HSBC Global Asset Management published a video interview on "Money Market Fund Reform in Europe" yesterday, which featured Hugo Parry-Wingfield, EMEA Head of Liquidity Product, interviewing Jonathan Curry, Global CIO Liquidity. Parry-Wingfield introduces the segment, saying, "Welcome to the discussion we're going to have on money market fund reform in Europe. Jonathan, we've been hearing a lot about ... regulatory reform for money funds in Europe for a long time now. Where have we actually got to and what is actually happening?"
Curry answers, "The good news is that we are reaching the end of the road after 6 or so years of discussing this. We have what we would describe as a few procedural steps to go, which is a full vote in the European Parliament, a full vote in the Council of Ministers, and then finally putting [it] onto the statute book. So we're reaching the end of the road. We expect that to be done by the second quarter of this year."
Parry-Wingfield says, "There's clearly a lot of detail in the new regulations. I think it runs to over 90 pages in fact.... What should investors be thinking about? What would we highlight as some of the key areas?" Curry tells him, "There's a number of areas that I think are worth highlighting to users of the funds. Firstly, we would break the reform down into two key parts. One would be the structural changes. The other would be the changes to the investment risk constraints that money market funds would have to follow post the implementation of reform. By far the most significant are the structural changes, and the most significant of those is the creation of a new style, or new type of money fund in Europe, which is known as the low volatility NAV, or LVNAV product."
He explains, "So the reason why this is significant is that it's a new type of fund, but it's also an effort by the regulators in Europe to find a compromise position so that there are money market funds in Europe that continue to invest in credit that investors will continue to want to use, whilst addressing some of the key concerns of the regulatory community. So that's what the LVNAV really is."
Curry also says, "The LVNAV itself, to an end user ... not a lot will change. The majority of our investors are in constant net asset value prime money market funds. For those investors, what they're used to, is a fund where the price remains at a constant of 1.00 unless it moves out of a 50 basis point, or 1/2 a percent, collar, plus or minus around that 1.00."
He comments, "So the most important thing to know about the LVNAV is that the main change is that that collar has been narrowed to 20 basis points. Outside of that, from a user perspective, really not a lot has changed, and that's the most significant point to make. Our view is the LVNAV is a very good alternative to today's CNAV prime funds. For those investors that want to continue to invest in a fund that has credit, the yield pickup that that has against investing in government assets. So that's probably the main change."
Curry adds, "Another area I would highlight, more a point of clarification ... is the fact of fund ratings. Our funds, and the majority of funds similar to ours in the market, are rated today AAA, by one of the major ratings agencies or more, and that's been an area where it was possible that that would no longer be a feature of the product after regulation. The good news from an investor standpoint is that money funds will still continue to be able to be rated. For many of our investors, that's important, and we understand that. These are the two areas I would highlight in terms of structural."
He states, "On the reinvestment side, the investment risk side, really, we are for all intents and purposes already compliant with the regulation using our own internal investment guidelines. So from a risk perspective, and therefore from a return perspective, we wouldn't expect to see any meaningful change for the investor in LVNAV funds."
Parry-Wingfield also asks, "These new regulations apply to European domiciled funds, including HSBC's global liquidity fund range. There's also been regulatory reform already taken place in the US. In October of last year, the SEC went live effectively with new regulation.... There are some similarities. But what would you highlight as the key differences between the two sets of regulations? Because they're clearly not the same."
Curry responds, "That's right. They're definitely not [the same] in a number of key areas. The most significant ones are as follows: Our investors ... are all institutional investors in our money market funds here in Europe. [US investors] are not able to access a CNAV prime fund any more, and the alternative that they have is a variable net asset value fund. That's a very different outcome to what we are going to see in Europe with the LVNAV product, which I just referenced. So unlike the VNAV product, we would not expect the price of the LVNAV fund to change. So quite a significant difference there between what the US regulators, the SEC, adopted, and what the European regulators are going to adopt."
He adds, "The other area I would say is probably around liquidity fees and redemption gates. These are mechanisms that are there to protect investors and are actually in our funds already today and have been for a while, in the case of gates since they were launched, and also in many of our peers' similar money market funds here in Europe. So the concepts are not new to the European investor, and how the European regulation treats them is also different to how the US regulation treats them. So some of the questions that US investors had, we don't think will apply in Europe, partly because of the comfort that already exists with European investors and the different way the regulations treats those mechanisms here in Europe."
Curry is asked, "What are the next steps? It's still to be absolutely finalized... When will it actually start to apply?" He comments, "We expect the procedural steps that still need to take place be completed by the end of the second quarter. Clearly, things can change with the European regulatory process. But that's what we expect today. There will then be an 18-month implementation period for existing money market funds, and for any new funds that are created post-implementation, they will have 12 months to comply.... If we're right about end of second quarter, then for existing funds, you're looking towards the end of 2018 for the funds to need to comply with the regulation."
Finally, Parry-Wingfield queries, "How is HSBC preparing for these changes and how are we planning to engage our clients in that regard?" Curry tells him, "In a number of ways, really. We've been holding a number of events in different locations around Europe over recent weeks, talking to investors, explaining the regulations, explaining the impact we see ... so they have a better understanding of the choices they would need to make. We've also put the information out in a thought piece as well.... We'll continue to keep our investors informed as we go along this process."
