Regulators in both the US and Europe are consulting on further regulatory reform of the money market fund (MMF) industry, following the financial market turmoil experienced in March 2020 due to the onset of the coronavirus pandemic. As investors scrambled to get hold of their cash, MMFs needed to meet resulting liquidity needs, placing fund values under pressure. Furthermore, there’s concern about the systemic influence of MMFs, as short-term market stresses were exacerbated by their emergency actions to raise liquidity by selling assets .
Although the biggest concerns seem to stem from the US, and EU MMFs held up reasonably well during last year’s crisis, the European Securities and Markets Authority (ESMA) launched a consultation in March 2021 on potential reforms to the EU Money Market Funds Regulation. It aims to review the experiences of MMFs and the roles played by various influencing factors in March 2020. Later this year the European Commission will undertake a legislative review following ESMA’s feedback.
ESMA will take another look at the current Low Volatility Net Asset Value (LVNAV) MMF structure and its continuing appropriateness. A small number of funds’ shadow/market NAVs came close to the 20 basis point boundary allowed either side of their stable dealing NAVs, a breach of which would have meant converting to a Variable NAV (VNAV) fund. This could have meant some losses for investors and would have likely rattled the entire LVNAV market.
Rule changes being considered include breaking the link between MMFs' minimum liquidity thresholds and withdrawal restrictions such as fees and gates, setting out specific situations where MMFs’ liquidity thresholds can be temporarily breached and/or increasing liquidity buffers. Other ideas such as ‘swing pricing’/dilution levies have been mooted, although could be more difficult to implement.
Other areas will include the rules on MMF credit ratings, stress-testing, transparency and disclosures, acknowledging the need for improved monitoring of investments, liquidity and investors. Sponsor support – i.e. the banks and asset managers who run MMFs helping out their funds in times of stress – is not allowed in Europe and this will be revisited, perhaps setting out situations where some support is permitted. This will be weighed against the fact that providing such support could negatively impact a sponsors’ balance sheet and make running MMFs an unattractive proposition for them.
Separately, the Financial Stability Board, the international body that monitors and makes recommendations about the global financial system, is conducting a wider review of short-term market liquidity and the stresses experienced in 2020. This is expected to report in July 2021.
The conclusions of the MMF consultations will be awaited but it seems unlikely any regulatory changes will be implemented before 2022. Arlingclose will of course keep its clients aware of any changes, the impact on funds and their potential usage as liquidity instruments, but until then the LVNAV remains the MMF of choice for most investors in Europe and the UK.
