Today marks an important milestone in the implementation of the EU's money market regulation (EU MMFR; Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on Money Market Funds). Money market funds (MMFs) domiciled in Europe that had to make changes to their prospectuses to comply with the EU MMFR had to present proof of their compliance by Jan. 21, 2019.
As S&P Global Ratings has previously stated, it supports a regulatory environment that promotes increased transparency, enhanced liquidity, safer investment products, and investor protection as well as a level playing field for the European money market fund industry. Our ratings on the money market funds domiciled in Europe have not been affected by the implementation of EU MMFR.
Bidding Goodbye To A Key Mechanism
Many euro-denominated funds had used share cancellation mechanisms (also known as reverse distribution mechanisms) to maintain their net asset value (NAV) per share when the value of their assets were affected by negative interest rates. The mechanism was favored by stable NAV MMF investors. It was recently announced, however, that such mechanisms are not allowed under the EU MMFR.
Given the short notice, a number of money market fund sponsors have delayed the conversion of their MMFs by using Article 44 of the regulation. This will see them finalize their transition by March 21, 2019.
Article 44 Gives Funds A Further Two Months Leeway
Numerous Ireland and Luxembourg–domiciled money market funds that have had share cancellation mechanism language in their prospectus since 2012 have used Article 44 as a backstop.
Article 44 states:
1) By 21 January 2019, an existing Undertakings for Collective Investment in Transferable Securities (UCITS) or alternative investment fund (AIF) that invests in short-term assets and has as distinct or cumulative objectives offering returns in line with money market rates or preserving the value of the investment shall submit an application to the competent authority of the MMF, together with all documents and evidence necessary to demonstrate the compliance with this Regulation.
2) No later than two months after receiving the complete application, the competent authority of the MMF shall assess whether the UCITS or AIF is compliant with this Regulation in accordance with Articles 4 and 5. The competent authority of the MMF shall issue a decision and notify it immediately to the UCITS or AIF.
The authorities only recently clarified that the use of share cancellation mechanisms is proscribed under the EU MMFR. The European Commission sent a letter to the European Securities and Markets Authority on Oct. 4, 2018, confirming that share cancellation mechanisms are incompatible with the EU MMFR. As recently as Jan. 11, 2019, the two most prominent money market fund competent authorities--Central Bank of Ireland and the Commission de Surveillance du Secteur Financier--stated that:
From Jan. 11, 2019 Press Release
"money market funds existing before 21 July 2018 shall submit an application for authorization to its competent authority by 21 January 2019, together with all documents and evidence necessary to demonstrate compliance with the MMF regulation. This application should include details of arrangements for the cessation of the use of the share cancellation mechanism".
Although the competent authorities requested the cessation of share cancellation mechanisms by March 21, 2019, many fund companies (including some of the largest European money market fund providers) are still waiting for the authorities to approve their resubmitted prospectuses.
Rated Funds Within Scope Of EU MMFR
The 91 Europe-domiciled funds recognized as MMFs under the EU MMFR and rated by S&P Global Ratings had approximately €711 billion in assets under management as of Dec. 31, 2018. These funds are denominated in currencies including euros, pounds sterling, U.S. dollars, Australian dollars, Swiss francs, Canadian dollars, and Singapore dollars. We rate all of these 91 funds under our principal stability fund rating or fund credit quality and fund volatility methodologies. These methodologies can be applied to the MMF regulatory categories of:
- Public debt constant net asset value,
- Low volatility net asset value (LVNAV),
- Variable net asset value (VNAV), or
- Standard VNAV.
Table 1
| Summary Of EU MMF Reform Metrics | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Short-Term MMFs | Standard MMFs | |||||||||
| Public debt CNAV | LVNAV | VNAV | VNAV | |||||||
| Eligible investments | Govt. debt, reverse repo, cash | Money market instruments (MMI) | Money market instruments | Money market instruments | ||||||
| Asset credit quality | To be deemed to be high-quality as per internal assessment of MMF's manager | To be deemed to be high-quality as per internal assessment of MMF's manager | To be deemed to be high-quality as per internal assessment of MMF's manager | To be deemed to be high-quality as per internal assessment of MMF's manager | ||||||
| Diversification limits | Up to 100% in government debt, 15% per reverse repo counterparty | 5% per issuer but with some exceptions (i.e., bank deposits [10%], reverse repo [15%] ) | Ranging from 10%-20% per counterparty or MMI | Ranging from 10%-20% per counterparty or MMI | ||||||
| Valuation approach | Mark-to-market valuation or amortized cost accounting | Mark-to-market valuation or amortized cost accounting < 75 days | Mark-to-market or mark-to-model valuation | Mark-to-market or mark-to-model valuation | ||||||
| WAM (max) | 60 days | 60 days | 60 days | Six months | ||||||
| WAL (max) | 120 days | 120 days | 120 days | 12 months | ||||||
| Maturity (max) | 397 days | 397 days | 397 days | Two years, with 397-day reset | ||||||
| Daily liquid assets (min.) | 10% | 10% | 7.5% | 7.5% | ||||||
| Weekly liquid assets (min.) | 30% with up to 17.5% of high quality public debt instruments | 30% with up to 17.5% of high quality public debt instruments | 15% with up to 7.5% in weekly redeemable MMI and MMF units/shares | 15% with up to 7.5% in weekly redeemable MMI and MMF units/shares | ||||||
| Potentially enforceable fund board actions | Liquidity fees and gates | Liquidity fees and gates | Not subject to liquidity fees or gates | Not subject to liquidity fees or gates | ||||||
| MMF--Money market funds. CNAV--constant net asset value. LVNAV--Low volatility net asset value. VNAV--Variable net asset value. WAL--Weighed-average life. WAM--Weighted-average maturity. | ||||||||||
Definitions
Share cancellation mechanisms enabled funds that sought to maintain a stable NAV per share to reflect negative money market yield as a pro rata reduction in the fund's number of shares, without seeing the share price or net asset value (NAV) per share of the fund decline.
An S&P Global Ratings principal stability fund rating (PSFR), also known as a "money market fund rating," is a forward-looking opinion about a fixed-income fund's capacity to maintain stable principal and to limit exposure to principal losses due to credit risk.
An S&P Global Ratings FCQR, also known as a "bond fund rating," is a forward-looking opinion about the overall credit quality of a fixed-income investment fund. FCQRs, identified by the 'f' suffix, are assigned to fixed-income funds, actively or passively managed, typically exhibiting variable net asset values. FCQRs reflect the credit risks of the portfolio investments, the level of the fund's counterparty risk, and the risk of the fund's management ability and willingness to maintain current fund credit quality. Unlike traditional credit ratings (e.g., issuer credit ratings), a FCQR does not address a fund's ability to meet payment obligations and is not a commentary on yield levels.
An S&P Global Ratings FVR is a forward-looking opinion about a fixed-income investment fund's volatility of returns relative to that of a "reference index" denominated in the base currency of the fund. A reference index is composed of government securities associated with the fund's base currency. FVRs are not globally comparable. FVRs reflect our expectation of the fund's future volatility of returns to remain consistent with its historical volatility of returns. FVRs reflect S&P Global Ratings' view of the fund's sensitivity to interest rate risk, credit risk, and liquidity risk, as well as other factors that may affect returns, such as use of derivatives, use of leverage, exposure to foreign currency risk, and investment concentration and fund management. Different symbology is used to distinguish FVRs from S&P Global Ratings' traditional issue or issuer credit ratings. We do so because FVRs do not reflect creditworthiness, but rather our view of a fund's volatility of returns.
Related Criteria And Research
Related Criteria
- Fund Credit Quality Ratings Methodology, June 26, 2017
- Fund Volatility Ratings Methodology, June 26, 2017
- Principal Stability Fund Rating Methodology, June 23, 2016
Related Research
- EU Money Market Reform: The Wait Is Finally Over, May 31, 2017
This report does not constitute a rating action.
| Primary Credit Analyst: | Andrew Paranthoiene, London (44) 20-7176-8416; andrew.paranthoiene@spglobal.com |
| Secondary Contact: | Francoise Nichols, Paris (33) 1-4420-7345; francoise.nichols@spglobal.com |
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