Money fund regulations continue to dominate the headlines in Europe as regulators and lawmakers prepare to act on a reform proposal introduced last September by the EU Commission. In recent weeks, there's been some momentum against the 3% capital buffer proposal as we wrote about in our Oct. 2 "News" piece, "European Regulators Shift Reform Focus Away from Buffer". Yesterday, Reuters in "EU looks to U.S. for solution to stalemate in reform of money market funds" reported that EU officials are looking to U.S. reforms to help them develop new rules for the $1.3 trillion European money market industry, but they haven't ruled out a buffer just yet.
While there are some similarities between the new US and the European proposal, there are some key differences. Asset management law firm Dechert took an in depth look at the proposed European regulations in a piece in the most recent issue of Dechert OnPoint called "Money Market Funds - Focus Shifts to Europe." "The prospects for sensible MMF reforms in Europe may be brighter as a result of the U.S. MMF reforms and recent changes to the European political landscape," wrote authors Jack Murphy, Declan O'Sullivan, and Stephen Cohen. (Note: Murphy will be speaking on regulations at Crane's Money Fund University, which will take place Jan. 22-23, 2015 in Stamford, Conn.)
Dechert writes, "While U.S. MMF managers and boards continue to digest the fine print of the SEC release, attention now turns to Europe. As the MMF industry is a global industry, the finalization of the U.S. MMF reforms will, undoubtedly, be expected to have a significant influence on the final regulatory outcome in Europe. However, the following comments of SEC Commissioner Daniel Gallagher on the impact of the reforms are worth noting: 'Given the level of chatter about this rulemaking in the EU, IOSCO, and the FSB, there will be international reactions to today's rule amendments. It will be up to local authorities to determine whether reforms are needed in their markets, and I caution policymakers abroad to recognize that our reforms reflect the unique features of the U.S. money fund marketplace. In this era of increasingly brazen attempts at reckless, unprecedented "one world" financial regulation, it is crucial to acknowledge that one size does not fit all for money fund reform.'"
The piece adds, "While the U.S. reforms provide for the continuation of a stable, or -- as referred to in Europe -- a constant NAV ("CNAV") for retail MMFs, most European MMFs would not qualify under that definition. In fact, the market for MMFs in Europe is almost entirely institutional. Accordingly, not much comfort can be taken from the preservation of CNAV MMFs for retail MMFs in the U.S."
The article goes on to detail how we got here. "The European Commission published a "Proposal for a Regulation of the European Parliament and of the Council on Money Market Funds" ("Commission Proposal") in September 2013. The Commission Proposal stated that only MMFs that establish and at all times maintain a capital buffer of 3% of NAV may be constituted as CNAV MMFs. If this requirement cannot be met, the MMF would be required to be constituted as a variable NAV MMF. The Commission Proposal was to have been brought to the Economic and Monetary Affairs Committee of the European Parliament ("ECON") in March of this year, but there was not sufficient consensus at the ECON table to bring the matter to a vote of the Parliament as a whole."
Dechert adds, "In the words of Gay Mitchell, an Irish Member of the European Parliament ("MEP") for Dublin, "There has been very little effort to meet the genuine concerns about CNAVs. The majority feel we should leave it to the new Parliament to give it timely consideration. Rushed legislation will be bad legislation." The delay also gave legislators the opportunity to consider the U.S. MMF amendments."
And here's where we are. "With the can having been kicked down the road by the previous Parliament, the baton of European MMF reform has now been taken up by the new Parliament and Commission along with the rotating presidency of the EU Council. While the Commission Proposal is still the only proposal formally on the European table, there are indications that some of the key players within the regulatory firmament of European politics may be more disposed to accept genuine industry concerns. At the European Commission, new Commission President, Jean-Claude Juncker, is a former Luxembourg Prime Minister.... Also, while UK nominee Lord Jonathan Hill still has a few hurdles to jump in the approval process, it is likely that he will be appointed as Financial Services Commissioner. It is expected that a commissioner from the UK would be more sympathetic to European funds industry concerns."
Further, "At the level of the ECON, the rapporteur for money market fund reform is Neena Gill, a UK Labour/Socialist MEP who has stated that she will seek "to ensure there is a format there that enables these funds [MMFs] to continue to exist." She further noted that she does "not think that it is a job of the Parliament to define what sort of investments you have or not." She is proposing a roundtable in November to discuss potential solutions, with a vote likely in January. The shadow rapporteur is a new MEP for Dublin, Brian Hayes. While the Irish Government supports the regulatory imperative to better regulate shadow banking, it does not support the capital buffer proposal, which Irish Financial Services Minister Simon Harris believes will "damage the industry [in Ireland], but also throughout the EU, and could lead to a outflow of investment from Europe."
They ask, What are the options? "It is incumbent upon the opponents of the capital buffer to bring something new to the table. The view of the industry -- as set out in Position Paper published by the Institutional Money Market Funds Association ("IMMFA") in response to the Commission Proposal -- is that the use of redemption gates and liquidity fees (a fundamental aspect of the U.S. reforms) is the "simplest and most effective mechanism by which to achieve" the objective "of better regulation of MMFs [which] is to prevent large scale runs from funds, which would likely amplify the risks to the banking system at a time of systematic disruption," says Dechert's piece.
Finally, Murphy, et. al, add, "In addition to the "fees and gates" proposal, other proposals being considered include a proposal for a MMF structure that is a compromise between a CNAV MMF (with penny rounding to two decimal places) and a variable NAV MMF -- a lower volatility NAV, which would allow for rounding to three decimal places. The MMF industry is facing into severe headwinds with the current ultra-low interest environment. It may be that while the forecast for ultra-low interest rate remains stable, the outlook with regard to MMF reform may appear a little brighter."
The Reuters article, "EU Looks to U.S. for Solution to Stalemate in Reform of Money Market Funds" reads, "European Union lawmakers will study new U.S. rules to help them to end a year-long deadlock over how to regulate the bloc's 1 trillion euro ($1.3 trillion) money market funds (MMF) sector. The stalemate is over whether to require funds to hold a capital buffer equivalent to 3 percent of assets on a type of MMF known as constant net asset value (CNAV), the share price of which stays at 1 euro regardless of fluctuations in the price of assets held. Neena Gill, a centre-left member of parliament who is sponsoring the bill, told its economic affairs committee on Monday the options she is considering to broker a deal. These include light tweaks to the draft, keeping the buffer, and possible limits on withdrawals during a crisis. She will also examine reform being introduced by the U.S. Securities and Exchange Commission (SEC). The third area I want to explore is a variation of the capital buffer, to sort of building a European version of the U.S. reform," Gill said."
The Reuters article continued, "The U.S. reform forces "prime" money funds sold to institutional investors to float their values, instead of letting them maintain a stable value at $1 a share. But in a partial victory for the industry, retail and government funds are exempt from the float requirement. The United States also approved "gates" to limit withdrawals in rocky markets for some funds. Gill's suggestion to look at the American rules was backed by the centre-right. "The SEC made a decision in July to reject the capital buffer proposal," said Brian Hayes, a lawmaker from Ireland. A buffer would make the EU less attractive internationally and is not workable, he said." Gill aims to put a deal to a committee vote in late February ahead of a full parliament ballot in March. A final deal would then be thrashed out with member states."
Finally, note that we have a correction to our October Money Fund Intelligence newsletter. In the article, "Rates, Reforms Driving Money Fund Consolidation, Changes," we stated that HSBC Treas Inv MMF had liquidated. But HSBC Investor US Treasury Money Market Fund continues to be open, and there are no plans to liquidate it. (A class of the fund had been liquidated but the fund overall remains open.) We apologize for the confusion.
