Treasurers adapt ahead of European money market reforms


Kimberley Long
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With six months to go before money market reforms are imposed on all funds in Europe, treasurers hoping to earn a return on their cash are scoping out the best options available.

By January 21, existing and new European money market funds (MMF) will have to fall in line with reforms that will see constant net asset value (CNAV) restricted to government portfolios only.

Investors seeking higher returns from funds investing in short-term liabilities of non-government issuers will have to cope with variable net asset value (VNAV) funds instead, but will also have access to new low volatility net asset value (LVNAV) structures.

Regulators hope these distinctions will bring greater stability to the market.

Natalie Cross,

With the reality of these regulations now looming, Natalie Cross, senior client portfolio manager at Invesco, says the reaction of investors so far has been positive.

“Clients have responded well to the incoming changes,” she says. “The product types are acceptable to clients and their needs.”

Will Goldthwait, portfolio strategist, fixed income cash currency, at State Street Global Advisors (SSGA), says investors looking to deploy cash comprehend the coming alteration of market structure.

“Clients are understanding the rule changes and how they will be impacted by them,” he says. “They understand that the rules are, overall, positive and will make money market funds safer and more liquid.”

To get a clear overview of what clients are now looking to do, SSGA has been in regular contact with them.

Goldthwait says: “We have spent considerable time speaking with clients to compile their views and opinions on the proposed European money market reform. Both through formal questionnaires and informal discussions we have been able to publish several white papers to guide our clients through reform.

“The latest paper will be published around the end of the second quarter of 2018.”

Goldthwait says even with the amount of change clients have to grapple with, the desire for MMF has not diminished.

“Overall, we have learned that clients like MMFs and want to continue to use them,” he says. “The MMF rule changes are very different from those rule changes that affected US money market funds.

“Thus we think clients will react differently and the change in strategies will not be as severe as it was in the US.”

The view was outlined in the SSGA Global Cash Outlook 2018 report, which shows European industry participants “will take the changes in their stride”. In contrast to the reaction in the US, the authors state there is unlikely to be “extreme caution” that was seen there, and, from the issuers’ perspective, “we expect reform to have little impact on short-term credit spreads”.


To be in time for the changes, a large number of treasurers are looking at which options to choose.

Invesco’s Cross says: “They need to update their treasury management policies to reflect the new fund types available before the January 2019 deadline. Most treasurers only change their policies once a year, so have been scheduling this in and updating their documents well in advance.”

Ensuring their systems are up to the job is also a necessary task over the coming months.

Will Goldthwait, SSGA

SSGA’s Goldthwait says: “It will be important for clients to examine all of the operational aspects of reform. Like their accounting system: can it handle a variable NAV? Are there procedures in place to respond to a liquidity gate or redemption fee?”

For treasurers to get a full understanding of what the changes will mean, Cross says it is up to the fund providers to proactively reassure them.

She says Invesco is compiling this information, adding: “The LVNAV funds will cease using just amortized cost accounting to price their portfolios. Instead, they will use a mixture of mark to market and amortized cost accounting depending on the individual securities’ maturity date.

“A daily check will be carried out to ensure the overall price of the fund stays within a 20-basis-point collar, ie 0.998 and 1.002. So long as the price stays within this collar, the fund will continue transacting at £/$/€1.00.

Cross adds: “We are looking to publish historic mark to market NAVs to show there has not been material variations in the overall price of the funds.”

Over time, as treasurers become more comfortable with what the different structures will involve, they are likely to begin exploring the options open to them. For those looking for a CNAV, the LVNAV is likely to be the first choice.

“Whilst most clients are comfortable with the new LVNAV product, there is increased interest in VNAV funds and, in particular, the variation in yield there may be between the two product types,” says Cross.

The short-term VNAV is an option for those looking for additional yield and who are wary of the gates and fees applied to LVNAVs. There is also the standard VNAV, which is likely to be used to earn additional yield on cash not needed for immediate operations.


The reform does require some additional legwork. Treasurers will have to learn the new rules around liquidity, says Cross.

“Liquidity has always been important in MMFs, with managers ensuring there is always sufficient liquidity to meet their investors’ redemption requirements,” she says. “The funds are already subject to fees and gates under UCITs [undertakings for collective investment in transferable securities] regulation.

“However, the reforms are introducing prescriptive fees and/or gates, which will result in funds being managed with higher levels of liquidity. The rules have also changed to identify what counts as liquidity.”

Overall, the reforms are intended to make a clearer, safer market, but that means implementing them brings new workloads.

Says Cross: “The transparency of funds has also been addressed in the reform. Portfolio holdings are currently available to all investors on a regular basis. However, under the new rules we will also have to disclose the overnight and weekly asset levels.”

Having these regular updates will give a clear insight into what is happening within a fund.

Goldthwait adds: “Investors should be satisfied that they will be investing in a safer, more liquid fund. There will be structural safeguards and transparency that did not exist prior to reform.”

The market is confident there will be a range of funds available for businesses.

Cross says: “We feel that the new regulations will continue to offer investors a suitable range of MMFs, which continue to prioritize capital preservation and liquidity, without significant impact to the operational mechanisms of the funds that they are already familiar with.”