Written by: Rachel Turner | Head of EMEA & APAC Product Development for Investment Managers, BNY Mellon
Money market fund managers appear drawn to the attractions of the Low Volatility NAV (LVNAV) – in effect a more flexible version the original Constant Net Asset Value (CNAV) – as they decide on their strategies following the new Money Market Fund Regulations.
The European Commission proposed new rules for Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs) money market funds in 2013. After a lengthy gestation, these rules have now been agreed by the various regulatory bodies. The regulation was published in the Official Journal of the European Union on 30 June 2017 and will come into force on 21 July this year for new funds and on 21 January 2019 for existing funds.
Currently, there are two broad categories of money market funds: short-term money market funds and standard money market funds. Under existing regulations, the standard money market fund can only be run as a Variable Net Asset Value (VNAV) fund, while the short-term money market fund can be run as either a Constant Net Asset Value (CNAV) or VNAV fund.
The new regulations introduce changes to the short-term money market fund category. In particular, they increase the number of structures available to investors from two to three:
The Low Volatility NAV (LVNAV) appears to be the most popular choice for money market fund managers as they restructure their offerings in line with the Money Market Fund Regulations being implemented over the next few months.
Based on the current plans of the money market fund managers that BNY Mellon Asset Servicing supports with the provision of Fund Accounting, Transfer Agency and Depository services, approximately 42% of clients’ funds are planning to move to LVNAV MMF. Due to uncertainty over the continued use of the Reverse Distribution Mechanism (RDM) or share cancellation practice, which is commonly used where interest rates are negative, we are seeing a move to VNAV MMF for the funds that currently utilise RDM. Otherwise, we are seeing very little movement on existing VNAV and government/treasury CNAV.
What is certain is a busy second half of 2018 as money market funds, and those supporting them, overhaul their fund options ahead of the 21 January deadline.
It will be interesting to see over the coming months which of the fund options managers do pursue, and eventually which will become the most popular with investors. While LVNAVs appear broadly similar to today’s CNAVs, they have specific characteristics that may influence investor demand. Investors and corporate treasurers may take different views on their attractions. It is possible we will see some managers altering their initial plans as they see competitors testing their strategies.
Similar regulatory changes to money market funds in the US in 2016 did not include the equivalent of the LVNAV and resulted in over a trillion dollars moving from credit-style to government-only money market funds. It appears that the European regulations, combined with greater familiarity in Europe than in the US with fees and gates, will mean the same sort of dramatic shift may be avoided.
The money market funds market has been a relatively stable one in recent years. Will the new regulations provide the opportunity or stimulus for a shake-up? Only time will tell.