Call for EU to amend MMF reform

by Colin Marrs
in Treasury
— 7 May, 2015

A senior figure at a leading asset manager has called on European politicians to amend proposed money market fund reforms to mitigate the potential damage to returns for local authorities.

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

Speaking to Room151 this week, Dennis F Gepp, senior vice president, managing director and chief investment officer, cash at Federated Investors, backed concerns raised by IMMFA, the money market funds association, that the changes could lead to lower returns for public sector investors.

The association said that the creation of a new public sector retail CNAV fund would likely reduce the number of investors in such funds from investors outside the government sector.

Gepp said: “The challenge will come because of the way retail is defined – it is pretty narrow, consisting of public authorities, charities, higher education institutions and housing associations.

“The problem is that inevitably if you have one type of investor in a fund, they tend to have some similar requirements.

“They tend to get cash coming in on similar days of the month and have payments to make at similar times. If you know money that you get from local authorities on 15th of the month will be required on 19th, you make sure that instead of doing your normal diverse set of investments across time periods you keep more available for instant access.

“It would probably require a higher level of liquidity to be retained for these periods, which could mean the returns on the retail product are lower than at present.”

He said that one way of helping mitigate this effect would be to allow more types of investor to invest in the public sector CNAV.

He said: “The challenge will come because of the way retail is defined – it is pretty narrow, covering public authorities, charities, higher education institutions and housing associations.

“To ensure sufficient diversification within a fund, it is important that the definition of retail is widened. As an example, in the USA, retail MMFs include ‘natural persons’ who invest in their own right or through pension schemes and the like. “

The carve out for public sector bodies under the retail definition means only 5 to 7% of the current CNAV market will remain, he said, leading to a potential reduction in the number of companies making retail CNAV funds available.

“Councils might well find their current provider is no longer going to continue in that short-term market place and might have to switch,” he added.

Such a reduction in the number of providers could also cause headaches for councils bound by diversification requirements in their treasury management strategies, he said.

“At least one local authority treasury adviser advises that councils should only have a small percentage of each fund,” he said. “If they have significant funds to invest, and are restricted to a certain amount invested in each MMF, then they could find it difficult to find a safe home for their short term investments.”

However, Gepp hopes that the remaining issues can be resolved when the reform package is considered by the European Council later this year.

He said: “For local authorities, the benefit of the retail CNAV product is that it retains a product they like and use and which has worked tremendously well for them.

“It gives them the diversity they require with instant access, which is important at a time that banks are wanting to avoid instant access to cash due to the BASEL III regulations.”