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

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

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

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?

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

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)

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…..

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

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

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

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

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

Appendix

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)

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.

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

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 2014. 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

Managing Director & CIO, Cash Federated Investors (UK) LLP Contact Information Dennis Gepp Managing Director & CIO, Cash 020 7618 2601 dgepp@federatedinv.com John Parker Director 020 7618 2607 jparker@federatedinv.com Federated Investors (UK) LLP federatedinvestors.co.uk

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