Michael Quicke on proposals to reform money market funds

Michael Quicke is chief executive of CCLA. Michael is part of a delegation of fund managers and investors travelling to Brussels next week to discuss with the European Commission their proposed reforms of the money market fund industry. 

Room151: Why are you going to Brussels? What is at stake?

Michael Quicke: We run three constant net asset value money market funds (CNAV MMFs). Collectively, these have around 25,000 charity and public sector investors with £1.7 billion pounds collectively invested. The funds provide an easy way for them to diversify their investments, which retain a constant value, and on which they reap a yield. Proposals before the European Parliament could have the unintended consequence of forcing these investors to abandon CNAVs and put all their cash into a single bank.  We are having meetings on 21 January with a variety of European officials and politicians to discuss the issue. We want to explain to them that the proposals as they stand could harm the security of public sector and charity investments. The thrust of what we are saying is CNAV funds are very valuable to smaller institutions or charities and that the way in which the policies have been developed has been assuming they are only used by large institutions. It sounds like a discussion for anoraks but it is hugely important.

R151: What is it about the proposals that you object to?

MQ: There is some good stuff in there concerning things like transparency. But there are two bad things. Firstly, it proposes that all constant net asset value MMFs retain a three per cent buffer. The buffer will effectively mean that such funds cease to exist. No fund manager will put three per cent into a fund – they just don’t operate like this. MMFs typically have very low fees and there is no way that a fund manager could justify these if they were required to hold back 3 per cent.

It also proposes that retail investors will be banned from investing in CNAVs. Under a separate regulation known as MiFID, from 2015 local authorities will be considered as retail investors. This would prevent them from investing in CNAV MMFs even if the buffer was removed.

The paper had also proposed a ban on MMFs from soliciting external credit ratings, which would also have caused problems, but an amendment has been tabled, but not yet formally adopted, to drop this. So really we are just talking about two major areas of concern.

R151: So couldn’t local authorities just invest in variable NAV MMFs?

MQ: Whereas CNAV MMFs are extremely simple, VNAV MMF is a pretty sophisticated concept. Big authorities would be sophisticated enough to understand VNAV MMFs, but when they look at smaller councils, right down to parishes, they are much more likely just to move their cash to a single bank account. CNAVS became popular after the Icelandic banks fiasco. The purpose was to get diversification, and in order for that to work, people need to be confident to use them easily.

Also from an accounting point of view moving from a constant to a variable fund looks like moving from a deposit to an investment, making them more complicated to account for. In addition, in practice a variable net asset value fund which attempted to keep its value constant would end up yielding a lower return than a dedicated constant one.

R151: What has happened to similar proposals in the USA?

MQ: The Americans have been through the same process regarding the buffer issue. They had a very exhaustive debate and have very firmly agreed that the idea of a buffer doesn’t work. It is all a question of where you draw the boundary between banking and fund management. This whole discussion has been about whether a MMF is a banking object or a fund management object. There is a debate and that argument is raging in Europe. It is clear that they are not banks, they are just like funds, and in the States they came to the correct conclusion. Insofar as people in Europe are interested in what the USA does, it could help our case.

R151: The idea of a buffer sounds like a good idea. Wouldn’t it provide extra security to councils’ investments?

MQ: I think in theory it would provide security but no fund manager will put the money up. The effect will be to eliminate the funds, not to provide them with a buffer. The risks that the buffer is aimed at addressing are related to market risk, such as interest rates moving. But the real risk that people will face if they are forced to go with a single provider is that the institution could fail, which goes well beyond 3 per cent. In a CNAV MMF that risk is spread, so if one institution goes belly-up, it only affects a small proportion of your investment.

R151: When should we expect to see a resolution to the issue?

MQ: The whole thing is going through the European Parliament Committee on Economic Affairs (ECON). It will meet on 23 of January, two days after our meetings to discuss tabled amendments.  A final proposal will be drafted by the end of January, with a vote on it scheduled for 12 February. It will then be heard in parliament in April. We want to make sure the proposal doesn’t just slide through as an amendment on page 77 of a larger document dealing with financial reform. It is not just about rich people getting richer but affects small public bodies and charities.