London: The governance of European money market funds (MMFs) will be under greater investor focus as a result of forthcoming reforms, given the prominence of liquidity fees and redemption gates in the new regulation, says Fitch Ratings in a new report.
The reforms became effective for new funds on 21 July and will apply to existing funds from January next year. They assign the ‘board’ additional responsibility for reform-specified fee and gate tests, on top of the existing discretion over applying a wide array of extraordinary liquidity management measures under UCITS.
If a post-reform European Low Volatility Net Asset Value (LVNAV) or Public Debt Constant Net Asset Value (CNAV) fund’s weekly liquidity falls below 30% and the fund suffers a simultaneous net outflow of above 10%, the ‘board’ must consider applying a fee or gate. If weekly liquidity falls below 10% it must apply either a fee or gate, but retains discretion over which best serves investors.
Of the Fitch-sampled CNAV MMFs boards, all had at least one independent director; however, only a few had boards on which more than half of the directors were independent. On average, funds had 42% independent directors. While this level falls short of a majority, it is higher than the industry-wide average for European UCITS funds (33%) and is marginally higher than the regulatory minimum for US funds (40%).
Women are significantly under-represented on MMF boards. In more than half of our sample, there were no female directors on the board. This low level of diversity is not confined to MMFs, however. Only 11% of directors at European UCITS are women.
The presence of independent directors, combined with effective policies and controls, can help to allay potential agency conflicts. The diversity of a fund’s board can support effective and robust decision-making by adding varied backgrounds and perspectives, helping to ensure that investors’ best interests are served.
The language in the reforms is potentially unclear as to whether the board of the fund or the board of the management company has ultimate responsibility for gate and fee decision-making. In any case, the ‘board’, be it fund or management company, will typically delegate significant responsibility for the management of the fund to the investment advisor.
Fitch sampled 17 umbrella funds governing more than 50 sub-funds. It focused on Ireland- and Luxembourg-domiciled UCITS MMFs and relied on the most recent published versions of the prospectus as of mid-2018. Its sample covered the vast majority of current European CNAV MMFs. It covered 88 fund directors, of whom we consider 36 independent. Fitch defines an independent director as one with no direct or current link to the fund sponsor.
Read the report here.