US Money Market Fund Reform, July 2014

25-07-2014

Author: Kevin Murphy, Sarah Cunniff and Dara Harrington



Today’s decision of the SEC on money market fund reform is of little relevance to the EU.

Unfortunately, today’s narrow decision of the SEC to impose a mandatory variable net asset value (“VNAV”) for prime institutional constant net asset value (“CNAV”) money market funds in the US is of little relevance to the EU in its quest for money market fund reform. It was always going to be a question of timing as to whether it would be the US or the EU who was going to be first to issue its reforms on money market funds. What the funds industry hoped for was a global solution to money market fund reform – a reasonable objective given that both the EU and the US were looking at money market fund reform at the same time. Sadly a global solution has not emerged today.

The real impact on the SEC decision to impose mandatory VNAV on prime institutional CNAV money market funds can be gleaned from the exemptions to that requirement. Not only are treasury or sovereign CNAV money market funds exempt, but so are prime CNAV funds that are sold to retail investors. Even the retail investor exemption is not limited to direct retail investors – it extends to retirement funds, pension products and other investment vehicles beneficially owned by retail investors. As a result of these significant exemptions, we already know from submissions made to the SEC that as much as 54% of current prime CNAV money market funds in the US will retain their assets and conservatively 75% of the assets of existing CNAV money market funds in the US will remain in those CNAV money market funds. Accordingly, the key message from an EU perspective is that, with the exception of one segment of CNAV money market funds in the US (i.e. prime institutional money market funds), the SEC has clearly decided to retain CNAV money market funds.

Of course the irony of today’s decision of the SEC is that some in the European Commission who have up to now ignored developments in the SEC and argued that the EU must pursue its own course on money market fund reform may cite today’s decision of the SEC as a rejection of CNAV money market funds and that today’s decision of the SEC vindicates the proposals of the European Commission on money market fund reform. Such an interpretation would be utterly misleading. The European Commission proposal is for a 3% capital buffer for CNAV money market funds which is a proposal that was firmly rejected by the SEC quite early on in its consideration of various reform proposals and was also rejected in today’s decision.

The other key point to note about the relevance of today’s decision of the SEC to EU CNAV funds is that because of the difference in the investor base in EU CNAV money market funds which are held mostly by institutional investors and because of the lack of treasury money market funds in the EU, if the EU were to adopt today’s decision of the SEC, it could wipe out the entire CNAV money market fund industry in the EU. This would be in stark contrast to the SEC who clearly decided today to retain at least 75% of the assets of CNAV money market funds.

What is also noteworthy about today’s decision of the SEC is that the SEC has opted to impose fees and gates for most money market funds. This is a solution that it also workable in the EU for all CNAV funds and it is a solution that the funds industry in the EU has put to the European Commission and the EU Parliament and is a solution that will no doubt also be considered by the Working Group of the EU Council of Ministers looking at money market fund reform.

Today’s decision of the SEC on prime institutional CNAV funds is a decision that reflects a particular feature of the US CNAV market. It is a decision that highlights the difference between the US and EU CNAV markets. If the SEC had been faced with an investor profile similar to that in the EU, it would not have adopted today’s proposal for prime institutional CNAV funds. A conscious decision was made by the SEC today to retain CNAV money market funds. This key point needs to be understood by regulators and legislators in the EU in deciding on how the EU should reform money market funds. Today’s decision also highlights the need for a global solution to money market fund reform. This issue needs to be referred back to IOSCO for further consideration and, unlike the last time when the matter was considered at IOSCO when the US was somewhat constrained in its participation because of the debates before the SEC, the US needs to be actively engaged in the IOSCO debate.

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