State Street Global Advisors recently published "A Shifting Cash Landscape," which surveys investors on the pending European Union Money Fund Reforms. It says, "The deadlines have been announced: the European Union's money market fund (MMF) reform will go into effect on 21 July 2018 for new funds, and on 21 January 2019 for existing funds. The EU reform reshapes the money fund landscape. Investors will need to study the new rules, identify fund types that meet their needs, and review their Investment Policy Statement (IPS). They will need to assess whether their internal systems can handle net asset value (NAV) variations. Many will need to upgrade accounting software -- unless they plan to allocate cash exclusively to more conservative public debt constant NAV funds." (Note: We'd like to welcome those of you attending our European Money Fund Symposium, which begins today, to Paris, France. We look forward to a number of discussions, including one with SSGA's Yeng Butler, involving European money market funds, and we hope you enjoy the show!)
The study explains, "SSGA conducted a survey of nearly 100 investors in the second quarter of 2017 and the responses suggest that many are not yet feeling the deadline pressure. Of the survey participants, 79% indicated that they either have not considered the reform in any great detail or that they see no urgency in doing so. While 93% of participants reported familiarity with the reform, many may not actually be fully aware of its intricacies. For instance, investors expressed a strong preference for the Low Volatility NAV (LVNAV) fund class, despite the fact that this category carries the attributes with which they most frequently express "concern" -- that is, liquidity-based gates and fees. Conversely, variable NAV (VNAV) prime funds were a less popular option, with only 31% planning to allocate to them, even though VNAV funds do not carry the aforementioned mandatory gates and fees."
SSGA writes, "This is a major financial reform, with significant implications for how investors invest in cash assets. The purpose of this paper is to help investors prepare for the forthcoming transition. Specifically, this paper: presents an overview of money fund reform; offers a to-do list to complete in advance of the deadlines; and provides information that can aid investors in deciding which cash solutions to pursue. SSGA encourages investors to educate themselves as early as possible, to ensure that they are best placed to invest in the most suitable funds.... The survey was presented online to SSGA cash clients in Europe during Q2 of 2017, and completed by 99 senior cash decision makers, primarily headquartered in Great Britain."
The survey queried 69% corporate investors, 23% financial investors and 8% government investors. Fifty percent said that the changes were "Kind of ... significant to cash management," 82% won't be looking for an alternative to money funds, and it says 51% of respondents are equally concerned about gates and fees vs. NAV pricing. Thirty nine percent were more concerned with liquidity gates and redemption fees, while 10% were more concerned with NAV pricing.
The report states, "We believe the reform will achieve its primary goal of reinforcing money market stability and forestalling future asset runs. It introduces or strengthens fund requirements for diversification, transparency and liquidity. And it mandates that all fund sponsors conduct risk analysis and diligently analyse the credit quality of their investments -- a practice long undertaken by more rigorous sponsors. From an investment perspective, SSGA is confident that the reform is a positive development. Specifically the reform: preserves the attributes that make MMFs the top destination for cash; an emphasis on liquidity and principal preservation, with a secondary opportunity to earn yield."
They add, "In SSGA's survey, 91% of respondents indicated an intention to continue allocating to money funds; enables managers in eligible fund categories to continue investing in instruments long held by money funds -- such as asset-backed commercial paper (ABCP), certificates of deposit (CDs), floating rate notes and other high-quality short-term securities; maintains the pre-reform maturity and asset-life constraints; continues to allow money funds to pay for outside credit ratings (with additional disclosures to shareholders).
State Street says, "Naturally, this added stability comes at a cost. The changes are significant. No fund segment remains untouched. Reform increases the complexity of money fund options and complicates decision-making for cash investors in the near term. It boosts the number of fund segments to four: a government category (Public Debt CNAV), two prime options (Low Volatility NAV and Short-Term Variable NAV) and a short-term bond category (Standard VNAV)."
They tell us, "[T]he reform forces institutional investors to choose between: a. Short-Term or Standard VNAV funds that are not subject to liquidity-based fees and gates; b. LVNAV funds that seek to maintain a constant NAV, but that carry gate and fee constraints if minimum liquidity or redemptions breach certain thresholds; and/or c. Public Debt CNAV funds that trade at a constant share price, but that also carry gates and fees. Simply put, EU money fund investors must accept either variable NAVs or the potential for liquidity-based gate and fee constraints. This contrasts with the U.S., where post-reform government MMFs feature constant NAVs and remain free of gates and fees."
The survey comments, "For operating cash, we believe LVNAV funds offer potential advantages that make them an appealing option for cash investors. The segment is expected to most closely resemble pre-reform constant NAV prime funds, trading with a stable NAV calculated to two decimal places under normal market conditions. Further, the reform stipulates elevated liquidity and diversification requirements that render this segment safer and more liquid than VNAV. Though lower liquidity requirements may enable VNAV funds to offer a few basis points of additional yield, we do not believe the spread will make up for the added stability, convenience and safety built into the LVNAV parameters. Of course, LVNAV funds will carry liquidity-based fees and gates."
Finally, SSGA adds, "For core and strategic cash with an investment horizon of greater than 6 months, we think investors should consider Standard VNAV funds. This segment offers a highly conservative option and is regulated by the European Securities and Markets Authority (ESMA). Standard VNAV funds offer the potential for greater yield within a risk profile acceptable for many cash investors' core and strategic cash segments."
