Updated: Apr 13, 2019
That is what the EU countries with a market share in the “offshore” fund industry’s first reaction seems to have been: we are talking Ireland and Luxembourg.
It is right there in the preamble clauses to the Money Market Mutual Fund Regulation: “ …. Uniform rules across the Union are necessary …”.
That is a central theme of the Single European Market and that was not about to be abandoned over MMFR, surely!
However, the markets of each of those 27 countries (“Include UK? Exclude UK?”) evolved separately with their own nuances and business imperatives. And so, Ireland and Luxembourg, two offshore jurisdictions that have built a substantial Fund industry had to worry.
A large percentage (around 57%) of EU MMFs; are domiciled there. (Look at some data from Deutsche Bank research – Table 3. This document is a great read for those interested in the sector, in any case.) Many of them are Fixed or Constant NAV Funds (CNAV). There could be redemptions from such funds owing to the banning of Share Cancellation Mechanisms (also known as Reverse Distribution Mechanisms). Indeed, the International Monetary Fund’s (IMF) Financial Stability Assessment Program assessments (Ireland & Luxembourg [see Box 4]) have documented the possible redemptions over MMFR as a systemic risk or shock. Industry body IMMFA provides some data.
Rather than panic all those two countries have to do is to study the US experience post Money Market Reforms there, in October 2016. The change in rules resulted in a redistribution of assets within that economy. That has an impact for Issuers, but perhaps not for jurisdictions.
Public Debt CNAV Funds or Low Volatility NAV Funds are in fact, designed as close substitutes for the erstwhile Constant NAV Funds. As the Central Bank of Ireland and the Central Bank of Ireland and the Commission de Surveillance du Secteur Financier, Luxembourg noted in their Joint Statement of January 11, 2019, all the Funds need to do is:
“ 1.Provide a copy of this notice to investors and notify such investors that they are invested in a fund which is the subject of this notice;
2. Ensure all necessary and appropriate facilities are available for investors or prospective investors to get such information as they may require from the fund with respect to the subject matter of this notice;
3. Take such steps which in the opinion of the fund are appropriate to avoid a disorderly sale of fund assets; and
4. Confirm to the Central Bank or CSSF (as applicable) in writing by no later than 21 March 2019 that all use of share cancellation mechanisms has ceased.”
That third point is important: simply shift them to Public Debt CNAV Fund or Low Volatility NAV Funds and you should be done.
Take heart from the fact that the negative yield scenario still attracts investors for fundamental reasons that do not change. They still have preferences for such Funds. Since there is a “uniform application of rules” within and across the EU, they have nowhere else to go.
(And then there is France, sitting pretty with 30-something percent of the European Fund market without any boondoggles to worry about!)
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