Commission proposals spell ‘de facto abolition’ of CNAV MMFs

European Commission proposals issued on Money Market Funds this week have been badly received by markets, with commentators saying that they go too far.

The EC is proposing that all MMFs based in Europe either value their assets daily (i.e. move to Virtual Net Asset Value, or VNAV pricing) or build up capital buffers of 3% of assets under management to guard against losses.

The Commission believes that Constant Net Asset Value (CNAV)  funds are more susceptible to runs during market turmoil. Announcing the proposals EU internal market commissioner Michel Barnier said: “The funds are not as stable [as bank deposits] and when there is tension this can imperil the financial sector, especially banks.” However the Commission’s proposals do not go as far as those suggested by the European Systemic Risk Board, which called for all money market funds to change to Virtual Net Asset Value (VNAV) pricing. Barnier called a ban on Constant Net Asset Value funds “brutal” and said it would damage the European economy.

However the Institutional Money Market Funds Association called the proposals a “de facto abolition” of CNAV funds saying that holding a 3% liquidity buffer would prove “uneconomical” for asset managers.

Susan Hindle Barone, Secretary General of the association said: “We reject the assertion that there is a greater degree of systemic risk inherent in constant NAV money market funds. The European Commission has not demonstrated that CNAV funds are more susceptible to run-risk than VNAV funds and the discrimination between these two accounting techniques is unjustified.”

Another proposal in the report could be of further concern to council finance officers. The Commission recommends that MMFs be banned from asking for and paying for credit ratings. AAA-rated money market funds are widely used by local government, with the rating providing much comfort.

Andrew Larkin, senior client director at Arlingclose, thinks that funds could move to VNAV. Many have been publishing ‘shadow’ VNAVs for some time and movement has been in the two-to-three thousandths of a basis point range, he explains. “Investors would get scared if asset values started jumping about,” said Larkin. “You’d ask, can something be used as a liquidity product if the NAV is moving on a daily basis, but we are pointing out to clients that the shadow net asset values are remaining stable and greater regulation can make products more stable in the long term.”

Although the Commission could vote as early as the first quarter of next year on the proposals, funds could have up to three years to make the changes.