Fitch Update on EU MMF Reforms
Fitch Ratings recently sent out an update entitled, "European MMF Reform: September 2018 Dashboard," which tells us, "Aviva Investors became the first money market fund (MMF) manager to convert to the new structures under the European MMF reforms. Aviva's sterling liquidity and sterling government liquidity funds switched to low-volatility net asset value (LVNAV) MMFs from short-term variable net asset value (VNAV) funds on 3 September 2018. The transition was smooth, with assets remaining broadly stable, auguring well for future conversions." They explain, "Discussions between the EC and ESMA continue on the eligibility of Reverse Distribution Mechanisms (RDM) in LVNAVs. ESMA asked the EC for more clarity on the subject in July, following the EC's statement in January that RDM was not compatible with the reforms. The final outcome on RDM remains unclear which brings significant uncertainty for fund investors and providers. Pending further guidance providers are considering solutions which might include prospectus amendments, LVNAVs with accumulating (variable) share classes or short-term VNAVs. Investors may, however, faced with the uncertainty in euros, move some money into bank deposits." The Fitch piece adds, "Euro MMFs hold around 43% of their portfolios in commercial paper. In the scenario in which lots of fund providers have to close and liquidate their euro short-term MMF portfolios due to RDM issues, negative pricing or liquidity pressure could emerge. The risk of this scenario is mitigated by the alternatives solutions being considered to euro LVNAVs; furthermore, any liquidation scenario may take place over a period of time, rather than instantaneously: most commercial paper in rated euro MMFs (69%) matures within the next three months, thus providing a 'natural' liquidation option over a limited timeframe."
