees and redemption gates: Public Debt CNAVs, Retail-only CNAVs and Low Volatility NAVs (LVNAVs). After further debate, the retail-only option was removed.
Regulators and fund managers will now have to get to grips with how the provisions will operate in practice - for example, the exemption from the 10% diversification limit on deposits, the know-your-customer requirements and the periodic reviews of the internal credit assessment process.
More critical for investors may be the impact of the prescriptive liquidity ladders on the performance and durability of existing investments and on future product offerings. And there is a concern that smaller players will be forced out of the market, resulting in a more concentrated sector. Only time will tell.