You would be forgiven if you had forgotten all about EU money market reform, as it completely fell off the radar in the last year. In fact, the industry entered this year much the way it entered 2015: awaiting the finalization of EU money market fund reform. That said, there was some notable progress last year (sort of).
In April 2015, EU Parliament approved its version of new money market rules, which were much more closely aligned with the new US money market fund rules. The most notable change was the decision to discard the much-derided 3% capital buffer for CNAV funds. It was replaced with strict conditions governing when a CNAV fund can operate. Under the new proposal, CNAV is limited to two types of funds:
- Retail CNAV, which would be available for subscription only for charities, non-profit organizations, public authorities, and public foundations.
- Public Debt CNAV, which would invest 99.5% of its assets in public debt instruments.
The proposal also called for the creation of a new money market fund, the Low Volatility Net Asset Value Money Market Fund, which would be allowed to offer a constant NAV under strict conditions. However, the rub is that the authorization would lapse after five years, at which point asset managers would have to adhere to the full money market rule. Given its time-bound nature, the Low Volatility has been viewed by many in the industry as little more than an empty gesture.
However, since the publication of the EU Parliament’s proposal there has been nary a peep out of Brussels on the subject. So, what happened?
Well, despite eliminating the capital buffer, the EU Parliament’s proposals were subject to fierce criticism from all sides. Those in favor of the floating NAV, led by France and Germany, voiced concerns that the proposals did not go far enough because they still allowed for a CNAV fund. On the other hand, those in favor of the constant NAV, led by Ireland, Luxembourg, and the UK, felt that the new rules go too far because they did not acknowledge that the EU marketplace is much more institutional than the US market. With the trialogue negotiations between the EU Parliament, Council, and Commission failing to produce a final compromise, EU money market fund reform remains in limbo.
After almost exactly a year of no discernible progress, the Dutch, who currently hold the rotating EU Presidency, have tried to break the impasse. In April, the Dutch proposed a compromise for money market fund reforms, which have been viewed as, generally, favorable to the industry. The key change is that the Dutch proposal removes the “sunset clause” for the Low Volatility Net Asset Value Money Market Fund, meaning the proposed new fund structure will no longer have an end date. In addition, the diversification requirements have been softened. However, there is a sting in the tale. The Dutch proposal explicitly bans any sponsor support from asset managers.
Despite the new proposals, there remains very little indication that anyone is in the mood to compromise. In fact, the stalemate seems so intractable that many in the industry do not believe that a solution can be found. This has led to a growing school of thought that the drive for reform may be abandoned all together, which would certainly be a welcome result for the industry, which is keen to maintain the status quo. Despite the impasse, we do not think the industry should be counting its chickens just yet. As anyone who follows EU policymaking knows, once put in motion, reforms are rarely stopped.
So, while there may be call for cautious optimism, the industry should keep a watchful eye on developments.
Note: A version of this post originally appeared in the 2016 BBH Regulatory Field Guide