Stability

Investment Solutions

Diligence

Money Market Fund Reform

Dennis Gepp
Managing Director & Chief Investment Officer- Cash
John Parker
Director

Federated Investors (UK) LLP

CIPFA Scotland Public Finance Conference, 6-7 March 2014

The Three Rules of Work

Out of clutter, find simplicity;

From discord, find harmony;
In the middle of difficulty lies opportunity.

- Albert Einstein

Overview

The European Commission has published a comprehensive

Money Market Fund reform proposal
Enhances MMF portfolio liquidity, transparency, credit quality
(which we agree with)
Makes MMF sponsors choose between placing 3% in capital
reserve or moving to Variable Net Asset Value (VNAV) in
December 2014
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Agenda (or, what we would like you to go away with today)

Putting things into context
Why are regulators seeking to make changes?
Main European Commission proposals
Potential timings
What could this mean for MMF users?
What might this mean in terms of risk?
What is Federated Investors view?
What is Federated Investors doing about it?
What should investors consider doing about it?

Why are the Regulators seeking to make changes?

The Credit Crisis of 2008 underlined the need for greater regulation of the
Financial Industry
European Money Market Funds are an integral part of the financial system
Minimise potential for Fund runs
Belief that Constant Net Asset Value (CNAV) funds are at greater risk of a rundespite
evidence to the contrary
Belief that CNAV funds are seen to be guaranteed
To ensure MMFs remain resilient even in times of extreme market stress and disruption

Main European Commission Proposals (as at March 2014)

Creation of two categories of MMFs

short-term MMFs

(may be CNAV (until 2019) or VNAV)

standard MMFs (must be VNAV)

CNAV MMFs to have capital buffer of 3%...

for 5 years from December 2014
thereafter mandatory conversion to VNAV

(Fuller list of proposals in Appendix)

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Potential Timing
Unlikely to be decided in this European parliament
(new Elections in May 2014)
- in the unlikely event of these proposals being accepted in
this parliament then:
Enactment in December 2014
Earliest ESMA Guidelines in 2015
All funds to be VNAV by December 2019
Otherwise new parliament to restart the process..

What could this mean for MMF users?

Liquidity
Potential shortening of liquidity day and/or T1

Yield Impact
With 3% buffer, yields are expected to fall by ~30bps

Confusion
Regular Money Market Funds and Short-Term Money Market Funds
Difference in proposals between Europe and US
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What might this mean in terms of risk?

VNAV vs CNAV
No credit Impact on conversion, with exposure to same names, but Standard
MMFs have different criteria
Potential daily pricing fluctuations
Systems/Accounting

Systems may have to be altered to accommodate chance of price change

Federated Investors View

Federated Investors
Welcomes enhancement to MMF portfolio liquidity, transparency, credit quality
Believes imposition of 3% Capital will kill off the CNAV industry, reducing
choices to investors
Does not believe that either CNAV or VNAV funds are more immune to runs if
investors lose faith in the financial system or its banks
Believes that a combination of gating (redemption gates) and liquidity fees
are better placed to address the possibility of runs

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What is Federated Investors doing?

Lobbying both the EC and the US Securities and Exchange
Commission (SEC) to maintain the CNAV product:
strengthened further by gating and liquidity fees to prevent potential runs

Seeking international agreement:

to avoid the possibility of different rules in different jurisdictions,
reducing the opportunities for regulatory arbitrage

Holding a series of workshops, webinars and meetings to help

educate regulators and inform investors

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What can investors do?

1. To maintain the CNAV choice:
Write to Syed Kamall, UK shadow rapporteur and to your MEP, all candidates and
the European Commission expressing your views
Contact CIPFA and other relevant bodies to ensure they are reflecting your views
Amendments will be considered up to 10th March 2014
so time is of the essence!

2. To prepare for potential ban of CNAV MMFs:

Consider adding VNAV to treasury policy if not already there
Ensure your systems are ready and able to account for VNAV products
Educate colleagues, members and other participants
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Appendix

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Legislative Process for Proposal European Commission

The European Commission (EC) is made up of 28 commissioners that are
appointed by each European Union (EU) member state.
EC has the right to initiate proposed laws for adoption by the Parliament and
Council. Recently, much of the EU financial services legislation is derived from
international agreements and rules (e.g., G20, IOSCO, FSB, Basel Committee)
September 2013: European Commission (EC) published its proposal for an
EU MMF regulation. Proposal sent to both the Parliament and the EU member
states in the Councileach institution will debate and amend the regulation as
necessary
Proposal is a regulation, which is a binding legislative act and must be applied
in its entirety across the EU (compared to a directive, which requires Member
State implementing measures and therefore provides some flexibility as to the
exact rules that are adopted)
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Legislative Process for Proposal Parliament

European Parliament765 MEPs (up for re-election in Spring 2014)

The Parliament is divided up into committees. Committee on Economic and
Monetary Affairs (ECON) is responsible for amending the MMF proposal

Sad El Khadraoui (Belgium, Socialist Party) was appointed as the lead MEP
(aka, the Rapporteur) to steer the proposal through the Parliaments legislative
process, supported by 4 shadow rapporteurs
Rapporteurs draft report issued on November 18, with consideration of the
draft report on December 2, and deadline for amendments on December 10
The vote in ECON is scheduled for March 10, with a view to vote in Plenary in
April
NB MEPs will cease legislative work in March/April 2014 to campaign for the
May 2014 elections.

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Legislative Process for Proposal European Council

European Council: consists of the heads of state or government of the

EUs 28 member states
Questionable whether Council will move at the same pace as the Parliament;
unlikely that the Council will adopt a position in time to enter into trilogue
negotiations before the May 2014 Parliament elections
Greece holds the Presidency starting in January 2014, but with only 4 months
before elections are likely to concentrate on the most advanced and important files
outstanding
Even if the rapporteurs proposal are acted on in the shortest possible timescale
(i.e. within the next few month)
Earliest date for regulation 31 st December 2014
Earliest date for ESMA guidelines 31 st July 2015
Earliest date for compulsory conversion to VNAV 31st December 2019

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Main European Commission Proposals

Creation of two categories of Money Market Funds
short-term MMFs (may be CNAV (until 2019) or VNAV)
standard MMFs (must be VNAV)
CNAV MMFs to have capital buffer of 3%
for 5 years from December 2014. Thereafter mandatory conversion to VNAV
Fund managers to implement Internal assessment and rating system for all MMF portfolio
assets
Ban on Retail CNAV funds
Restriction to investing in securitizations to those with underlying corporate debt that is highquality and liquid (e.g., trade receivables)
Restrictions to sponsor support (on CNAV funds to use of capital buffer and ban on support
by state entities)
Ban on use or distribution in Europe of offshore MMFs
Restrictions on use of Amortised Cost Accounting to assets under 90 days to maturity.
Limitations on collateral for reverse repurchase agreements
Narrow definitions of daily and weekly liquid assets
Concentration, diversification, stress testing and KYC requirements
Portfolio reporting to regulators use of ESMA for larger funds

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Contact Information
Dennis Gepp
Managing Director & CIO, Cash
020 7618 2601
dgepp@federatedinv.com

John Parker
Director
020 7618 2607
jparker@federatedinv.com

Federated Investors (UK) LLP

federatedinvestors.co.uk
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Important Information
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Past performance is not a guide to future performance and yields may vary.
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