Fitch Survey: European Treasurers Yet to Define Impact of Regulatory Change

by Alastair Sewell, Director, and Aymeric Poizot, CFA, CAIA, Head of EMEA Fund & Asset Manager Rating Group, Fitch Ratings

European treasurers surveyed by Fitch have increasingly turned to money market funds (MMFs), which many view as an extension of traditional bank deposits. When selecting funds, treasurers take a holistic view, emphasising the financial and operational role of the fund sponsor in addition to the fund itself. Treasurers appear to hold mixed views on the respective merits and flaws of CNAV and VNAV funds. Some even use both, which is particularly interesting in light of the current regulatory debate on the future of money market funds. Nevertheless, it appears many treasurers have not adequately anticipated the impact of a potential regulatory move to VNAV, which indicates the need for a sound transition framework.

Money market funds are subject to ongoing regulatory debate around the world. Many changes have been proposed, notably a potential move from the constant net asset value (CNAV) structure, which represents around half of total MMF assets in Europe, to a variable net asset value (VNAV) structure, which is predominant in French funds and represents the remaining MMF assets. While calling for changes to MMF operating frameworks, regulators have also expressed concerns about the potential impact on short-term investors who have adopted pooled solutions in recent years. Fitch has surveyed 68 European treasurers on their cash management practices. The findings are particularly relevant in light of the ongoing global regulatory debate around money market funds.

Treasurers have diversified the types of cash instruments they use and while deposits remain the preferred vehicles, half have also adopted MMFs. Half of the treasurers using MMFs only invest in CNAV, and a third only in VNAV but interestingly about a fifth of those treasurers that invest in MMFs (or 9% of treasurers overall) use both. Therefore, a fifth of treasurers using MMFs can deal with both frameworks in their accounting or tax treatments. (Fig. 1)

Fitch’s survey also showed that MMF and deposit rating guidelines are not always aligned. Credit quality guidelines for deposits typically stipulate a minimum credit quality of ‘A’ or above, consistent with broader counterparty guidelines. By contrast, MMF guidelines still mainly adopt an ’AAA or nothing’ approach, even though a quarter of respondents could accommodate MMFs rated ‘AA’ or ‘A’. This is an area where regulators are concerned with a ’cliff risk’ (the risk of ’run on the fund’ should it be downgraded below AAA) and have advocated broader guidelines and accordingly more dispersion in fund ratings and profiles. (Fig. 2)

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Treasurers do not appear to hold strong views with regard to CNAV versus VNAV funds – they recognise their respective merits and flaws. When comparing CNAV and VNAV, treasurers highlight the clear profile of CNAV funds and the true valuation of VNAV. Most CNAV funds abide by the stricter guidelines of IMMFA (the CNAV trade body) and rating agencies. Conversely, they are also concerned with the perception that CNAV funds offer a guarantee, given they offer a stable NAV of 1$, 1£ or 1€m. To a lesser extent lack of valuation transparency represents a concern, given that the net asset value of the fund is not based on assets’ mark to market valuation, as it is with VNAV funds. VNAV funds’ volatility and potential hidden capital losses represent further concerns. (Figs. 3-4)

Treasurers using CNAV have different views on the impact of a potential regulatory move to VNAV. Forty-seven per cent do not expect to be materially affected while 42% anticipate a significant or material impact, mostly in accounting and tax areas. This makes clear the need for more communication and preparation on the part of industry and regulators. (Fig. 5)

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As treasurers place particular value on the clear profile of CNAV funds, it is interesting to note that 43% do not have an opinion on whether funds converted to VNAV would be less clearly defined. Nevertheless, Fitch believes there is a risk of collateral damage if the CNAV model were to disappear. Indeed, the CNAV model goes beyond an accounting convention; it corresponds to clear restrictions and strong governance. Both factors are valued by investors and would need to be preserved even under a VNAV framework. (Fig. 6)

This uncertainty explains their expectation that regulators will ensure a reasonable transition period. Fifty-eight per cent think a transition of maximum 24 months should suffice to adapt if CNAV were replaced by VNAV but only 12% would envisage a quick transition in less than six months.

The multifaceted role of the sponsor is viewed as critical. The regulatory debate highlights the hybrid status of MMFs sitting between deposits and actively managed products. Fitch’s survey confirms the specific nature of MMFs: 80% of respondents consider the financial standing of the sponsor when selecting an MMF, and not just the portfolio and investment strategy. However 40-50% of respondents take a holistic approach, seeing the sponsor not only as a backstop to the fund, able to ’bail-in’ the fund if necessary, but also looking at the sponsor’s ability to provide liquidity and operational to support the fund. (Fig. 7)

Notes

Fitch surveyed 68 European treasurers from mid December 2012 to 21 January 2013. Seventy-six per cent are corporate treasurers, 9% local authorities and 6% bank treasurers. Respondents are evenly split between small investors (50% with less than EUR/GBP/USD250m of cash) and larger investors (50% with more than EUR/GBP/USD250m and 26% with more than EUR/GBP/USD1bn). Percentages are expressed on the total number of responses.