European Money Market Fund (MMF) Reform Update

The European Standards Market Authority and the European Systemic Risk Board published recommendations on EU money market fund reform in Q1 of this year. We don’t foresee any substantial changes for investors till 2024, however there are a number of key elements that investors should start thinking about. Here we explore the proposed changes and what these mean for cash investors.

In Q1 of this year, the European Standards Market Authority (ESMA) and the European Systemic Risk Board (ESRB) published recommendations on EU money market fund (MMF) reform. The European Commission is reviewing the input received on these recommendations and is preparing a legislative proposal (expected in Q3) for a formal review of EU money market fund regulations (MMFR). This proposal will trigger a round of legislative discussions and positioning; a final agreement would not be expected before Q1 2024. Any such agreement would likely also include an implementation period.

This all means that, for State Street Global Advisors’ MMF investors, there will be no substantial changes for at least two years. However, there are a number of issues that investors should begin thinking about.

Most significantly, the changes as recommended by ESMA and the ESRB would lead to the loss of stable net asset value (NAV) for the existing low volatility NAV (LVNAV) funds — i.e., the ability to price money market funds at $1.00, £1.00 or €1.00 — which would introduce price volatility into the MMF space. The recommended abolition of amortised cost accounting for the majority of assets and the abolition of the ability to round to two decimal points would both contribute to price volatility. Thus, the current LVNAV fund structure would cease to exist — it would become a variable NAV (VNAV) fund structure. Post-implementation, differing VNAV MMFs will likely be offered as a result, featuring different risk profiles, e.g.:

• A new short-term VNAV fund structure (evolved from the legacy LVNAV fund structure) will be created, though investors will likely need to make system enhancements and changes to internal reporting due to the loss of the $1/£1/€1 pricing mechanism. This type of fund will continue to have high liquidity levels, though it is unclear if a short-term VNAV will be classified as a cash/cash equivalent (this is a key point that the MMF industry will lobby for). We would encourage all investors to have an initial conversation with their accounting partners to seek clarity on this issue.
• Public debt MMFs might also be a consideration for investors. But little choice of sizeable funds in USD, and no availability in EUR and GBP, may limit availability.

In sum, we think that most European MMF investors will need to begin to get comfortable with the new short-term VNAV structure and its accounting, pricing, and reporting implications. On a positive note, the ESMA/ESRB proposal removes the cliff-edge effect we saw play out in 2020 between liquidity levels and fees/gates, which is advantageous for investors and market liquidity. Also, managers will likely be offered a larger choice of liquidity management tools and buffers to use during times of market stress.

For more information, and if you have any questions or would like a more detailed discussion, please contact your State Street Global Advisors Cash Sales representative.