The European Fund and Asset Management Association (EFAMA) has today published its response to the ESMA consultation on the legislative review of the EU Money Market Fund Regulation (MMFR).
Generally, EFAMA sees no need for a fundamental reform of the EU MMFR. According to the association, European MMFs continued to meet redemptions throughout 2020, even though liquidity management proved challenging for all market participants in March 2020. Moreover, European MMFs have provided a high-quality, well-diversified and liquid investment option at a time when markets underwent considerable stress, while offering both investors and regulators complete transparency around funds’ portfolio holdings and liquidity levels.
European fund managers entered the pandemic with very prudent fund liquidity levels, helped by the “know your customer” provisions in the MMFR and the anticipation of quarter-end seasonal outflows.
EFAMA insists that any reform of the EU MMFR regime needs to be carefully assessed to preserve the intermediary role that MMFs play in short-term money markets, as they continue to offer a critical alternative to traditional bank financing.
ESMA’s preparatory work on the review of the MMFR is a well-timed effort to contribute to a broader debate on MMF reform options, particularly, with the international standard-setting bodies IOSCO and FSB, who in turn have launched a consultation addressing MMF reform options yesterday.
Federico Cupelli, Senior Regulatory Policy Adviser at EFAMA comments: “We insist that the money market fund reform efforts in Europe and globally remain fact-based and do not lose sight of the importance of a functioning underlying secondary market structure where short-term securities are traded. Reform efforts should, for instance, focus more on incentivising liquidity provisions by bank dealers during periods of heightened stress, avoiding a dominant focus on the buy-side. Otherwise, we risk reducing the number of alternative sources of financing to banks, to the detriment of issuers and investors.”
Looking at the options presented in the ESMA consultation document, EFAMA highlights the following:
- The association supports decoupling the potential activation of liquidity fees or gates from a possible breach of the prescribed weekly (30%) and daily (10%) liquidity thresholds for LVNAV and public debt CNAV funds.
- Liquidity management tools: The anti-dilution levies in the form of fixed liquidity fees represent the most appropriate solution for managers to counter unanticipated surges in redemption demands, according to the association.
- The proposed recalibration of the existing liquidity levels would introduce an inevitable “performance drag” to the detriment of corporate and institutional investors, thus diminishing the attractiveness of non-public debt MMFs in particular. Some of the proposed solutions would even risk blurring the distinction between market-based financing vs. bank financing in the eyes of investors, supervisors and the general public.
- Even though LVNAV, public debt CNAV and VNAV MMFs have demonstrated resilience in the course of last year’s market correction, ESMA introduces the option to eliminate LVNAV and public debt CNAV funds. This would reduce sources of market financing and increase reliance on traditional bank intermediation, thus countering the EU’s prospects for a Capital Markets Union. Some investors continue to value stable NAV MMFs for specific reasons and the absence of viable alternatives would be detrimental, especially for corporate investors.
- Lastly, EFAMA believes that the MMFR’s explicit ban of “external support” - when an affiliated bank would step in to support the fund's NAV - should stay in place, as such a ban marks an important positive difference to other global jurisdictions (notably the U.S.).
Notes to Editors
VNAV - Variable Net Asset Value
CNAV - Constant Net Asset Value
LVNAV - Low Volatility Net Asset Value
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About the European Fund and Asset Management Association (EFAMA)
EFAMA, the voice of the European investment management industry, represents 28 member associations, 58 corporate members and 24 associate members. At end Q1 2021, total net assets of European investment funds reached EUR 19.6 trillion. These assets were managed by more than 34,600 UCITS (Undertakings for Collective Investments in Transferable Securities) and almost 29,600 AIFs (Alternative Investment Funds). At the end of 2020, assets managed by European asset managers as investment funds and discretionary mandates amounted to an estimated EUR 27 trillion.
More information is available at www.efama.org.