Preparing Scottish Local Authorities for Money Market Fund reform CIPFA Treasury and Capital Management Panel conference 24 November 2017 Jane Lowe, Secretary General Institutional Money Market Funds Association
Agenda MMFs – background information MMF reform in Europe Practical actions Concluding points 1
Money market funds - background information
Money Market Funds – the basics MMFs offer an alternative to depositing cash at bank Legal structure is an authorised investment fund In practice MMF are used in similar ways to bank accounts Money funds have the principle objective of preserving capital and maintaining liquidity – hence “liquidity funds” Another objective is to produce yield 3
More about Money Market Funds In UK and Europe, there are 2 main types of money fund: constantly priced (CNAV – Short Term MMF) and variably priced (VNAV) IMMFA funds are CNAV funds In summary CNAV funds aim to give back £1.00 for every £1.00 invested, with yield in addition The funds hold high quality very short term assets, mostly to maturity Investors obtain access to professional cash management and diversification (from bank credit risk) 4
European MMFs – total assets managed Source: ECB, IMMFA 5
All IMMFA Constant NAV MMFs - assets by currency 6
IMMFA Constant NAV sterling MMFs 7
Investor types in IMMFA constant NAV MMFs Source: IMMFA 8
Domicile of Investors in IMMFA constant NAV MMFs Source: IMMFA 9
Money market fund reform in Europe
European MMF Regulation – a 5 year marathon…. 11
European MMF reform overview We are now at the finishing line: 5 years, 28 countries, 2 parliaments, 7 European presidencies, hundreds of amendments… MMF Regulation published in Official Journal 30 June 2017 The Money Market Fund Regulation (EU) 2017/1131 applies directly in every Member State. All MMFs “established, managed or marketed” in the European Union MUST comply Neutralising perceived “shadow banking” risk a core outcome, so: Substantial focus on product structure Substantial focus on liquid asset requirements Support for connected funds banned e.g. by a parent bank 12
European MMF reform overview cont’d… New European MMF product structure very recognisable compared to today’s MMF product range Requirements for the constant NAV funds have changed more than for the variable NAV funds Many of the changes reflect or tighten existing guidelines and practices (e.g. through credit rating, IMMFA Code), and fall on managers to implement Secondary legislation is still being made, mostly this also will apply to managers 13
European MMF product range: old to new 14
Money fund products in European MMF Regulation New fund Public Debt CNAV MMF Low Volatility NAV MMF (LVNAV) Variable NAV MMF (VNAV) Standard (VNAV) MMF categories Fund type Short Term MMF Short Term MMF Short Term MMF Standard MMF Eligible 99.5% of portfolio to be invested in Money market instruments, securitisations Money market instruments, Money market instruments, investments public debt securities, reverse repo and ABCP, deposits, derivatives, repo, securitisations and ABCP, deposits, securitisations and ABCP, deposits, secured with government securities, and reverse repo, other MMF derivatives, repo, reverse repo, MMF derivatives, repo, reverse repo, MMF cash Currency unrestricted WAM / WAL 60 days / 120 days 60 days / 120 days 60 days / 120 days 180 days / 365 days Minimum 30% weekly, includes 10% daily 30% weekly, includes 10% daily 15% weekly, includes 7.5% daily 15% weekly, includes 7.5% daily liquidity Mandatory Apply when weekly liquidity falls below Apply when weekly liquidity falls below 10% No No fees and gates 10% Discretionary Existing UCITS provisions on fund Existing UCITS provisions on fund suspensions Existing UCITS provisions on fund Existing UCITS provisions on fund fees and gates suspensions apply apply suspensions apply suspensions apply MMFR extra provisions apply on MMFR extra provisions apply on convergence convergence of 2 events: of 2 events: weekly liquidity drops below 30% and weekly liquidity drops below 30% and daily daily net redemptions exceed 10% net redemptions exceed 10% Liquid asset Minimum 12.5% cash, reverse repo, Minimum 12.5% cash, reverse repo, deposits Minimum 7.5% cash, reverse repo, Minimum 7.5% cash, reverse repo, restrictions deposits Maximum 17.5% govt. securities to 190 days deposits deposits Maximum 17.5% govt. securities to 190 Other MMF not permitted Maximum 7.5% other MMF Maximum 7.5% other MMF days Other MMF not permitted Valuation Amortised cost accounting for all Amortised cost accounting for securities up At market or model At market or model method securities to 75 days. Securities over 75 days at market/model. Securities more than 10bp away from market to be valued at market or model. NAV - Fund collar – 50bp rounding (either side) Fund collar – 20bp rounding (either side) N/A N/A rounding Fund valuation To 2 decimal places - € /£/$1.00 To 2 decimal places - € /£/$1.00 To 4 decimal places - € /£/$1.0000 To 4 decimal places - € /£/$1.0000 Shadow NAV Required: daily “shadow” NAV to be Required: daily “shadow” NAV to be N/A N/A calculation calculated on a per asset M2M basis. calculated on a per asset M2M basis. Review clause Regulation reviewed 5 years post Regulation reviewed 5 years post Regulation reviewed 5 years post Regulation reviewed 5 years post implementation implementation implementation implementation Review to assess use of alternative Review to assess regime for LVNAV product product structure and feasibility of establishing 80% EU public debt quota 15
Comparing old and new: LVNAV MMF NOW - CNAV MMF (Prime) FUTURE - LOW VOLATILITY NAV MMF (“LVNAV”) Fund type Short Term MMF (ESMA guidelines) Short Term MMF [Art.3] Eligible High quality short term money market instruments Money market instruments, securitisations and investments (principally bank debt) ABCP, deposits, derivatives, repo and reverse repo IMMFA Code requires credit quality assessment Subject to credit quality assessment [Arts.9-16] WAM and WAL 60 days / 120 days 60 days / 120 days [Art.24(1)] 397 days maximum residual maturity 397 days maximum residual maturity Minimum Specified by rating agencies 10% daily / 30% weekly [Art.24(1)(c) and (e) liquidity Liquid assets Minimum 12.5% cash, reverse repo and deposits Maximum 17.5% government securities to 190 days [Art.24(1)(g)] Valuation Amortised cost accounting for all securities Amortised cost accounting for securities up to 75 method days. Securities with longer maturity to be marked- to-market [Art.29(7) Valuation - Fund collar - 50 basis points rounding (either side) Fund collar - 20 basis points rounding (either side) rounding [Art.33(2)(b)] Pricing To 2 decimal places - £0.01 To 2 decimal places - £0.01 [Art.32(2)] Shadow NAV Yes - on a regular basis (not less than weekly) Yes - “shadow” NAV to be calculated daily calculation Any asset that diverges in value from the CNAV by more than 10 basis points must be valued at mark-to- market until back within 10bp asset collar [Art.29(7)] Fees and gates Yes - discretionary Yes - mandatory when weekly liquidity below 10; otherwise discretionary (as now) [Art.34(1)(b)] Review clause ESMA guidelines reviewed as needed Product to be reviewed 5 years after implementation [Art.46] 16
Comparing old and new: Public Debt CNAV MMF NOW - CNAV GOVERNMENT MMF FUTURE - PUBLIC DEBT CNAV MF Fund type Short Term MMF (ESMA guidelines) Short Term MMF Eligible Portfolio must invest in highest quality short term 99.5% of portfolio must invest in money market investments money market instruments or deposits (cash) instruments issued or guaranteed by governments and specified institutions, reverse repo and cash WAM and WAL 60 days / 120 days 60 days / 120 days 397 days maximum residual maturity 397 days maximum residual maturity Minimum Specified by rating agencies 10% daily / 30% weekly liquidity Liquid assets Minimum 12.5% cash, reverse repo and deposits Maximum 17.5% government securities to 190 days Valuation Amortised cost accounting for all securities Amortised cost accounting for all securities method Valuation - Fund collar - 50 basis points rounding (either side) Fund collar - 50 basis points rounding (either side) rounding Pricing To 2 decimal places - £0.01 To 2 decimal places - £0.01 Shadow NAV Yes - on a regular basis (not less than weekly) Yes - “shadow” NAV to be calculated daily calculation Fees and gates Yes - discretionary Yes - mandatory when weekly liquidity falls below 10%; otherwise discretionary (as now) Review clause ESMA guidelines reviewed as needed Product to be reviewed 5 years after implementation 17
European Regulation - the timeline September 2013 European Commission proposes draft legislation for MMF reform in Europe April 2015 European Parliament agree position on MMFR June 2016 EU Member States agree position on MMFR 30 June 2017 MMF Regulation (EU) 2017/1131 published in Official Journal: in force 20 July 2017 21 July 2018 Funds launched after July 2017 must comply and have MMF authorisation 21 January 2019 Existing funds must comply, including obtaining additional (“top up”) MMF authorisation 2022 5 year review of Regulation due 18
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