Europe Can Benefit from US Experience in Money Market Reform

Article 37 is part of a larger Regulation on Money Market Funds (MMF Reform) released by the European Commission in 2017. MMF Reform replaces the Common Definition of European Money Market Funds (2014/1103) and supplements the Alternative Investment Fund Managers Directive (AIFMD) and Undertakings for Collective Investment in Transferable Securities (Ucits). The regulation, which was published in the Official Journal of the European Union in June, seeks to mitigate the systemic risk that money markets pose to the economy and to standardize the rules governing money market funds across the EU.

Tom Pfister, global head of regulatory reporting solutions for Confluence, a data-driven managed investment solutions provider, says that while implementation of Form N-MFP and its subsequent expansions in the US went relatively smoothly, there are still takeaways for European firms affected by the new rules.

MMF Reform defines and categorizes money market funds “to support the idea that investors should be able to get their money back quickly and efficiently,” he says.

The regulation dictates whether a money market fund is allowed to purchase certain investments, when it can use a constant net asset value (NAV), credit quality requirements, stress-testing requirements, and transparency reporting to regulators and investors.

Pfister says a key area that the European Commission and the European Securities and Markets Authority are seeking to improve is “resistance to market stress [that would] require money market funds to further diversify their asset portfolios, invest in higher-quality assets and then meet those liquidity demands, meet those concentration demands and test all that stuff on a frequent basis.”

This shouldn’t be anything new for large asset managers with money market funds in both the US and Europe, but it is “a new game” for new players and funds entering the market, he says.

Preparation is Key

Based on the US experience of implementing similar reforms, Pfister says the key to success in Europe lies in preparing early and avoiding duplication.

“Taking a look at product portfolios, we saw a reduction in the total count of money market funds, because the reforms created buckets that required people to really target their funds,” he says. “People targeted [duplicative funds] first so that they didn’t give themselves onerous work.”

Firms should not only be preparing early, but also ensuring their preparation is front-to-back, he says. That is because MMF Reform will require firms to be able to provide a higher level of data on a daily basis, so they need to test the process effectively.

Pfister says there are three key transparency requirements in Article 37: a daily report for both constant and low-volatility NAVs that must be published online; a weekly transparency report of data on the portfolio itself; and a quarterly report that he describes as a mix of AIFMD and Ucits.

“[The quarterly report rule] takes some lessons from [AIFMD and Ucits] and blends them together to create quarterly reporting for those funds that has to go to the national regulator,” he says. “It’s going to be a new layer of reporting that never existed before… with new datafeeds and gap analysis against existing datafeeds.”

Firms must ensure they have identified both the correct data source and its proper ownership so that they can adjust when upstream sources change, Pfister says.

There is also the matter of obtaining the necessary technology, and paying for it. “The time frames are very quick, historically, with money market funds, so [firms] have to use technology solutions that are either created internally or through a vendor offering to actually grab all this data, confirm it’s right, test it against previous disclosures and threshold tolerance, then distribute it automatically,” he says.

Pfister adds that there will also be limited solutions available, as the technology is so specialized.

Finally, he says, firms should be prepared for change after the deadline, as the US equivalent has changed “about a dozen times” since it was first introduced. “These things always change. Understanding that change is a function of doing these disclosures, and then building your solutions or finding vendors that support them all.”