0. Money Market Fund Reform
Dennis Gepp
Managing Director & Chief Investment Officer- Cash
John Parker
Director
Federated Investors (UK) LLP
CIPFA Scotland Public Finance Conference, 6-7 March 2014

1. The Three Rules of Work……
“Out of clutter, find simplicity; From discord, find harmony; In the middle of difficulty lies opportunity.” - Albert Einstein

2. Overview
The European Commission has published a comprehensive Money Market Fund reform proposal
Enhances MMF portfolio liquidity, transparency, credit quality (which we agree with)
Makes MMF sponsors choose between placing 3% in capital reserve or moving to Variable Net Asset Value (VNAV) in December 2014

3. Agenda (or, what we would like you to go away with today)
Putting things into context……
Why are regulators seeking to make changes?
Main European Commission proposals
Potential timings
What could this mean for MMF users?
What might this mean in terms of risk?
What is Federated Investors’ view?
What is Federated Investors doing about it?
What should investors consider doing about it?

4. Why are the Regulators seeking to make changes?
The Credit Crisis of 2008 underlined the need for greater regulation of the Financial Industry
European Money Market Funds are an integral part of the financial system
Minimise potential for Fund “runs”
Belief that Constant Net Asset Value (CNAV) funds are at greater risk of a “run”…despite evidence to the contrary
Belief that CNAV funds are seen to be “guaranteed”
To ensure MMFs remain resilient even in times of extreme market stress and disruption

5. Main European Commission Proposals (as at March 2014)
Creation of two categories of MMFs
”short-term MMFs” (may be CNAV (until 2019) or VNAV)
“standard MMFs” (must be VNAV)
CNAV MMFs to have capital buffer of 3%...
for 5 years from December 2014
thereafter mandatory conversion to VNAV
(Fuller list of proposals in Appendix)

6. Otherwise new parliament to restart the process…..
Potential Timing
Unlikely to be decided in this European parliament (new Elections in May 2014) - in the unlikely event of these proposals being accepted in this parliament then:
Enactment in December 2014
Earliest ESMA Guidelines in 2015
All funds to be VNAV by December 2019
Otherwise new parliament to restart the process…..

7. What could this mean for MMF users?
Liquidity
Potential shortening of liquidity day and/or T1
Yield Impact
With 3% buffer, yields are expected to fall by ~30bps
Confusion
Regular Money Market Funds and Short-Term Money Market Funds
Difference in proposals between Europe and US

8. What might this mean in terms of risk?
VNAV vs CNAV
No credit Impact on conversion, with exposure to same names, but Standard MMFs have different criteria
Potential daily pricing fluctuations
Systems/Accounting
Systems may have to be altered to accommodate chance of price change

9. Federated Investors’ View
Welcomes enhancement to MMF portfolio liquidity, transparency, credit quality
Believes imposition of 3% Capital will kill off the CNAV industry, reducing choices to investors
Does not believe that either CNAV or VNAV funds are more immune to runs if investors lose faith in the financial system or its banks
Believes that a combination of “gating” (redemption gates) and liquidity fees are better placed to address the possibility of runs

10. What is Federated Investors doing?
Lobbying both the EC and the US Securities and Exchange Commission (SEC) to maintain the CNAV product:
strengthened further by gating and liquidity fees to prevent potential runs
Seeking international agreement:
to avoid the possibility of different rules in different jurisdictions,
reducing the opportunities for regulatory arbitrage
Holding a series of workshops, webinars and meetings to help educate regulators and inform investors

11. What can investors do? 1. To maintain the CNAV choice:
Write to Syed Kamall, UK shadow rapporteur and to your MEP, all candidates and the European Commission expressing your views
Contact CIPFA and other relevant bodies to ensure they are reflecting your views
Amendments will be considered up to 10th March 2014
so time is of the essence!
2. To prepare for potential ban of CNAV MMFs:
Consider adding VNAV to treasury policy if not already there
Ensure your systems are ready and able to account for VNAV products
Educate colleagues, members and other participants

13. Appendix

14. Legislative Process for Proposal — European Commission
The European Commission (EC) is made up of 28 commissioners that are appointed by each European Union (EU) member state.
EC has the right to initiate proposed laws for adoption by the Parliament and Council. Recently, much of the EU financial services legislation is derived from international agreements and rules (e.g., G20, IOSCO, FSB, Basel Committee)
September 2013: European Commission (EC) published its proposal for an EU MMF regulation. Proposal sent to both the Parliament and the EU member states in the Council—each institution will debate and amend the regulation as necessary
Proposal is a “regulation,” which is a binding legislative act and must be applied in its entirety across the EU (compared to a “directive,” which requires Member State implementing measures and therefore provides some flexibility as to the exact rules that are adopted)

15. Legislative Process for Proposal — Parliament
European Parliament—765 MEPs (up for re-election in Spring 2014)
The Parliament is divided up into committees. Committee on Economic and Monetary Affairs (ECON) is responsible for amending the MMF proposal
Saïd El Khadraoui (Belgium, Socialist Party) was appointed as the lead MEP (aka, the Rapporteur) to steer the proposal through the Parliament’s legislative process, supported by 4 shadow rapporteurs
Rapporteur’s draft report issued on November 18, with consideration of the draft report on December 2, and deadline for amendments on December 10
The vote in ECON is scheduled for March 10, with a view to vote in Plenary in April
NB – MEPs will cease legislative work in March/April 2014 to campaign for the May 2014 elections.

16. Legislative Process for Proposal — European Council
European Council: consists of the heads of state or government of the EU’s 28 member states
Questionable whether Council will move at the same pace as the Parliament; unlikely that the Council will adopt a position in time to enter into trilogue negotiations before the May 2014 Parliament elections
Greece holds the Presidency starting in January 2014, but with only 4 months before elections are likely to concentrate on the most advanced and important files outstanding
Even if the rapporteur’s proposal are acted on in the shortest possible timescale (i.e. within the next few month)
Earliest date for regulation – 31st December 2014
Earliest date for ESMA guidelines – 31st July 2015
Earliest date for compulsory conversion to VNAV – 31st December 2019

17. Main European Commission Proposals
Creation of two categories of Money Market Funds
”short-term MMFs” (may be CNAV (until 2019) or VNAV)
“standard MMFs” (must be VNAV)
CNAV MMFs to have capital buffer of 3%
for 5 years from December Thereafter mandatory conversion to VNAV
Fund managers to implement Internal assessment and rating system for all MMF portfolio assets
Ban on Retail CNAV funds
Restriction to investing in securitizations to those with underlying corporate debt that is high-quality and liquid (e.g., trade receivables)
Restrictions to sponsor support (on CNAV funds to use of capital buffer and ban on support by state entities)
Ban on use or distribution in Europe of offshore MMFs
Restrictions on use of Amortised Cost Accounting to assets under 90 days to maturity.
Limitations on collateral for reverse repurchase agreements
Narrow definitions of daily and weekly liquid assets
Concentration, diversification, stress testing and KYC requirements
Portfolio reporting to regulators – use of ESMA for larger funds

18. Managing Director & CIO, Cash Federated Investors (UK) LLP
Contact Information
Dennis Gepp
Managing Director & CIO, Cash
John Parker
Director
Federated Investors (UK) LLP
federatedinvestors.co.uk

19. Important Information
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