Preparing Scottish Local Authorities for Money Market Fund reform
CIPFA Treasury and Capital Management Panel conference24 November 2017
Jane Lowe, Secretary General Institutional Money Market Funds Association
1
Agenda
MMFs – background information
MMF reform in Europe
Practical actions
Concluding points
Money market funds- background information
3
Money Market Funds – the basics
MMFs offer an alternative to depositing cash at bank
Legal structure is an authorised investment fund
In practice MMF are used in similar ways to bank accounts
Money funds have the principle objective of preserving capital and
maintaining liquidity – hence “liquidity funds”
Another objective is to produce yield
4
More about Money Market Funds
In UK and Europe, there are 2 main types of money fund: constantly
priced (CNAV – Short Term MMF) and variably priced (VNAV)
IMMFA funds are CNAV funds
In summary CNAV funds aim to give back £1.00 for every £1.00
invested, with yield in addition
The funds hold high quality very short term assets, mostly to maturity
Investors obtain access to professional cash management and
diversification (from bank credit risk)
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European MMFs – total assets managed
Source: ECB, IMMFA
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All IMMFA Constant NAV MMFs - assets by currency
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IMMFA Constant NAV sterling MMFs
8
Investor types in IMMFA constant NAV MMFs
Source: IMMFA
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Domicile of Investors in IMMFA constant NAV MMFs
Source: IMMFA
Money market fund reform in Europe
11
European MMF Regulation – a 5 year marathon….
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European MMF reform overview
We are now at the finishing line: 5 years, 28 countries, 2 parliaments, 7
European presidencies, hundreds of amendments…
MMF Regulation published in Official Journal 30 June 2017
The Money Market Fund Regulation (EU) 2017/1131 applies directly in
every Member State. All MMFs “established, managed or marketed” in
the European Union MUST comply
Neutralising perceived “shadow banking” risk a core outcome, so:
Substantial focus on product structure
Substantial focus on liquid asset requirements
Support for connected funds banned e.g. by a parent bank
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European MMF reform overview cont’d…
New European MMF product structure very recognisable compared to
today’s MMF product range
Requirements for the constant NAV funds have changed more than for
the variable NAV funds
Many of the changes reflect or tighten existing guidelines and practices
(e.g. through credit rating, IMMFA Code), and fall on managers to
implement
Secondary legislation is still being made, mostly this also will apply to
managers
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European MMF product range: old to new
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Money fund products in European MMF RegulationNew fund
categoriesPublic Debt CNAV MMF Low Volatility NAV MMF (LVNAV) Variable NAV MMF (VNAV) Standard (VNAV) MMF
Fund type Short Term MMF Short Term MMF Short Term MMF Standard MMF
Eligible
investments
99.5% of portfolio to be invested in
public debt securities, reverse repo
secured with government securities, and
cash
Currency unrestricted
Money market instruments, securitisations
and ABCP, deposits, derivatives, repo,
reverse repo, other MMF
Money market instruments,
securitisations and ABCP, deposits,
derivatives, repo, reverse repo, MMF
Money market instruments,
securitisations and ABCP, deposits,
derivatives, repo, reverse repo, MMF
WAM / WAL 60 days / 120 days 60 days / 120 days 60 days / 120 days 180 days / 365 days
Minimum
liquidity
30% weekly, includes 10% daily 30% weekly, includes 10% daily 15% weekly, includes 7.5% daily 15% weekly, includes 7.5% daily
Mandatory
fees and gates
Apply when weekly liquidity falls below
10%
Apply when weekly liquidity falls below 10% No No
Discretionary
fees and gates
Existing UCITS provisions on fund
suspensions apply
MMFR extra provisions apply on
convergence of 2 events:
weekly liquidity drops below 30% and
daily net redemptions exceed 10%
Existing UCITS provisions on fund suspensions
apply
MMFR extra provisions apply on convergence
of 2 events:
weekly liquidity drops below 30% and daily
net redemptions exceed 10%
Existing UCITS provisions on fund
suspensions apply
Existing UCITS provisions on fund
suspensions apply
Liquid asset
restrictions
Minimum 12.5% cash, reverse repo,
deposits
Maximum 17.5% govt. securities to 190
days
Other MMF not permitted
Minimum 12.5% cash, reverse repo, deposits
Maximum 17.5% govt. securities to 190 days
Other MMF not permitted
Minimum 7.5% cash, reverse repo,
deposits
Maximum 7.5% other MMF
Minimum 7.5% cash, reverse repo,
deposits
Maximum 7.5% other MMF
Valuation
method
Amortised cost accounting for all
securities
Amortised cost accounting for securities up
to 75 days. Securities over 75 days at
market/model.
Securities more than 10bp away from market
to be valued at market or model.
At market or model At market or model
NAV -
rounding
Fund collar – 50bp rounding (either side) Fund collar – 20bp rounding (either side) N/A N/A
Fund valuation To 2 decimal places - €/£/$1.00 To 2 decimal places - €/£/$1.00 To 4 decimal places - €/£/$1.0000 To 4 decimal places - €/£/$1.0000
Shadow NAV
calculation
Required: daily “shadow” NAV to be
calculated on a per asset M2M basis.
Required: daily “shadow” NAV to be
calculated on a per asset M2M basis.
N/A N/A
Review clause Regulation reviewed 5 years post
implementation
Review to assess use of alternative
product structure and feasibility of
establishing 80% EU public debt quota
Regulation reviewed 5 years post
implementation
Review to assess regime for LVNAV product
Regulation reviewed 5 years post
implementation
Regulation reviewed 5 years post
implementation
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Comparing old and new: LVNAV MMF
NOW - CNAV MMF (Prime) FUTURE - LOW VOLATILITY NAV MMF (“LVNAV”)
Fund type Short Term MMF (ESMA guidelines) Short Term MMF [Art.3]
Eligible
investments
High quality short term money market instruments
(principally bank debt)
IMMFA Code requires credit quality assessment
Money market instruments, securitisations and
ABCP, deposits, derivatives, repo and reverse repo
Subject to credit quality assessment [Arts.9-16]
WAM and WAL 60 days / 120 days
397 days maximum residual maturity
60 days / 120 days [Art.24(1)]
397 days maximum residual maturity
Minimum
liquidity
Specified by rating agencies 10% daily / 30% weekly [Art.24(1)(c) and (e)
Liquid assets Minimum 12.5% cash, reverse repo and deposits
Maximum 17.5% government securities to 190 days
[Art.24(1)(g)]
Valuation
method
Amortised cost accounting for all securities Amortised cost accounting for securities up to 75
days. Securities with longer maturity to be marked-
to-market [Art.29(7)
Valuation -
rounding
Fund collar - 50 basis points rounding (either side) Fund collar - 20 basis points rounding (either side)
[Art.33(2)(b)]
Pricing To 2 decimal places - £0.01 To 2 decimal places - £0.01 [Art.32(2)]
Shadow NAV
calculation
Yes - on a regular basis (not less than weekly) Yes - “shadow” NAV to be calculated daily
Any asset that diverges in value from the CNAV by
more than 10 basis points must be valued at mark-to-
market until back within 10bp asset collar [Art.29(7)]
Fees and gates Yes - discretionary Yes - mandatory when weekly liquidity below 10;
otherwise discretionary (as now) [Art.34(1)(b)]
Review clause ESMA guidelines reviewed as needed Product to be reviewed 5 years after implementation
[Art.46]
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Comparing old and new: Public Debt CNAV MMF
NOW - CNAV GOVERNMENT MMF FUTURE - PUBLIC DEBT CNAV MF
Fund type Short Term MMF (ESMA guidelines) Short Term MMF
Eligible
investments
Portfolio must invest in highest quality short term
money market instruments or deposits (cash)
99.5% of portfolio must invest in money market
instruments issued or guaranteed by governments
and specified institutions, reverse repo and cash
WAM and WAL 60 days / 120 days
397 days maximum residual maturity
60 days / 120 days
397 days maximum residual maturity
Minimum
liquidity
Specified by rating agencies 10% daily / 30% weekly
Liquid assets Minimum 12.5% cash, reverse repo and deposits
Maximum 17.5% government securities to 190 days
Valuation
method
Amortised cost accounting for all securities Amortised cost accounting for all securities
Valuation -
rounding
Fund collar - 50 basis points rounding (either side) Fund collar - 50 basis points rounding (either side)
Pricing To 2 decimal places - £0.01 To 2 decimal places - £0.01
Shadow NAV
calculation
Yes - on a regular basis (not less than weekly) Yes - “shadow” NAV to be calculated daily
Fees and gates Yes - discretionary Yes - mandatory when weekly liquidity falls below
10%; otherwise discretionary (as now)
Review clause ESMA guidelines reviewed as needed Product to be reviewed 5 years after implementation
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European Regulation - the timeline
September 2013
European Commission proposes draft legislation for MMF reform in Europe
April 2015
European Parliament agree position on MMFR
30 June 2017
MMF Regulation (EU) 2017/1131 published in Official Journal: in force 20 July 2017
2022
5 year review of Regulation due
June 2016
EU Member States agree position on MMFR
21 January 2019
Existing funds must comply, including obtaining additional (“top up”) MMF authorisation
21 July 2018
Funds launched after July 2017 must comply and have MMF authorisation
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BREXIT and MMFs
Subject to the Government’s on-going negotiations… these factors are relevant:
1. Where the fund is established
2. Where the investment manager is located
3. Where the investors are based
IMMFA funds mostly established in Ireland and Luxembourg, with local
infrastructure – these will remain in the EU
Most IMMFA funds have their assets managed by firms in the UK - post-BREXIT,
managers will have “third country” status (like US, Hong Kong) unless other
arrangement agreed
There is provision for “third countries” in existing legislation; under review by ESMA
(European securities regulators in Paris)
Promoting an EU fund to UK clients may be subject to new rules post-BREXIT
Impact falls mostly on the manager
Practical actions and concluding points
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Practical actions…
INVESTORS – PRACTICAL ACTIONS1. Prep the relevant Committee/Council Members so that they know that
amendments to investment mandates will be coming.
Discuss cash/cash equivalent status with finance dept., auditors.
2. Collect published material on new products, LVNAV in particular, plus
new key facts documents from fund managers, IMMFA pamphlet on
reform.
3. Ask your fund managers about their plans, e.g.
a. How will they manage LVNAV against tighter limits, 20bp fund collar
in particular?
b. What is their transition timetable?
4. Timetable: be aware that 18 month transitional period for current funds
will disappear quickly. Some regulatory uncertainties may persist until
quite late in the process. Consider making outline change to mandates
soon.
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Concluding points
European MMF reform is here
Additional comfort from statutory regulation replacing varied set of
standards in place now
LVNAV the lead MMF solution to replace CNAV
VNAV also an option
Understanding the product range is key to assessing choices offered
Prospectus changes likely for all MMF
Cash equivalence will have to be revisited: with tighter legislative
requirements, should not be a problem
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Institutional Money Market Funds Association
Camomile Court, 23 Camomile Street, London EC3A 7LL
+44(0)20 7269 4657
Visit our website at: www.immfa.org
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