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.
Investing involves risk including the risk of loss of principal.
Past performance is not a guarantee of future results.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
This communication is directed at professional clients (this includes eligible counterparties as defined by the appropriate EU regulator who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The views expressed in this material are the views of Global Cash Management team through the period ended March 21, 2022 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
You should obtain and read a Key Investor Information Document and Prospectus relating to the SSGA Cash funds prior to investing. Further information, including the annual and semi-annual reports and the Key Investor Information Document and Prospectus describing the characteristics, charges, expenses and risks involved in your investments are available for residents of countries where SSGA cash funds are authorized for sale, at www.ssga.com/cash and from your local SSGA office or by calling +44 (0)20 3395 2333.
Investing involves risk including the risk of loss of principal. It is possible to lose money by investing in the funds.
Before investing, carefully consider a fund's investment objectives, risks, charges and expenses. Click the link to obtain a prospectus which contains this and other information, or by calling +44 (0)20 3395 2333, please read it carefully before investing.