External Insight - Federated Investors (UK) External Insight treasury@arlingclose.com

This is an Insight written by an external organisation. The following article was written by Federated Investors (UK) and represents their views.

Representatives of the European Parliament and European Commission have reached agreement on new regulations to enhance the safety and stability of short-term money market funds for all European investors.  ‎The agreement is subject to final approval by both governing bodies, which is expected to occur early in 2017.

The final reform package preserves stable value products for investors in both prime short-term money market funds (Low-Volatility Net Asset Value Model "LVNAV") and government short-term money market funds (Constant Net Asset Value Model "CNAV").  Investors currently invested in government CNAV short-term money market funds will see no structural changes in the operation of this high quality, diverse product. The Commission has been tasked to continue to monitor the importance of government CNAVs for European investors and evaluate in 2022 if they should continue as currently structured beyond 2025 or transition to an LVNAV structure at that time.  Federated will continue its efforts to ensure the interests of European investors in government CNAV products are represented in Brussels.

Investors in prime short-term money market funds will continue to have a CNAV money market fund option and benefit from enhanced ‎investment and structural protections afforded in the new LVNAV.  To ensure a smooth transition and time for investors to understand the enhanced features of LVNAV short-term money market funds a lengthy transition period applies.  The conversion from a prime CNAV model to a prime LVNAV model is not expected until late 2018 or early 2019 (depending on the final publication date of the regulation).  Until that time, you can expect the same high quality, diverse and prime CNAV short-term money market funds to continue as they do today without change.  Upon conversion, LVNAV short-term money market funds will continue to hold high quality, diverse, liquid portfolios subject to even greater diversification and liquidity requirements.  They will continue to provide investors with a CNAV, in normal market conditions, provided the funds shadow price does not deviate by more than 20 basis points from its net asset value.  Full product details will be provided in early 2017 with periodic updates through a 2018/2019 conversion.

The regulation also adds additional colour on when a board of a fund must consider whether liquidity fees or gates should be applied.  These tools are applicable for all UCITS funds today, including short-term money market funds, and these enhancements are designed to ensure the boards review the use of these tools at certain times.  There is no requirement for liquidity fees or gates to be applied other than in the event of a fund’s liquidity falling below 10%.

Please note that given the withdrawal of the United Kingdom from the European Union and the lengthy transition period, application of these rules for the Federated Sterling short-term money market funds may or may not occur at all, depending entirely upon the timing, negotiations and decisions of the UK government.

Written by Gavin Hayward, GHaywood@federatedinv.com