European Money Market Fund Reform

Damien Donoghue: Welcome to this update on European Money Fund Reform. My name is Damien Donoghue and I am the Co-Head of the International Cash Management Business at BlackRock.

I am joined today by Carey Evans, a member of BlackRock's Global Government Relations & Public Policy team and a member of the BlackRock Government Relations Steering Committee. Based in Brussels, Carey focuses on regulatory policy issues impacting end-investors at the EU, global and European Member State level.

Today, we find ourselves in the midst of one of the most dynamic times in the history of the European Money Fund industry, with a political agreement reached between the European Parliament, Council and Commission, in regards to the Money Fund Reform. 

As part of BlackRock’s commitment to help our clients successfully manage through these complex regulatory changes, we’ve set up this short initial video update. We will continue to update you throughout the year as and when progress is being made.

The goal of these updates is to provide you access to and insights from various senior members of our portfolio management, credit, and product strategy teams. So, without any further ado, let’s hear the latest on the European Money Fund Reform from Carey.

 

Damien Donoghue: So Carey, what would you say are the headline impacts for investors as a result of the European Money Fund Reform?

 

Carey Evans: Well, at a very high level, the existing European Securities and Markets Authority (ESMA) classifications of Short-term Funds (STMMF) and Standard Funds (Standard MMF) will continue to exist largely in their form.

 

That means that Short-term funds will be restricted to a maximum investment of 397 days at the security level, a weighted average maturity of 60 days and a /weighted average life of 120 days, respectively. There will be three fund structures that short-term money funds can take:

 

• First: A Constant Net Asset Value (CNAV) Government Fund priced to 2 decimal places
• Second: A new Low Volatility NAV (LVNAV) Fund which can deal at a constant price of 1.00, provided the mark-to-market (MTM) does not deviate from the constant price by more than 20 basis points
• And finally: A Variable Net Asset Value (VNAV) Fund which uses full mark-to-market and price to 4 decimal places

 

The CNAV Government Funds and the LVNAV Funds require a 10% holding of daily maturing assets and a 30% holding of weekly maturing assets. These levels will be monitored by the fund’s Board of Directors and should the weekly assets fall below 10%, the Board can apply either redemption fees or gate redemptions to protect shareholders.

 

So, Standard MMFs will be restricted to a WAM/WAL of 6 months/1 year, as they are today , and a final maturity restriction of 1 year for fixed rates and 2 years for floating rate notes. They will operate as full VNAV funds as they do today.

 

Damien Donoghue: So, in your view, what are the key takeaways for the cash investor community as a result of these changes?

 

Carey Evans: Well, the users of MMFs tend to use the product because of to the relative ease with which they are able to access high credit quality, diverse portfolios with daily liquidity. In a world already bearing the consequences of banking regulation, we believe cash investors place increasing importance on having access to short-term investment tools and we have always felt it is vital for MMFs to retain the usability factor. We believe that the LVNAV is a middle-ground offering that will keep many of the operational features valued by the cash investor community but will also meet the regulators’ objectives of ensuring that the product is more sensitive to the underlying market prices of the underlying securities.

 

Damien Donoghue:   OK. And more holistically how do you feel the industry will react in the short- and also in the long-term to these changes? And more so specifically to ourselves, do you see our product suite changing?

 

Carey Evans: So, it is important to recognise that, once the final reforms are published earlier this year, we will then have a transition period with the regulations only fully coming into force - we expect in late 2018/ maybe early 2019. So, at this early stage, we anticipate that most asset managers will continue to offer their current product range in the short term. In the background, as we experienced in the U.S. Reform process, firms are probably likely to build out the architecture to move existing products over to one of the new structures and possibly add products to their range in the longer term.

 

Having been through the process in the U.S., BlackRock can leverage this experience to our advantage. However, it wouldn’t surprise us if we saw further consolidation in the industry due to the operational costs involved in building some of this architecture to accommodate the European reforms. We believe economies of scale really come into play in this market and that was one of the driving factors when BlackRock took on the management of assets of BofA Global Capital Management last year.

 

We will continue to offer products that seek to meet client demand and again whilst early days, we would envisage us continuing to offer the full suite of STMF products in the major currencies. We also already run a set of Variable Standard MMFs in the shape of our Ultra Short Bond Funds. As we work with a hugely diverse set of clients we may see sufficient demand to build additional pooled products within the available landscape while continuing to offer tailored separately managed accounts.

 

Damien Donoghue:   What would be your view then of the future of the MMF industry in Europe as we sit here today?

 

Carey Evans: Well, we’re confident that the new regime will offer a suite of options that may help meet the demands of cash investors. The landscape for short-term investing has already begun a huge transformation through the Basel III regulations which will continue to be implemented in the coming years and we believe that money funds are placed to offer a potential solution for the more challenging investment environment.

 

Damien Donoghue: A final question and a clarification: under the new rules will there still be the availability of a constant NAV product?

 

Carey Evans: Yes, there will be constant NAV in the form of Government funds, and, in essence, the LVNAV funds should be able to maintain a constant NAV on most days. I think the attractiveness of this product is that it is designed to offer investors flexibility in a liquidity crisis by affording the fund’s Board of Directors parameters under which they must either apply gates and/or fees and/or move to full mark-to-market four decimal place pricing. From our experience running STMMF, we believe that clients will find this product replicates many of the features they value in today’s CNAV Prime Funds. The key is in the name though – this will be a low volatility product and BlackRock would seek to manage an LVNAV product to mitigate the risk of the pricing moving away from 1.00. 

 

Damien Donoghue: Thank you very much Carey for your insights today.  And, as we’ve heard, there’s a lot of detail and, as a result lots of clarification will be needed over the next couple of years so we certainly look forward to hearing from you over the coming months. So, thank you very much for your time today. Bearing in mind that amount of information we will be running a number of events and videos over the coming months.

 

But in the meantime if you have any questions at all in regards to what we’ve talked about today, please do reach out to your BlackRock relationship manager or visit our website at blackrock.com/cash.