Barclays on European MMF Reforms
Earlier this summer, Barclays published "EU MMFs: Reform is approaching, important issues remain," which tells us, "A few months ahead of the full implementation of the MMF reform in January 2019, more clarity on the cash-equivalent status and shares cancellation policy is needed. Given the small size of the EUR-denominated CNAV MMFs and the reduction in commercial paper issuance by banks, we expect a small effect from the reform on 3m Euribor. As of the end of Q1 18, the AuM of the EU MMF industry amounted to €1.16trn.... AuM kept creeping down in Q1 18 to a level that is €54bn lower than the peak reached in Q1 17." The piece, written by Giuseppe Maraffino, says, "EU MMFs are mainly concentrated in France, Ireland and Luxembourg. As of the end of March 2018, MMFs in Ireland accounted for 44% (€485bn) of the total AuM of EU MMFs, those in France for 32% (€362bn) and those in Luxembourg 24% (€268bn). Importantly, MMFs based in Ireland and Luxembourg are constant NAV and therefore are affected by the changes introduced by the EU MMF reform, while most of the French MMFs are already floating NAV. According to data from the Institutional Money Market Funds Association (IMMFA), within the CNAV funds, AuM of the euro-denominated MMFs is about €85bn, much smaller than USD-denominated MMFs (about 330bn euro equivalent) and GBP denominated (about 220bn euro equivalent)." The Barclays piece adds, "One crucial aspect is the cash-equivalent status of MMFs that allows corporate treasuries to buy shares of MMFs for their cash management activities as an alternative to bank accounts. If MMFs lose their cash-equivalent status, there could be significant implications from an accounting perspective for some MMF investors, especially corporate treasuries, which could be forced to withdraw their cash from MMFs. Only CNAV funds maintain this status, and it is not clear yet whether low volatility CNAVs will be considered cash equivalent.... Because of negative rates in the euro area, euro-denominated MMFs have an additional problem, which stems from the fact that the reverse distribution mechanism (RDM) is no longer allowed under the reform. The RDM (a share cancellation mechanism) was introduced in mid-2015 to take into account the situation of negative money markets rates in the euro area that pushed the rates offered by the MMFs into negative territory.... While the MMF reform does not deal with such a mechanism, the ESMA expressed a negative view on its continuation under the reform. The European Commission agreed with the ESMA's view that the reverse distribution mechanism (RMS) 'is not compatible with MMF regulation.' Currently, there is a lively debate about this important issue. A final decision is likely to be taken by ESMA in the very near term, possibly ahead of the implementation of the reform for the new funds in July."
