Europe’s money market fund providers search for a backup plan
Continent is moving to tighten rules for the industry in much the same way as the US
Money market fund providers in Europe are afraid impending regulation could force significant amounts of money to flee their products, potentially making it much harder for the real economy to raise short-term finance.
“Let’s not shut down €500 billion (Dh2 trillion) of funding to the European economy,” says Dan Waters, managing director of ICI Global, the international arm of the Investment Companies Institute, the mutual fund industry body.
Although the original proposals have been watered down, the European Parliament is still in favour of forcing the half of the €1 trillion industry that maintains net asset value at a constant €1 per share to switch to a new “low-volatility net asset value” structure.
From a regulatory point of view, the advantage of a variable net asset value, whether low volatility or otherwise, is that it is less likely to be seen as a cash alternative. This means that in times of stress, investors are less likely to panic if they see the net asset value of their fund fall. This is the theory, although recent analysis from Moody’s, the rating agency, questions whether there is actually any difference in practice.
Trialogue underway
Nevertheless, a trialogue is under way in Europe between the parliament, the commission and council, the next stage in the ponderous process of European lawmaking. In the US, the Securities and Exchanges Commission, the regulator, last year announced a new regime requiring money market funds for the institutional market to move to a floating value structure but allowing retail products to remain fixed at a dollar a share.
“The challenge is that now the US rules are set, the current European proposals hew much closer to those US rules,” says Sean Tuffy, head of regulatory intelligence at Brown Brothers Harriman, the financial services group. “But the market is structurally very different.”
While the US market has a very high retail share, in Europe most of the assets in such funds are institutional, from corporate treasuries, which see the funds as a cash-management tool. Another distinction, which increases the risk that legislation could cause problems, is that much of the assets in European money funds are from outside the continent, in particular from Asia.
It is hard to get a precise handle on the proportion of assets coming from overseas, as there is no requirement to report says Tuffy.
Vanessa Robert, a senior credit officer at Moody’s, says the problem would not be limited to investors from outside Europe. “Will they leave money market funds based on regulation? This is an appropriate question not only for outside investors but also for inside [the EU], irrespective of jurisdiction.”
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The main question Roberts expects investors to ask is what the accounting treatment of the instruments will be. Even if the constant value funds are forced to adopt the low-volatility variable structure, “they will have the same risk profile”, so in theory there should be little reason to change. But if its tax treatment were to change, making it less attractive, money would flow elsewhere quickly.
The challenge is that now the US rules are set, the current European proposals hew much closer to those US rules. But the market is structurally very different.”
Sean Tuffy | Head of regulatory intelligence at Brown Brothers Harriman
Ray of hope
The one ray of hope for the market is that the proposed European regulation is likely to be a long time coming. The rotating presidency of the EU is about to leave Latvia for Luxembourg at the beginning of July. As one of the centres of the European money market fund industry, Luxembourg might be well placed to lead the process in terms of expertise, but, says Waters, “Luxembourg will be perceived as having too much of an interest, so it will pass it on to the Dutch to sort out” at the beginning of 2016.”