EU money market fund reform
FREQUENTLY ASKED QUESTIONS
These FAQs are intended to help investors navigate through the money market fund reforms. They are divided into 7 sections:
I. About the Money Market Fund Regulation
Q. What is this Regulation?
It is a new European Regulation that will govern all money market funds established or sold in the EU.Its official title is Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds.It was published in the Official Journal of the European Union on 30 June 2017 and entered into force on 20 July 2017.
Q. Who does it apply to?
It applies to all money market funds established or sold in
the EU. These are defined in the Regulation. As a Regulation it applies
directly in every Member State, without needing to be brought into law locally.
Of course, every money market fund will be subject to authorisation and
supervision by regulators in each Member State.
Q. Where can I find a copy?
II. Timetable for Change
Q. When do new funds have to comply with the new Regulation?
After 20 July 2018 all new money market funds will have to be fully authorised under the Regulation.(“New” funds means money market funds established after 20 July 2017.)
Q. When do existing funds have to comply with the new Regulation?
By 21 January 2019 at the latest. (“Existing” means money market funds established before 20 July 2017.)
III. MMF Products
Q. What money market fund products does the new Regulation allow?
The full range of investment fund product structures are:
- Public Debt CNAV MMF (“CNAV”)
- Low Volatility NAV MMF (“LVNAV”)
- Variable NAV MMF (“VNAV”): these are further divided into two kinds, Short Term or Standard – see the next FAQ for more information.
Q. What are the different categories of money market fund in the Regulation?
Money market funds are divided into two categories – Short Term MMFs and Standard MMFS.The former are invested in very short term assets and the latter in longer dated assets:
- The Public Debt CNAV MMF and the Low Volatility NAV MMF can only be Short Term MMFs.
- Variable NAV MMF (VNAV) can be either Short Term MMFs or Standard MMFs.
Q. How do the new types of money market funds relate to today’s funds?
The following chart sets out existing and new fund types and shows how they are categorised. Many firms have stated that they will follow the trajectory illustrated in this chart.However it is possible that some of the Short Term MMF may change MMF type, for example Short Term VNAV-to-LVNAV or CNAV Prime-to-Short Term VNAV.Your fund manager should make the choice clear.
Q. What are the most significant new requirements in each money fund type?
The changes made by the new Regulation vary quite a lot between different types of MMF and how they are categorised (whether they are Short Term or Standard MMF). In general, more changes have been made to the LVNAV and Public Debt CNAV MMFs than to VNAV MMFs. Please see the IMMFA pamphlet on European Money Market Reform for more information.This includes a table setting out the principle requirements that apply for each fund type - https://www.immfa.org/about-mmfs/investor-help.html
Q. What currencies are offered?
Within the IMMFA universe of funds three currencies are available now and this is not expected to change.Individual managers offer MMF in Euro, GBP and USD.
Q. Will I have to move to a new fund once the new Regulation is fully implemented?
No, unless you choose to.Most firms intend to make changes to their existing funds so that they are compliant with the new Regulation. However, you are likely to have to consent to changes made to the fund, such as Prospectus changes.
IV. Operational Issues
Q. Will the new funds be cash equivalent?
We expect that the Public Debt CNAV and LVNAV products will be cash equivalent, and some Short Term VNAV MMF as well.However it remains a matter for each investor to determine individually, as now.
Q. Where can I find out more about cash equivalence?
Generally cash equivalence is a matter for each investor to reach a view on, with their auditor if an investment is material.
In principle we expect that existing Short Term MMF that are cash equivalent will continue to be considered so under the new regime.The new Regulation was enacted to bolster financial stability and amongst other reforms introduces tighter rules for Short Term MMF investment criteria.The purpose of the changes is to promote investment in assets that will incur minimal price movements.This is highly relevant in assessing whether a fund is cash equivalent.
Q. Will I still be able to get same day liquidity?
Yes. However you will need to check the precise details of what is offered for each fund you invest in.
Q. Will my funds still have a credit rating?
The new Regulation allows the fund manager to obtain a credit rating for the fund, as now.It is therefore a matter of choice for each manager.
V. Accounting and Valuation
Q. What are the accounting and valuation differences between CNAV and VNAV MMF?
Money market funds apply accounting and valuation conventions in two different ways.
- Constantly priced MMFs (which are Public Debt CNAV MMF and LVNAV MMF) are valued using amortised cost accounting, with a daily check against mark-to-market asset pricing.The LVNAV MMF also has constraints on which assets may be included in the amortised cost methodology.
- Variably priced MMFs (VNAV) are valued using mark-to-market and mark-to-model asset pricing.CNAV can only be Short Term MMFs.VNAV can be Short Term MMFs or Standard MMFs.
Q. Will the timing for accessing cash in my funds be the same as now?
Where funds settle once a day, the timings are likely to stay the same.
Where funds offer settlement more than once a day, it is likely that some changes will be made to the timings.Managers will reach out to investors when their arrangements are finalised.
VI. LVNAV Funds
Q. Is the valuation process for an LVNAV going to be the same as now?
No, but it will be similar and therefore recognisable for investors.The new Regulation imposes more restrictions on the LVNAV product and this will create more work daily when the fund’s assets are valued.The most significant factors relate to the narrowing of the fund collar for price movements from par - 50 basis points now will change to 20 basis points; and to the requirement that any asset that moves more than 10 basis points from its par value must be marked to market.
Q. What is meant by the LVNAV fund “collar”?
The LVNAV fund “collar” forms part of the valuation mechanism for the fund.LVNAV funds allow investors to purchase and redeem shares at a constant NAV calculated to 2 decimal places, i.e. £1.00.This is achieved by the fund using amortised cost for valuation purposes, subject to the variation against the marked-to-market NAV being no greater than 20 basis points (O.2%).(This compares to current Prime CNAV funds which round to 50 basis points, or 0.5%, of the NAV.)
Q. Will the LVNAV valuation rules have any impact on my accessing cash same day?
No, save for possible minor changes in the timings for
Q. What are fees and gates?
Fees and gates appear in existing funds legislation, such as UCITS.Gates allow for a temporary suspension in the purchase or redemption of fund units, where this can be justified in the interests of holders of the units.Fees may also be applied in respect of fund purchases or redemptions (therefore in addition to NAV).Again the aim is to ensure fair treatment of all investors in the fund.
Q. How will fees and gates apply to LVNAV funds?
The MMFR has specific provisions about fees and gates that apply to Public Debt CNAV and LVNAV funds.Mandatory fees and gates must be applied by the fund Board when weekly liquid assets in these funds falls below 10% (the requirement is to hold 30% in weekly liquid assets).Discretionary fees and gates may be applied when the fund Board decides they are needed.
Q. Will the IMMFA Code stay in place?
The IMMFA Code of Practice will stay in place until 20 January 2019.Almost every provision of the Code has now been embedded in the new Regulation, together with a cohesive framework for money market fund product. The new Regulation will apply in full from 21 January 2019, so that is when the IMMFA Code will be retired.
Q. Will the IMMFA Code be replaced?
Yes.Effective 1 January 2018, IMMFA introduced new Principles of Best Practice.These will apply to new members joining IMMFA from that date.Existing (pre-2018) members will continue to be governed by the IMMFA Code until 20 January 2019 or until such time as their funds are re-authorised under the new Regulation, whichever is earlier.From 21 January 2019 the Principles of Best Practice will apply to all IMMFA members.
The Principles of Best Practice may be found on the IMMFA website: https://www.immfa.org/about-immfa/immfa-code.html
Q. Where can I get more information on money market fund changes?
Your fund manager will have information about the reforms as well as about changes to their own funds. Other useful sources of information are the IMMFA website and the credit rating agencies (Fitch Ratings, Moody’s Investor Services and Standard & Poor’s, all of which are IMMFA members).Information may be found here: