ESMA Regulatory Consultation Raises ST VNAV Fund Profile

Published 

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.

Most recent episodes

Audio TMI - ESG: Time to Decide

The pressure to comply with ESG initiatives is being felt by corporates like never before, with ESG-compliance a common concern among treasury departments. TMI talks to Lavinia Bauerochse (Deutsche Bank) about treasury’s ...

11:41

Embedded Finance: A 101 Guide for Treasurers

Our latest TreasuryCast guest, Aman Narain (HSBC) sits down with TMI's Eleanor Hill to consider the ways in which treasury might be impacted by embedded finance. In this podcast, Aman explains the differences between embedded finance and BaaS, shares his hopes for the future in this space, and provides...

12:58

Audio TMI - A Modern, Agile, and Efficient Machine

UniCredit's Raphael Barisaac and Massimo Ortino explain how the fir...

What’s on the Horizon for Short-term Investments?

The treasury community has risen to the ongoing challenge of rising interest rates and inflation, with corporate cash serving as the sought-after safety net. Here, Daniel Farrell (Northern Trust Asset Management) and Karl Adams (ICD) consider how the latest MMF reform proposals affect short-term...

39:27

Transitioning a Corporate from LIBOR to CME Term SOFR

The loans market has predominantly moved to forward looking term rates, and both corporate borrowers and global lenders are increasingly turning to CME Term SOFR as the forward looking risk-free benchmarks to support their activities. Listen to this podcast, featuring Gavin Lee, Marco Bianchi (CME...

37:16

HSBC’s Sibos Spotlight – View from Sibos

TMI's Eleanor Hill invites Neil Atkinson, Nadine Lagarmitte, and Vinay Mendonca (HSBC) to discuss the critical treasury topics and conversations highlighted at this year's Sibos conference in Amsterdam. Amongst a wealth of market insights, our guests consider the most critical developments emerging from...

38:40

ECB’s Targeted TLTRO Tweaks Set to Drain Excess Market Liquidity

Welcome to the latest edition of Liquidity Link Live, your exclusive market analysis provided by Northern Trust Asset Management, one of the world’s largest cash managers. Tune in each month to discover the very latest insights on the UK, Eurozone and US markets. This edition was recorded on the 7th...

05:42

Asian Treasury Trends: Learnings and Opportunities

Former corporate treasury professional, Valerie Heng (Deloitte) joins Eleanor Hill to discuss the hot topic of treasury transformation, alongside other key shifts treasurers should be aware of. In this podcast, Valerie uses her knowledge of the Asian Treasury market to explain how the role of the...

20:27

Collaborative Trade Finance: How to Unlock Liquidity at Speed

Imagine if trade finance applications were fully collaborative and corporates could communicate with every trade participant via an open digital hub.  In this podcast, Vincent Almering (Interfood Holding B.V.) and Enno-Burghard Weitzel (Surecomp) explain to TMI's Ben Poole how collaborative trade...

35:54