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European Money Fund Reform: The Final … reform...Alastair Sewell, CFA Head of Fund & Asset Manager...
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Alastair Sewell, CFA Head of Fund & Asset Manager Ratings: Europe 11 December 2018 European Money Fund Reform: The Final Countdown is on Key Risks to Monitor and Post-Reform Outlook
Transcript of European Money Fund Reform: The Final … reform...Alastair Sewell, CFA Head of Fund & Asset Manager...
Alastair Sewell, CFA
Head of Fund & Asset Manager Ratings: Europe
11 December 2018
European Money Fund Reform: The Final Countdown is on
Key Risks to Monitor and Post-Reform Outlook
Contents
1 Money Fund Reform: Update
2 Key Risks to Monitor
3 The Post-Reform Landscape
4 Brexit
5 Conclusions
6 Appendix
7 Related Research
8 Contacts
Final Conversion Fast Approaching
Money Fund Reform: Update1
Low Volatility Net Asset Value: The New Kid on the Block
Current Range Future Range Post Reform
ST CNAV
ST VNAV
Standard
VNAV
Public
Debt
CNAV
LVNAV
Standard
VNAV
ST VNAV
Today’s CNAVs will cease to exist in their current form
Source: Fitch, regulatory documents
Conversion Dates now Concentrated in January
0
10
20
30
40
50
60
70
80
90
100
Sep 18 Oct 18 Nov 18 Dec 18 Jan 19
(% AUM converted)
Over 60% of Conversions to Happen in January 2019
LVNAV Public debt CNAV
Source: Fitch Ratings, iMoneyNet, MMF Managers Websites
Options for Euros Under Money Fund Reform
RDM Not Permitted
EUR LVNAV/Acc EUR VNAVOtherProducts
eg Bank Deposits
Positive Euro Rates Forecast by End-2019
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Aug
13
Dec 1
3
Apr
14
Aug
14
Dec 1
4
Apr
15
Aug
15
Dec 1
5
Apr
16
Aug
16
Dec 1
6
Apr
17
Aug
17
Dec 1
7
Apr
18
Aug
18
(%)
Source: Fitch Ratings, Bloomberg
Three-Year (Policy) Interest-Rate Futures
ECB 3 year forward overnight rate
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2017 2018F 2019F 2020F
(%) US Eurozone UK
Source: Fitch Ratings Global Economic Outlook September 2018
Fitch Forecasts Rising RatesEnd period
Credit Risk Is A Key Sensitivity
Key Risks to Monitor2
LVNAV Technical Features 1: The NAV Collar
0.9960
0.9970
0.9980
0.9990
1.0000
1.0010
1.0020
1.0030
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
“–20bp” “+20bp” Mtm nav
Compared With the Effective 50bp Corridor in Pre-Reform CNAVs
Source: Fitch Ratings
(Day)
Move to VNAV
Move to VNAV
Move to Variable Pricing
Move to Variable Pricing
Historic Record Shows Negligible NAV Movements
0
10
20
30
40
50
60
70
80
90
100
>= +2 +1 0 –1 <= –2
(%) Complex 1 Complex 2 Complex 3
Source: Fitch Ratings, Fund Managers
Negligible MTM NAV Movements Over the
Last Five Years in European Funds
Source: Fitch Ratings, Crane Data
US Prime Funds NAVs Highly Stable Too
No. and % of observations across 45 funds
No move
93.9%
(15,705
observations)
3+ bp up
0.1%
(22
observations)
2 bp up
0.1%
(21
observations)
1 bp up
3.0%
(497
observations)
3+ bp down
0.1%
(19
observation)
1 bp down
2.6%
(440
observations)
2 bp down
0.1%
(20
observations)
Credit Rather Than Rates Is the Key Sensitivity
120+bp Rate Movement Needed
An LVNAV will break the 20bp limit if the interest rate
increases or decreases by +/– 1.20% assuming a
regulatory maximum 60-day WAM.
Higher Sensitivity to Credit Spreads
An LVNAV will break the 20bp limit if credit spreads
move by more than 61bp, assuming a regulatory
maximum 120-day WAL.
1
-1.5
-0.75
0.750.5
-0.75
1.22
-1.22
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
(%)
Data as of 12 Nov 18. Beginning period: 18 Dec 98 for ECB and
14 Nov 88 for FED & BoE
Source: Fitch Ratings, Bloomberg
BoE FED
(06 Nov 08)
Instantaneous Rates Moves > 122bp
are Rare
ECB
0
5
10
15
20
25
0–1 year Euro broad
market
Financials 0–1 year US
corporate rated AAA–
A
0–1 year US
corporate
Financials rated ‘BBB’
(bp)
ICE BofAML timeframe data: 31 Jan 06 to 31 Oct 18
ML timeframe data: 02 Jan 97 to 03 Oct 18
Source: Fitch Ratings, Bloomberg, ICE BofAML, ML
Oct 08
Aug 15 Mar 19
Material Spread Movements Are More
Common
LVNAV Technical Features 2: Gates & Fees
Liquidity fees,
gates or
temporary
suspension of
redemption may
be introduced
Step 1
If weekly liquidity
< 30% AND daily
net redemption >
10%
Mandatory
implementation
of liquidity fees or
of temporary
redemptions
suspension
Step 2
If weekly liquidity
< 10%
Mandatory move
to full VNAV
Step 3
If suspension of
redemptions
exceeds 15 days in
any
90-day period
Gates or Fees Are a Remote Outcome
0
10,000
20,000
30,000
40,000
50,000
60,000
<–
10
–9
–8
–7
–6
–5
–4
–3
–2
–1 0 1 2 3 4 5 6 7 8 9
>1
0
Source: Fitch Ratings, Bloomberg. Observations between Sep 08 and
Sep 18
Outflows Above 10% Highly Infrequent
(Frequency)
(%)
0
2
4
6
8
10
12
14
16
18
20
30–34 35–39 40–44 45–50
Source: Fitch Ratings. Sample of funds only
Funds Already Ahead of Regulatory
Minimums(As of September 2018)
(No. of funds)
(Weekly Liquidity, %)
Reforms and Rates Increase Focus on Ultra-Short Bond Funds
The Post-Reform Landscape3
We Expect Broad Stability, With Change Underneath
Reform
Status
Underway
Full implementation January 2019
AUM & five-
year growth
rate to end-
2Q18
AUM: USD1.5trn
CAGR: 2.9%
Source: Fitch Ratings, ICI Global 2Q18
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
4Q
11
2Q
12
4Q
12
2Q
13
4Q
13
2Q
14
4Q
14
2Q
15
4Q
15
2Q
16
4Q
16
2Q
17
4Q
17
2Q
18
(USDtrn) Americas Europe APAC Africa
Source: Fitch Ratings, ICI Global
European Assets Stable but Global Share
Shrinking
Putting Money Market Funds in Context
Equity30%
Bond24%
Balanced/mixed20%
Money market
8%
Real estate
4%
Source: Fitch Ratings, ICI Global. 2Q18 data
Money Market Funds Represent 8% of
Total Fund Assets
Other Funds
14%
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
Ju
l 14
Oct 1
4
Ja
n 1
5
Apr
15
Ju
l 15
Oct 1
5
Ja
n 1
6
Apr
16
Ju
l 16
Oct 1
6
Ja
n 1
7
Apr
17
Ju
l 17
Oct 1
7
Ja
n 1
8
Apr
18
Ju
l 18
(EURm)
ST MMF Standard MMF STBF
Source: Fitch Ratings, fund factsheets, Lipper
Short-Term Bond Funds Fastest Growing
Today’s CNAVs Will Largely Convert into LVNAVs
0
100,000
200,000
300,000
400,000
500,000
600,000
StandardVNAV
ST VNAV ST CNAV ST CNAV gov’t
(EURm)
EUR GBP USD
Source: Fitch Ratings, Lipper, ICI, Efama, iMoneyNet; indicative only
ST CNAVs Dominated at End-2017
0
100,000
200,000
300,000
400,000
500,000
600,000
StandardVNAV
ST VNAV LVNAV CNAV govt
(EURm)
EUR GBP USD
Source: Fitch Ratings, Lipper, ICI, Efama, iMoneyNet; indicative only
Replaced by LVNAVs in 2019
Ultra-Short Bond Funds Have Seen Increased Demand
0
5
10
15
20
25
0
10
20
30
40
50
60
70
Ju
n 1
4
Aug
14
Oct 1
4
De
c 1
4
Fe
b 1
5
Apr
15
Ju
n 1
5
Aug
15
Oct 1
5
De
c 1
5
Fe
b 1
6
Apr
16
Ju
n 1
6
Aug
16
Oct 1
6
De
c 1
6
Fe
b 1
7
Apr
17
Ju
n 1
7
Aug
17
Oct 1
7
De
c 1
7
Fe
b 1
8
Apr
18
Ju
n 1
8
Aug
18
(AUM EURm)
AUM EURm (LHS) No. of rated funds (RHS)
Source: Fitch Ratings, Fund Administrators
Fitch-Rated European ST Bond Fund Universe Expanding Significantly
Brexit4
Conclusions5
Key Takeaways
Regulatory statements
appear to rule out RDM,
which will affect euro MMFs
The reforms will be fully
effective for all funds from
21 January 2019.
Fitch considers MMFs cash
& cash equivalent under its
corporate rating criteria
LVNAVs have certain
features which are
important to understand
Fitch does not anticipate
Brexit will disrupt the MMF
sector materially
LVNAVs will dominate the
post-reform landscape
Appendix6
Short-Term MMFsStandard MMFs
(VNAV Only)Public debt CNAV LVNAV Short-Term VNAV
Max asset maturity 397 days 397 days 397 days 2 years, with 397 days max to next interest
rate reset date
Max WAM 60 days 60 days 60 days 6 months
Max WAL 120 days 120 days 120 days 12 months
Min O/N liquidity (%) 10 10 7.5 7.5
Min weekly liquidity (%) 30 30 15 15
Eligible assets for
inclusion in weekly
liquidity
Highly liquid assets from
sovereign, supranationals or
agencies <190 days and up to
17.5% provided
one-day settlement
Highly liquid assets from sovereign,
supranationals or agencies <190
days and up to 17.5% provided
one-day settlement
MMFs up to 7.5% MMFs up to 7.5%
Eligible assets for
investment
99.5% government assets,
cash or reverse repo backed
by government assets
Money market instruments, certain
securitisations or ABCP, instantly
accessible deposits, short-dated
reverse repo, other short-term MMFs
provided no circularity, currency and
interest-rate derivatives (for hedging
purpose only)
Money market instruments, certain
securitisations or ABCP, instantly
accessible deposits, short-dated reverse
repo, other short-term MMFs provided no
circularity, currency and interest-rate
derivatives (for hedging purpose only)
Money market instruments, certain
securitisations or ABCP, instantly
accessible deposits, short-dated reverse
repo, other MMFs provided no circularity,
currency and interest-rate derivatives (for
hedging purpose only)
Diversification Max 100% per sovereign,
agency or European
supranational, across at least
6 issues, max 30% per issue
Max 15% per reverse repo1
counterparty
Max 5% per issuer
Max 10% per deposit counterparty
Max 15% per reverse repo1
counterparty
Max 100% per sovereign, agency or
European supranational, across at
least 6 issues, max 30% per issue
Max 5% risk exposure per derivative
counterparty
Max 5% per MMF
Max 10% per issuer and max 40%
aggregate in issuers > 5%
Max 10% per deposit counterparty
Max 15% per reverse repo1 counterparty
Max 100% per sovereign, agency or
European supranational, across at least
6 issues, max 30% per issue
Max 5% risk exposure per derivative
counterparty
Max 5% per MMF
Max 10% per issuer and max 40%
aggregate in issuers > 5%
Max 10% per deposit counterparty
Max 15% per reverse repo1 counterparty
Max 100% per sovereign, agency or
European supranational, across at least 6
issues, max 30% per issue
Max 5% risk exposure per derivative
counterparty
Max 5% per MMF
Aggregate
diversification
Max 15% overall exposure to
securitisation and ABCPs
Max 17.5% overall MMF exposure
Max 15% overall exposure to
securitisation and ABCPs
Max 17.5% overall MMF exposure
Max 15% overall exposure to securitisation
and ABCPs
Max 17.5% overall MMF exposure
Credit quality Favourable assessment based on internal credit quality assessment. Credit rating agency ratings as inputs in internal assessment, among others.
A Guide to the New Money Market Fund Types
Source: Fitch Ratings
Glossary
AUM Assets Under Management
CAGR Constant Annual Growth Rate
CNAV Constant Net Asset Value (fund)
IMMFA Institutional Money Market Fund Association
LVNAV Low Volatility Net Asset Value (fund)
MMF Money Market Fund
MRF Market Risk Factor
NAV Net Asset Value
PCF Portfolio Credit Factor
RDM Reverse Distribution Mechanism
ST Short Term
STBF Short-Term Bond Fund
STMMF Short-Term Money Market Fund
VNAV Variable Net Asset Value (fund)
WAL Weighted Average Life
WAM Weighted Average Maturity
WARF Weighted Average Rating Factor
Related Research7
Related Research
European Money Market Fund Reform Dedicated
Web Page
www.fitchratings.com/site/fam/mmfr
European MMF Reform: November 2018 Dashboard –
November 2018
European Money Market Fund Gate Risk Low – September 2018
Fitch Ratings: Global Effect of Europe MMF Reform Strongest in
Singapore – September 2018
Fitch: Governance of European Money Funds to Face Greater
Investor Scrutiny – September 2018
Fitch Debuts European Money Fund Reform Dashboard – July 2018
Fitch: LVNAVs to Take Centre Stage Post-Reform – April 2018
European Money Fund Reform – April 2018
The Post-Reform European Money Fund Landscape – April 2018
Fitch: Euro LVNAV Viability Now Hinges on Higher Interest Rates –
February 2018
European MMF Investors Await Clarity as Reform Beckons –
January 2018
MMF Compare:
Interactive Data
Comparison Tool MMFs key risk attributes
Graphical peer comparison
Published monthly
Contacts8
Fitch Ratings Contacts
Alastair Sewell, CFA
Senior Director
+44 20 3530 1147
Analytical
Business and
Relationship
Management
Kathleen Plunkett
Associate Director
+44 20 3530 1435
Charlotte Quiniou, CFA
Director
+33 1 44 29 92 81
Investor
Development
Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.
Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-
looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future
events or conditions that were not anticipated at the time a rating was issued or affirmed.
The information in this presentation is provided “as is” without any representation or warranty. A Fitch Ratings credit rating is
an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk,
unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the
issuer and its agents in connection with a sale of securities.
Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not
provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE
LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.
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