By Jason Straker, Head of Client Portfolio Management, EMEA, Global Liquidity, J. P. Morgan Asset Management
More than three years since they were first proposed, new regulations for the money market fund (MMF) industry in Europe are now in their final stages. While technical fine tuning of the text may still occur, we do not expect substantive changes and the implementation will likely take effect in late 2018. The clock has now started for investors in European MMFs to begin reviewing and understanding the different fund types that will be available, and to determine whether they will need to amend investment and accounting policies, systems and processes to take account of these changes. This article outlines some of the key changes for corporate investors, and some of the important issues they should be considering. Given the regulatory changes impacting corporate investors, specifically Basel III, it is also important that the issue of MMF reform not simply be viewed in isolation.
Introducing the LVNAV fund
While they follow the MMF reforms which were implemented in the United States, the expected European regulations take a different approach which ultimately offers greater optionality for investors. One of the ‘headlines’ under the new regulations is that short-term MMFs that invest in government debt will be permitted to continue to use a Constant Net Asset Value (CNAV). Alongside this, the regulation introduces a new style of a Low Volatility Net Asset Value (LVNAV) fund. The LVNAV fund will effectively operate as a CNAV fund, provided that it operates within certain constraints (see Box 1). In brief, the LVNAV fund will have the following features: