Presentation on theme: "The Three Rules of Work……"— Presentation transcript:
0 Money Market Fund Reform Dennis GeppManaging Director & Chief Investment Officer- CashJohn ParkerDirectorFederated Investors (UK) LLPCIPFA 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 OverviewThe European Commission has published a comprehensive Money Market Fund reform proposalEnhances 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 proposalsPotential timingsWhat 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 IndustryEuropean Money Market Funds are an integral part of the financial systemMinimise potential for Fund “runs”Belief that Constant Net Asset Value (CNAV) funds are at greater risk of a “run”…despite evidence to the contraryBelief 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 2014thereafter mandatory conversion to VNAV(Fuller list of proposals in Appendix)
6 Otherwise new parliament to restart the process….. Potential TimingUnlikely 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 2014Earliest ESMA Guidelines in 2015All funds to be VNAV by December 2019Otherwise new parliament to restart the process…..
7 What could this mean for MMF users? LiquidityPotential shortening of liquidity day and/or T1Yield ImpactWith 3% buffer, yields are expected to fall by ~30bpsConfusionRegular Money Market Funds and Short-Term Money Market FundsDifference in proposals between Europe and US
8 What might this mean in terms of risk? VNAV vs CNAVNo credit Impact on conversion, with exposure to same names, but Standard MMFs have different criteriaPotential daily pricing fluctuationsSystems/AccountingSystems may have to be altered to accommodate chance of price change
9 Federated Investors’ View Welcomes enhancement to MMF portfolio liquidity, transparency, credit qualityBelieves imposition of 3% Capital will kill off the CNAV industry, reducing choices to investorsDoes not believe that either CNAV or VNAV funds are more immune to runs if investors lose faith in the financial system or its banksBelieves 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 runsSeeking international agreement:to avoid the possibility of different rules in different jurisdictions,reducing the opportunities for regulatory arbitrageHolding 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 viewsContact CIPFA and other relevant bodies to ensure they are reflecting your viewsAmendments will be considered up to 10th March 2014so time is of the essence!2. To prepare for potential ban of CNAV MMFs:Consider adding VNAV to treasury policy if not already thereEnsure your systems are ready and able to account for VNAV productsEducate colleagues, members and other participants
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 necessaryProposal 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 proposalSaïd 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 rapporteursRapporteur’s draft report issued on November 18, with consideration of the draft report on December 2, and deadline for amendments on December 10The vote in ECON is scheduled for March 10, with a view to vote in Plenary in AprilNB – 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 statesQuestionable 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 electionsGreece 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 outstandingEven 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 2014Earliest date for ESMA guidelines – 31st July 2015Earliest 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 VNAVFund managers to implement Internal assessment and rating system for all MMF portfolio assetsBan on Retail CNAV fundsRestriction 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 MMFsRestrictions on use of Amortised Cost Accounting to assets under 90 days to maturity.Limitations on collateral for reverse repurchase agreementsNarrow definitions of daily and weekly liquid assetsConcentration, diversification, stress testing and KYC requirementsPortfolio reporting to regulators – use of ESMA for larger funds