Preparing Scottish Local Authorities for Money Market Fund reform - - PowerPoint PPT Presentation

Preparing Scottish Local Authorities for Money Market Fund reform

CIPFA Treasury and Capital Management Panel conference 24 November 2017

Jane Lowe, Secretary General Institutional Money Market Funds Association

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Agenda

• MMFs – background information
• MMF reform in Europe
• Practical actions
• Concluding points

Money market funds

• background information

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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

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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

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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 Regulation

New fund categories

Public 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

• f 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;

• therwise 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 ACTIONS

1.

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 Camomile Court, 23 Camomile Street, London EC3A 7LL +44(0)20 7269 4657 admin@immfa.org Visit our website at: www.immfa.org