European policy makers have proposed money market fund (MMF) reforms relatively similar to the US changes slated to take effect next year, says Moody's Investors Service in a new report.
"As in the US, the goal in Europe is to enhance MMFs' ability to withstand stressed market conditions, reducing systemic risk. However, reforms will have diverging effects in these markets, given their very different starting points," observes Vanessa Robert, a Moody's Vice President – Senior Credit Officer.
"For investors, the new money fund regulations will generally translate to more conservative portfolios, because portfolio managers will want to limit net asset value volatility. Investors can expect more transparency around fund valuation from portfolio managers, but also lower yields" says Marina Cremonese, a Moody's analyst. Moody's also expects a proliferation of MMF types, especially in Europe, which could confuse investors.
In the US, Moody's expects government and treasury funds to represent a bigger slice of US MMF assets. Prime MMFs will shrink in size and primarily appeal to retail investors, who can continue to invest in constant net asset value (CNAV) structures. Institutional investors will only find prime MMFs attractive if the yield differential with government MMFs is high enough to compensate for the risk of fees and gates.
The rating agency forecasts that MMF assets both in the US and in Europe will remain fairly stable, despite a reallocation of assets within the different types of MMFs. The US government and treasury MMF segment could grow by as much as 25% in assets. In Europe, Moody's considers that low volatility net asset value (LVNAV) funds have the potential to widely replace prime CNAV MMFs, which currently account for about 60% of the MMF sector.
At the asset manager level, Moody's expects the industry to remain concentrated with potential for further, although limited, consolidation both in Europe and in the US. These regulations favour the bigger players who are able to leverage their scale to more easily stomach increasing costs and are in a better position to offer a variety of cash and short term investment solutions to investors.
