Preparing Scottish Local Authorities for Money Market Fund reform

CIPFA Treasury and Capital Management Panel conference24 November 2017

Jane Lowe, Secretary General Institutional Money Market Funds Association

1

Agenda

MMFs – background information

MMF reform in Europe

Practical actions

Concluding points

Money market funds- background information

3

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

4

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)

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European MMFs – total assets managed

Source: ECB, IMMFA

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All IMMFA Constant NAV MMFs - assets by currency

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IMMFA Constant NAV sterling MMFs

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Investor types in IMMFA constant NAV MMFs

Source: IMMFA

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Domicile of Investors in IMMFA constant NAV MMFs

Source: IMMFA

Money market fund reform in Europe

11

European MMF Regulation – a 5 year marathon….

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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

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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

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European MMF product range: old to new

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Money fund products in European MMF RegulationNew fund

categoriesPublic Debt CNAV MMF Low Volatility NAV MMF (LVNAV) Variable NAV MMF (VNAV) Standard (VNAV) MMF

Fund type Short Term MMF Short Term MMF Short Term MMF Standard MMF

Eligible

investments

99.5% of portfolio to be invested in

public debt securities, reverse repo

secured with government securities, and

cash

Currency unrestricted

Money market instruments, securitisations

and ABCP, deposits, derivatives, repo,

reverse repo, other MMF

Money market instruments,

securitisations and ABCP, deposits,

derivatives, repo, reverse repo, MMF

Money market instruments,

securitisations and ABCP, deposits,

derivatives, repo, reverse repo, MMF

WAM / WAL 60 days / 120 days 60 days / 120 days 60 days / 120 days 180 days / 365 days

Minimum

liquidity

30% weekly, includes 10% daily 30% weekly, includes 10% daily 15% weekly, includes 7.5% daily 15% weekly, includes 7.5% daily

Mandatory

fees and gates

Apply when weekly liquidity falls below

10%

Apply when weekly liquidity falls below 10% No No

Discretionary

fees and gates

Existing UCITS provisions on fund

suspensions apply

MMFR extra provisions apply on

convergence of 2 events:

weekly liquidity drops below 30% and

daily net redemptions exceed 10%

Existing UCITS provisions on fund suspensions

apply

MMFR extra provisions apply on convergence

of 2 events:

weekly liquidity drops below 30% and daily

net redemptions exceed 10%

Existing UCITS provisions on fund

suspensions apply

Existing UCITS provisions on fund

suspensions apply

Liquid asset

restrictions

Minimum 12.5% cash, reverse repo,

deposits

Maximum 17.5% govt. securities to 190

days

Other MMF not permitted

Minimum 12.5% cash, reverse repo, deposits

Maximum 17.5% govt. securities to 190 days

Other MMF not permitted

Minimum 7.5% cash, reverse repo,

deposits

Maximum 7.5% other MMF

Minimum 7.5% cash, reverse repo,

deposits

Maximum 7.5% other MMF

Valuation

method

Amortised cost accounting for all

securities

Amortised cost accounting for securities up

to 75 days. Securities over 75 days at

market/model.

Securities more than 10bp away from market

to be valued at market or model.

At market or model At market or model

NAV -

rounding

Fund collar – 50bp rounding (either side) Fund collar – 20bp rounding (either side) N/A N/A

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

calculation

Required: daily “shadow” NAV to be

calculated on a per asset M2M basis.

Required: daily “shadow” NAV to be

calculated on a per asset M2M basis.

N/A N/A

Review clause Regulation reviewed 5 years post

implementation

Review to assess use of alternative

product structure and feasibility of

establishing 80% EU public debt quota

Regulation reviewed 5 years post

implementation

Review to assess regime for LVNAV product

Regulation reviewed 5 years post

implementation

Regulation reviewed 5 years post

implementation

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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

investments

High quality short term money market instruments

(principally bank debt)

IMMFA Code requires credit quality assessment

Money market instruments, securitisations and

ABCP, deposits, derivatives, repo and reverse repo

Subject to credit quality assessment [Arts.9-16]

WAM and WAL 60 days / 120 days

397 days maximum residual maturity

60 days / 120 days [Art.24(1)]

397 days maximum residual maturity

Minimum

liquidity

Specified by rating agencies 10% daily / 30% weekly [Art.24(1)(c) and (e)

Liquid assets Minimum 12.5% cash, reverse repo and deposits

Maximum 17.5% government securities to 190 days

[Art.24(1)(g)]

Valuation

method

Amortised cost accounting for all securities Amortised cost accounting for securities up to 75

days. Securities with longer maturity to be marked-

to-market [Art.29(7)

Valuation -

rounding

Fund collar - 50 basis points rounding (either side) Fund collar - 20 basis points rounding (either side)

[Art.33(2)(b)]

Pricing To 2 decimal places - £0.01 To 2 decimal places - £0.01 [Art.32(2)]

Shadow NAV

calculation

Yes - on a regular basis (not less than weekly) Yes - “shadow” NAV to be calculated daily

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]

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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

investments

Portfolio must invest in highest quality short term

money market instruments or deposits (cash)

99.5% of portfolio must invest in money market

instruments issued or guaranteed by governments

and specified institutions, reverse repo and cash

WAM and WAL 60 days / 120 days

397 days maximum residual maturity

60 days / 120 days

397 days maximum residual maturity

Minimum

liquidity

Specified by rating agencies 10% daily / 30% weekly

Liquid assets Minimum 12.5% cash, reverse repo and deposits

Maximum 17.5% government securities to 190 days

Valuation

method

Amortised cost accounting for all securities Amortised cost accounting for all securities

Valuation -

rounding

Fund collar - 50 basis points rounding (either side) Fund collar - 50 basis points rounding (either side)

Pricing To 2 decimal places - £0.01 To 2 decimal places - £0.01

Shadow NAV

calculation

Yes - on a regular basis (not less than weekly) Yes - “shadow” NAV to be calculated daily

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

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European Regulation - the timeline

September 2013

European Commission proposes draft legislation for MMF reform in Europe

April 2015

European Parliament agree position on MMFR

30 June 2017

MMF Regulation (EU) 2017/1131 published in Official Journal: in force 20 July 2017

2022

5 year review of Regulation due

June 2016

EU Member States agree position on MMFR

21 January 2019

Existing funds must comply, including obtaining additional (“top up”) MMF authorisation

21 July 2018

Funds launched after July 2017 must comply and have MMF authorisation

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BREXIT and MMFs

Subject to the Government’s on-going negotiations… these factors are relevant:

1. Where the fund is established

2. Where the investment manager is located

3. Where the investors are based

IMMFA funds mostly established in Ireland and Luxembourg, with local

infrastructure – these will remain in the EU

Most IMMFA funds have their assets managed by firms in the UK - post-BREXIT,

managers will have “third country” status (like US, Hong Kong) unless other

arrangement agreed

There is provision for “third countries” in existing legislation; under review by ESMA

(European securities regulators in Paris)

Promoting an EU fund to UK clients may be subject to new rules post-BREXIT

Impact falls mostly on the manager

Practical actions and concluding points

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Practical actions…

INVESTORS – PRACTICAL ACTIONS1. Prep the relevant Committee/Council Members so that they know that

amendments to investment mandates will be coming.

Discuss cash/cash equivalent status with finance dept., auditors.

2. Collect published material on new products, LVNAV in particular, plus

new key facts documents from fund managers, IMMFA pamphlet on

reform.

3. Ask your fund managers about their plans, e.g.

a. How will they manage LVNAV against tighter limits, 20bp fund collar

in particular?

b. What is their transition timetable?

4. Timetable: be aware that 18 month transitional period for current funds

will disappear quickly. Some regulatory uncertainties may persist until

quite late in the process. Consider making outline change to mandates

soon.

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Concluding points

European MMF reform is here

Additional comfort from statutory regulation replacing varied set of

standards in place now

LVNAV the lead MMF solution to replace CNAV

VNAV also an option

Understanding the product range is key to assessing choices offered

Prospectus changes likely for all MMF

Cash equivalence will have to be revisited: with tighter legislative

requirements, should not be a problem

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Institutional Money Market Funds Association

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