Last Thursday, Crane Data hosted its latest European Money Fund Symposium, a 2 1/2 hour virtual event which discussed money funds denominated in euro, pound sterling and U.S. dollars and domiciled in Ireland, Luxemburg and France. Our latest European MFS featured several sessions, including one entitled, "Regulatory, ESG & Ultra-Short Issues." Veronica Iommi, Secretary General of IMMFA, the Institutional Money Market Funds Association, spoke first during this segment and reviewed the latest on European MMFs and potential regulatory changes. We quote from her talk below, and watch for more EMFS excerpts in coming days. (For those that missed our European MFS, the recording is available here and Powerpoints are available here. Mark your calendars for next year too, Sept. 28-29, 2022 in Paris.)
Iommi explains, "Those of you who are not familiar with IMMFA, ... originally formed over 22 years ago, our core objective is to promote and support the development and integrity of the money market funds industry in Europe. We do this by engaging with policymakers, regulators, educating investors, providing regular data on various funds and overall, providing a centralized point of contact, information and expertise."
She says, "Let's look at where the industry currently is [and] reminding ourselves of the range of funds categories available in Europe. As you know, the 2017 Money Market Funds Regulation introduced new fund categories and enhanced investor protections. [It introduced] two new constant NAV fund types, low volatility NAV and public debt constant net asset value money market funds.... You will see in particular [the] minimum daily 10% and weekly 30% ... and linked to these liquidity thresholds, fees and redemption gates for LVNAV and PDCNAV funds."
Iommi tells us, "As a share of total European fund assets under management (in euros), IMMFA currently represents approximately 58%. Over 95% of these IMMFA funds are low volatility funds (LVNAV), with some public debt CNAV funds.... Another point to note ... is IMMFA funds specifically are triple-A rated." By currency, she says, "You'll see that US dollars were the largest with about 50%, sterling about one-third, and euros about 15%.... Growth in assets under management continues across the three main currencies."
She comments, "Perhaps unsurprisingly, the U.K. accounts for a high percentage of IMMFA funds distribution, over 40%. Just under 25% sold to investors elsewhere in Europe [including 13% in Benelux, 3% in Ireland and 4% in Germany/Switzerland].... Approximately 18% of funds were sold outside of Europe.... Corporates represent the largest investor type, accounting for a third of all distribution.... Pension funds are a significant part.... Third party, 20%, is where money market funds are sold via platforms in Europe. And as you can see, insurance companies are also very active, constituting 7%, and financial institutions (9%), which can be entities such as private banks and securities lenders.... Public sector investors [are another 5%]."
Iommi asks, "How did money market funds fare in the Covid storm? As mentioned earlier, the 2017 Money Market Fund Regulation in Europe introduced a number of measures designed to make funds more robust. Of course, the events of March last year put these mechanisms to the test. We're pleased to report that money market funds proved resilient in this storm, despite the exceptional and adverse market conditions.... Money market funds met all redemptions on time and no gates or fees were imposed. In other words, they continued to serve their purpose in protecting capital and providing liquidity. At the same time, the crisis highlighted some areas where regulation did not work as intended and above all, the interconnectivity of short-term markets. Most importantly, notwithstanding the challenges, once the markets normalized, assets increased again, reflecting investor confidence in the underlying structure including the dominant LVNAV category."
She states, "You may be wondering what is on the horizon. Well, in the aftermath of the storm, and taking into consideration that all financial markets experienced great stress due to the pandemic. Several workstreams were set up at an international level, led by the FSB in collaboration with IOSCO to evaluate the effectiveness of the post global financial crisis reform. The aim of these workstreams being to assess the ongoing resilience in all financial markets and draw lessons from the crisis and the roles played by markets, investors and regulation, with a view to proposing potential reforms where needed. And of course, among the areas up for review are money market funds."
Iommi continues, "The FSB money market funds policy work started at the beginning of this year, involving prudential market authorities.... This resulted in a consultation report issued by the FSB on the 30th of June, setting out policy proposals to enhance money market fund resilience. Following closure of this consultation in August, which IMMFA responded to, the FSB, published the final report on the 11th of October, just ahead of the G20 summit at the end of this month. As expected, the policy proposals in the final report are generally in line with those contained in the consultation and are not mandatory. The objective being to inform jurisdictions and any necessary adjustments to policy recommendations for money market funds issued by IOSCO. Now, the shape that any actual reforms may take along with their implementation will be determined by national authorities."
She tells the EMFS, "In Europe, our focus over the next few years will be the review of EU Money Market Fund regulation.... In anticipation, ESMA launched on the 26th of March, its consultation on potential reforms of the regulation. The aim of the consultation being to review the overall regime, including the roles played by markets and investors, take account of lessons learned following market stress experience during March last year. So, what are the current options on the table at the EU level and how do they marry with those contained in the FSB's final report and those being considered in other key jurisdictions? [S]everal of the potential reform options proposed by ESMA are similar to those of the U.S. President's Working Group Report issued in February and the FSB's recent final report."
In focusing on three potential options at an international and European level, Iommi discusses the benefits of de-linking gates and fees, the problems with swing pricing, then explains, "Moving to VNAV is not the solution to systemic liquidity events. The experience of funds during the March crisis does not indicate that VNAV money market funds were more resilient. Indeed, as we witnessed during the March period, fund behavior was not homogenous either by currency or type. U.S. prime funds and euro standard money market funds, which both operate with a floating NAV, also experienced significant redemptions.... Above all, we believe that the investor base in Europe is best served by a spectrum of funds which offers choice."
She says, "Although not a specific option on the table for money market funds per se, there is recognition at the international level that measures should aim at improving the overall functionality of short-term financial markets.... Money market funds operate as part of a complex, short-term ecosystem. Questions of reform should be considered in the context of this broader ecosystem and any proposed solutions should take this into account ... and, in particular, how money market funds were affected by underlying market issues."
The IMMFA leader comments, "Finally, you may be wondering what role we've been playing at IMMFA over this challenging period. Throughout, we've been having a regular dialogue with central banks and regulators, providing intelligence and data from the outset of the crisis. As a voice of the industry, we've been actively contributing to the post-Covid crisis analysis. You'll recall that early of July last year, we issued detailed position paper setting out our assessment of the impact of pandemic on the sector. Our findings helped to shape some of the thinking of key authorities."
She adds, "All along [we're] continuing to engage with regulatory policy stakeholders at European, national and international level. In the beginning of this year, [we] engaged stakeholders in the FSB and IOSCO work. And in doing so, we've involved investors to reinforce our messaging around utility of money market funds and importance of preserving investor choice. And in this regard, we published earlier this year an insight on the utility of money market funds, which is available on the public website should you to wish read it? Likewise, we've responded to the various consultations mentioned. These are also on our website."
