Changes to Europe’s money market fund (MMF) regulations, which entered into force on 20 July, may spark consolidation among providers, according to rating agency Fitch.
In an opinion, it notes that MMF providers “are faced with the costs and challenges of developing new products, or amending existing ones, to comply with the reforms”.
Meanwhile, “corporate treasurers and other short-term investors are determining which [products] best meet their needs.
“Managers currently offering constant net asset value (CNAV) funds are largely focused on the new low-volatility net asset value (LVNAV) fund type – but investor appetite for this new product is by definition untested.”
Fitch points out: “Providers unable to absorb the added costs of new products and investor education – or unable to differentiate themselves – could look to exit the business, leading to more consolidation.
“The industry has already been consolidating for some years, [including] more recent consolidation in the US in relation to US money fund reform.”
Fitch notes: “The timing of product launches and conversions may become an important competitive dynamic, as will effective investor outreach and education.
“Achieving efficient and early regulatory approval may provide an advantage, as funds are concentrated in just a handful of jurisdictions, creating the risk of approval delays and backlogs.”
However, it adds, “any advantage will depend on whether investors understand the new products and are willing to make the switch early, or will want to wait.”
Fellow rating agency Moody’s has struck an equally cautious note on new MMF products, despite predicting that the LVNAV type is likely to be adopted by many investors.
The organisation says: “A survey of Moody’s-rated MMF managers shows that, at this stage, the industry expects LVNAV MMFs to attract most of the assets currently invested in prime CNAV MMFs, and the majority intends to offer LVNAV funds to their investors.”
However, Moody’s vice president and senior analyst, Marina Cremonese, notes: “While we also expect a significant proportion of CNAV assets to flow into LVNAV funds as the former wind down, some investors may be deterred by the LVNAV valuation process – as well as the potential implementation of fees and gates, which could restrict daily liquidity.”
“In addition,” adds vice president and senior credit officer Vanessa Robert, “LVNAV funds are likely to have lower yields than competing variable net asset value MMFs because of their stricter liquidity rules, which could further limit their appeal to some investors.”
Moody’s expects that LVNAV funds will be managed more conservatively than prime CNAV MMFs.
“Portfolio managers,” it says, “will likely opt for shorter durations and increase near-term liquidity, as LVNAV funds could impose redemption fees and gates if liquidity thresholds are breached.
“Also, the narrow share price volatility tolerance for LVNAV funds will likely drive portfolio managers toward lower-risk investments.”
It adds: “The day-to-day task of running LVNAV funds will also be more complex, with portfolio managers focused on liquidity management, sourcing short-dated assets, NAV calculations, and operational procedures around fees and gates.”