MMF Reforms: The End to Share Cancellation is Confirmed

Written by: Rachel Turner | Head of EMEA & APAC Product Development for Investment Managers, BNY Mellon

The ban on share cancellation by EU money market funds may increase interest in multi-NAV products

The long awaited deadline for implementing the new regulations for existing European money market funds (MMF) should have come and gone by now.

But the deadline is being realigned by individual national regulators, as money market fund prospectuses were submitted and approved prior to the ban on share cancellation being enforced. All fund companies who submitted prospectuses previously have requested additional transition periods and these are being granted by national regulators on a case-by-case basis.

The transition periods were granted after the European Securities and Markets Authority (ESMA) confirmed that it would no longer allow the practice of share cancellation. Share cancellation - sometimes known as the reverse distribution mechanism - enables money market funds to keep the value per share constant under negative interest rates. The assets of the cancelled shares are split among the remaining ones so their value per share remains constant. It has been in common use by funds denominated in currencies with negative interest, such as we have seen with the euro.

During much of 2018, while fund managers were preparing for the new regulations and submitting their applications to competent authorities in advance of the original 21 January 2019 deadline, there had been ongoing uncertainty about whether the national competent authorities - the Central Bank of Ireland (CBI) and the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg - would be permitted to allow share cancellation, or at least grant long transition periods as it is withdrawn. In December, ESMA announced that not only would share cancellation be inconsistent with the new regulations, but there would be no phasing out period.

The extension of the transition period to a deadline of 21 March 2019 was granted after fund managers complained about the lack of notice to change their plans in the light of the announcement about share cancellation.

With the practice of share cancellation prohibited, constant net asset value (CNAV) funds denominated in euros will no longer be an option while they remain in negative rates. Instead they will need to become either variable net asset value (VNAV) funds or low volatility net asset value (LVNAV) accumulating funds. In practice, funds are moving to LVNAV accumulating funds.

Despite the headache that this late decision - or clarification - is giving money market fund managers, it seems unlikely the European Commission or ESMA will be legally challenged. Fund managers we have spoken to about it would rather avoid continued uncertainty on the issue.

It is too early to be sure of the implications of this change. Specifically, will money market funds become significantly so much less attractive to those seeking liquidity denominated in euros that they seek alternatives, such as bank deposits? Fund managers may instead begin to explore the alternative functionality that multi-NAV products can provide, whereby investor liquidity is provided by multiple valuation points throughout the day, providing a clearer view of intra-day pricing.

The views expressed herein are those of the author only and may not reflect the views of BNY Mellon.

The ban on share cancellation for money market funds was discussed at the BNY Mellon Tax and Regulatory Client Forum.