Impending reforms to European money market fund regulations will likely spare prime funds from the exodus of assets that the U.S. market has seen following SEC reforms, sources said.
Investors have one more month before the changes in the U.S. fully come into force. Those changes aim to reduce the risk of investor runs and require institutional prime funds to transact at a fluctuating net asset value, rather than the current constant net asset value.
But U.S. investment in prime money market funds has fallen by about $338 billion this year through July to $1.23 trillion, according to Securities and Exchange Commission data. Instead, some $339 billion has flown into government money market funds, which remain trading at constant NAV.
Observers expect Europe's incoming reforms will avoid this drain, and critically important, maintain the funds' role in financing the real economy.
Dennis Gepp, senior vice president, managing director and chief investment officer, cash, at Federated Investors (UK) LLP based in London, is “certain” the money market fund reform and its effects will take a very different shape in Europe than in the U.S.
“One consequence (of the U.S. reform) that Europe would like to avoid is to have cash flow out of the prime money market funds into government funds,” Mr. Gepp said.
The European Commission first proposed a regulation on money market funds in September 2013. Constant NAV money market funds, or CNAV funds — which are considered most similar to the U.S. model — will be required to convert into a new low-volatility model, or a LVNAV fund, within 24 months of implementation, according to the European Council's June release.
Such low-volatility funds can retain a constant share price as long as the share value does not deviate from its actual NAV by more than 20 basis points.
Rudolf Siebel, managing director at German Investment Funds Association BVI and chair of European Fund and Asset Management Association money market fund working group, said the EU was under pressure from both Financial Stability Board and International Organization of Securities Commissions to reform these systemically risky instruments.
“IOSCO postulated in 2012 that regulators, where workable, should push for a conversion of CNAV to variable NAV. The European lawmakers share this view in proposing capital buffers on CNAV and offering conversion of CNAV to LVNAV funds,” he said.
Mr. Siebel added that investment funds do not need capital buffers because assets are held separately in trust by the asset manager and do not form part of the manager's balance sheet.
In the consultation period, at industry request, regulators have extended the transition period from constant NAV to the low-volatility NAV model to 24 months after approval, which is expected this year.