EU reforms could mean ‘lower returns’ for MMFs

Local authorities could face lower “returns” from money market funds, according to an expert speaking after a package of reforms cleared another hurdle in their progress through the European Parliament.

MEPs this week voted to approve a compromise package of reforms aimed at providing more security for investors in the instrument.

Speaking to Room151, Susan Hindle Barone, secretary general of the IMMFA, the money market funds association, said that local authorities should be protected by the creation of a new government CNAV category for MMFs.

She said: “We would say that local authorities are better off relative to many other investors – there is a specific CNAV carve out  for ‘charities, non-profit organisations, public authorities and public foundations’”

However, she said that there would likely be a flight from existing CNAV funds from investors outside the government sector.

She said: “The downside might be if the funds they are invested in are a lot smaller. They may operate less efficiently than they currently do if there is a smaller and less diverse group of investors.

“If a fund has a lot of investors from one sector – such as the public sector – they may want to invest or withdraw their money at similar times.

“Correlation of this type is not good for the overall running of the MMF, it impedes liquidity and may lead to lower returns.”

She added that a “sunset clause” which would prevent the authorisation of a separate new category of low volatility net asset value (LVNAV) fund after five years “have the potential to destabilise the short-term capital markets for years to come”.

Stuart Freeman, director of cash investments at investment manager CCLA, told Room151: “It was an important decision that CNAV funds continue to be permitted for public sector and charitable bodies.

“In fact CCLA’s cash products for these two sectors already undertake most of the proposed new liquidity, transparently and investment requirements and have done so for almost 60 years.

“But we are worried that the relatively short sunset clause that has been imposed on the rest of the MMF industry with the new LVNAV does question their viability and hope that agreement can be found in the very near future.”

Local government currently has around £5bn invested through MMFs, representing around 3% of the market, according to estimates.

The European Council, which represents member states, must now work up a joint position on the proposed legislation before entering negotiation with the European Parliament on the final reform package.

Photo (cropped): By rock Cohen, Flickr