ESMA Regulatory Consultation Raises ST VNAV Fund Profile

Published: May 14, 2021

London: ESMA’s recent consultation report considering the potential elimination of the dominant fund type in Europe, low-volatility net asset value (LVNAV) money market funds (MMFs), while retaining variable net asset value (VNAV) funds, has increased investor interest in short-term (ST) VNAVs. Fitch Ratings estimates ST VNAV MMFs represented around 10% of MMF assets in Europe at end-2020.

Fitch considers the portfolio risk profiles of rated ST VNAVs and LVNAVs as comparable, despite the differing regulatory requirements. Fitch’s special report, published today, compares the liquidity management, flow dynamics and valuation volatility of ST VNAV and LVNAV funds.

ST VNAVs have lower minimum regulatory liquidity requirements than LVNAVs. Fitch-rated ST VNAV funds maintained solid liquidity buffers of more than the 7.5% regulatory requirement for daily maturing assets and the 15% for weekly maturing assets throughout 2020. Rated ST VNAVs typically maintain considerably higher weekly liquid asset cushions than rated LVNAV funds. The minimum liquidity levels required in LVNAVs are higher than ST VNAVs, at 10% and 30% for daily and weekly maturing assets, respectively.

Outflows were most severe in US dollar-denominated MMFs. The magnitude of outflows was higher in rated LVNAVs than ST VNAVs in the March 2020 market stress period. Sampled ST VNAV and LVNAV funds had 8% and 22% decreases, respectively, in total assets in March 2020.

Daily NAV movements in ST MMFs have been limited. Fitch identified a maximum daily movement of 5bp – during the March 2020 stress period – across a sample of 12 ST VNAVs. LVNAV funds’ maximum mark-to-market daily NAV movements in our sample were 7bp.

Fitch has ‘AAAmmf’ ratings on several European ST VNAV funds. While there are regulatory differences between MMF types in Europe, Fitch’s analytical approach is consistent for LVNAV and ST VNAV funds, effectively setting a consistent baseline in terms of fund risk characteristics.