Trésorier/Treasurer magazine - N°99 - Nov/Dec/Jan 2018 - 28

Money Market Fund Reform

DECISION TIME:
INVESTING IN MONEY
FUNDS AFTER EU
REFORMS
Money market fund reforms that recast the marketplace for cash
investors in Europe are making their presence felt as the countdown
to implementation starts.

With this overhaul of regulations
now finalised, with new rules
agreed and defined, it's important

LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE

N°99

- NOV /

DEC / JAN 2018

that investors make themselves
comfortable with how these changes
alter the money fund environment
they have been familiar with.
A decade on from the crisis that rocked
financial markets, a new landscape for
cash investment is emerging. The United States implemented a set of money
market fund (MMF) reforms in 2016 and
regulators in the European Union have
been following closely on its heels. With
this overhaul of regulations now finalised, with new rules agreed and defined,
it's important that investors make
themselves comfortable with how these
changes alter the money fund environment they have been familiar with.

Quick Recap: MMF Reforms
The purpose of the EU reforms is to
enhance stability, diversification and
transparency among EU money funds.
We believe they will render the financial
system safer, by working to forestall
future asset runs, and by reducing the
likelihood that an incident within one
fund would trigger a broader impact.
In late 2016, the European Parliament
finalised reforms for the €1.2 trillion
MMF market. In July 2017, progress
stepped up a gear. Formal deadlines
have been set and new funds will have
to be fully compliant from July 2018;
existing funds have an additional six
months (to January 2019) to meet
requirements.

Adapting to Change
For the purposes of cash management,
we believe money market funds will
continue to provide a strong option for
investors seeking to balance safety, diversification, liquidity and convenience.
This was echoed in our recent online
survey: 91% indicated that they intend
to continue investing in money funds*.
We foresee a smooth transition for
money fund reform in Europe, helped
by lessons learned from US reform
implementation. Due to the inclusion
in Europe of the Low Volatility NAV
segment, these reforms are unlikely to have the same impact as the
seismic shift that occurred in the US,
where the choice was binary (VNAV
or Government/Treasury CNAV); we
do not anticipate the same extreme
caution that saw more than $1 trillion in
assets being transferred from prime to
government strategies in the US. Nor do
we expect reform to affect short-term
credit spreads.

New Horizons
While the day-to-day impact may not be
significant, investors will still encounter
change. We are confident the reform is a
positive development, while still preser-

ving the attributes that make MMFs
an appealing destination for cash: an
emphasis on liquidity and principal
preservation, while seeking to generate
a market rate of return.
The reforms set out rules providing
wider choice and greater opportunity,
boosting the number of fund segments
to four: Public Debt Constant Net
Asset Value (CNAV), Low Volatility NAV
(LVNAV), Short-Term Variable NAV and a
Standard Variable NAV.

Public Debt CNAV
EU-domiciled government MMFs will
almost certainly be converted into
Public Debt CNAV funds, which target
a constant NAV per share. In the event
that weekly liquidity drops below 10%,
liquidity-based fees or redemption
gates will be imposed. In practice, a
well-managed Public Debt CNAV fund
is unlikely to have to impose such
constraints given they typically invest
in high-quality, highly-liquid US, British,
German and French government debt.
Still, investors should ensure that their
investment policies permit them to
allocate to funds that can impose such
restrictions.

* The SSGA survey was presented online to SSGA cash clients in Europe during Q2 of 2017 and completed by 99 senior

cash decision makers primarily domiciled in Great Britain.

Table des matières de la publication Trésorier/Treasurer magazine - N°99 - Nov/Dec/Jan 2018