The amendments in question would require any constant net asset value (CNAV) MMF to be either a Retail CNAV – only eligible for a limited range of investors such as natural persons, charities and public bodies – or an EU Public Debt CNAV – which would have to hold at least 80 per cent of its investments in instruments based on debt issued by EU Member States. To complete the assessment, we conducted a number of interviews with operators of MMFs, issuers of the money market instruments in which they invest (MMIs) and investors in MMFs, and worked with existing research, including the impact assessment accompanying the original Commission proposal.
Around 540 billion euro are invested in CNAV MMFs, with a similar amount invested in variable net asset value (VNAV) MMFs. Investors value the diversity and quality of the instruments which they are able to invest in through MMFs and the ease with which they can use them. Those that use CNAV MMFs value their operational simplicity and flexibility.
Europe Economics do not believe that there would be a substantial take-up of the Retail CNAV or EU Public Debt CNAV. The retail component in European MMF investment is small and likely to remain so. That means that the funds might struggle to be viable, particularly with greater homogeneity in investor behaviour (e.g. redemptions at similar times, reflecting similar needs for operational funds). The returns to short-term EU Public Debt are low (the returns on existing euro-denominated government funds are negative) and, even in the event that rates are higher, there seems to be little appetite for EU Public Debt only funds. The proposed amendments would therefore retain the effect of the Commission’s proposals to largely end the use of constant net asset value in the European MMF industry.
Europe Economics expect that most of the funds currently invested in European CNAV MMFs would instead be invested in either VNAV MMFs (limited by existing investment policies, tax rules, laws and other restrictions) or bank deposits (limited by the requirements of bank regulation). To some extent, the features that investors value in CNAV MMFs would be replicated in VNAV MMFs. However, that might also mean that any systemic risks associated with CNAV MMFs would also be duplicated in those funds.
The transition to the new regulations should itself be regarded as a potentially systemically significant event, as the large relocation of funds could lead to mis-pricing or other errors which act as a source of pressure. Smaller shares of the funds would be invested in CNAVs outside Europe; invested directly in short-term instruments; and invested in bespoke arrangements with banks.
The most likely impacts are similar to those that might result from the Commission proposals: that existing MMF operators have to adjust to managing VNAV MMFs; some corporate issuers see an increase in the cost of short-term debt; and investors may face additional accounting effort in their treasury management operations (this may be severe in some Member States without changes to tax or accounting rules).