Frequently Asked Questions: European Money Market Fund Regulations

Transcription

1 Frequently Asked Questions: European Money Market Fund Regulations J.P. Morgan Global Liquidity September TIMELINE What is the implementation timeline? There are just 3 months until the new regulations are applied to J.P. Morgan Global Liquidity s Luxembourg domiciled money market funds (MMFs). Shareholder notification Fund structure choice deadline for JPMAM clients JPMAM clients transitioned to chosen funds 3 SEPTEMBER Q3 23 November 30 November 3 December January 2019 JPMAM clients choose fund structures Last trading date under current fund structure Implementation deadline JPMAM: J.P. Morgan Asset Management PRODUCTS What is the planned product range in MMFs for J.P. Morgan Asset Management clients? CURRENCY AND EXPOSURE PUBLIC DEBT CNAV LVNAV VNAV USD treasury USD government USD credit GBP gilt GBP credit EUR credit AUD credit SGD credit CNAV: Constant Net Asset Value. LVNAV: Low Volatility Net Asset Value. VNAV: Variable Net Asset Value What do the new classifications mean? The new regulations provide investors with a high degree of optionality for investing their short term cash, with two types of money market funds ( MMFs ) and three structural options available. MMFs must be classified as either a Short term MMF or a Standard MMF: Short term MMFs are funds that maintain the existing conservative investment restrictions currently provided under the ESMA 1 Short Term Money Market Fund definition, including a maximum WAM 2 of 60 days and maximum WAL 3 of 120 days 1 European Securities and Markets Authority 2 Weighted average maturity 3 Weighted average life

2 Standard MMFs reflect the existing ESMA Money Market Fund definition, including a maximum WAM of 6 months and maximum WAL of one year MMFs may be structured as Public Debt Constant NAV ( CNAV ) MMFs, Low Volatility NAV ( LVNAV ) MMFs or as Variable NAV ( VNAV ) MMFs: Public Debt CNAV MMFs must invest 99.5% of their assets into government debt instruments, reverse repos collateralised with government debt, and cash, and are permitted to maintain a constant dealing NAV LVNAV MMFs are permitted to maintain a constant dealing NAV provided that certain criteria are met, including that the market NAV of the fund does not deviate from the dealing NAV by more than 20 basis points VNAV MMFs price their assets using market pricing and therefore offer a fluctuating dealing NAV Are all the structures available on both types of MMF? Short term MMFs may be structured as Public Debt CNAV, LVNAV or VNAV. Standard MMFs may only be structured as VNAV. SHORT TERM MMF STANDARD MMF Public Debt CNAV ü LVNAV ü VNAV ü ü How does the LVNAV MMF work? Investors will interact with the LVNAV MMF in much the same way as they interact with the CNAV MMF today. Investors will be able to subscribe and redeem at the two decimal constant NAV (the NAV will be rounded to the nearest cent or penny), provided the fund is managed to certain restrictions: Portfolio holdings with a maturity of up to 75 days may be valued using the amortised cost methodology. Longer dated instruments must be valued using mark to market (or mark to model) valuations. The portfolio level mark to market valuation must not deviate from the constant dealing NAV valuation by more than 20 basis points. If the deviation exceeds 20 basis points, investors must subscribe and redeem at the 4 decimal mark to market NAV. If the mark to market valuation on any instrument in the portfolio deviates from its amortised cost valuation by more than 10 basis points, that instrument must be marked to market. The remainder of the portfolio instruments with a maturity of up to 75 days may continue to be valued using the amortised cost methodology, and investors may continue to subscribe and redeem at the 2 decimal constant dealing NAV. The portfolio must hold at least 10% in daily liquid assets and at least 30% in weekly liquid assets. If the LVNAV MMF suspends redemptions for more than 15 days in any 90 day period, the LVNAV must convert to a VNAV MMF. What assets are included within the daily liquid assets and weekly liquid assets ratios? Daily liquid assets comprise cash, and daily maturing assets including overnight reverse repurchase agreements and overnight deposits: Short term Public Debt CNAV MMFs are required to hold at least 10% of their assets in daily liquid assets. Short term LVNAV MMFs are required to hold at least 10% of their assets in daily liquid assets. Short term VNAV MMFs are required to hold at least 7.5% of their assets in daily liquid assets. Standard VNAV MMFs are required to hold at least 7.5% of their assets in daily liquid assets. Weekly liquid assets comprise weekly maturing assets including reverse repurchase agreements maturing within 5 business days, deposits maturing within 5 business days, and certain government and government backed assets: Short term Public Debt CNAV MMFs are required to hold at least 30% of their assets in weekly liquid assets, which may include up to 17.5% in highly liquid government and government backed assets with a residual maturity of up to 190 days. Short term LVNAV MMFs are required to hold at least 30% of their assets in weekly liquid assets, which may include up to 17.5% in highly liquid government and government backed assets with a residual maturity of up to 190 days. Short term VNAV MMFs are required to hold at least 15% of their assets in weekly liquid assets, which may include up to 7.5% in money market instruments or shares of other MMFs. Standard VNAV MMFs are required to hold at least 15% of their assets in in weekly liquid assets, which may include up to 7.5% in money market instruments or shares of other MMFs. The weekly liquid asset ratio includes the daily liquid asset ratio.

3 Will all funds have accumulating and distributing share classes? J.P. Morgan Asset Management plans for all fund structures to have both, accumulating and distribution share classes. Are the Managed Reserves funds impacted by the MMF regulations? No, the Managed Reserves funds are not money market funds under the regulations. Therefore there is no impact on these funds. Will there be any changes to the fund prospectus? The prospectus will be updated for the new regulations. Subject to regulatory approval, J.P. Morgan Asset Management expects the revised prospectus to be available to clients in early October. Clients should speak to their J.P. Morgan Asset Management Client Advisor for more detail. Will J.P. Morgan Asset Management launch flex dist. share classes in the Euro Liquidity LVNAV Fund? The subject of share cancellation mechanisms, or reverse distribution mechanisms, such as that used in the flex dist. share class, is under discussion amongst policymakers. This regulatory debate may continue for some time. J.P. Morgan Asset Management continues to plan for the launch of flex dist. classes on the Euro Liquidity LVNAV Fund. J.P. Morgan Asset Management is also building accumulating share classes on the Euro Liquidity LVNAV Fund, and launching a Euro Liquidity VNAV Fund. What does the 5 year review clause on the public debt CNAV MMF mean? European policymakers have included a review clause on the Public Debt CNAV MMF. Review clauses are not an unusual feature in European regulations. The new regulations provide that the European Commission must, within 5 years from the entry into force of the regulations, present a report on the feasibility of establishing an 80% European Union public debt quota for Public Debt CNAV MMFs. The Commission must examine (i) supply of short-term European Union public debt instruments, and (ii) whether the LVNAV MMF might be an appropriate alternative for the Public Debt CNAV MMF. The new regulations does not presuppose any particular outcome to the review; the results of the review shall be presented to European policymakers, along with any appropriate amendments to the new regulations. Does the new regulations apply only to MMFs that are UCITS funds? The new regulations applies to any UCITS or AIF 4 that has the objective of offering returns in line with money market rates, or of preserving the value of the investment, and that seek to achieve these objectives by investing in short term assets such as money market instruments or deposits. 4 Alternative Investment Fund as defined under Directive 2011/61/EU

4 How do the new regulations compare with the previous requirements for short term MMFs? CURRENT SHORT TERM MONEY MARKET FUNDS NEW UCITS 5 /ESMA SHORT TERM MMF (CNAV) PUBLIC DEBT CNAV LVNAV VNAV PORTFOLIO RULES WAM (max) 60 days 60 days 60 days 60 days WAL (max) 120 days 120 days 120 days 120 days Maturity (max) 397 days 397 days 397 days 397 days Credit ratings Instruments must hold one of the two highest short term credit ratings (A 2/ P 2/F2 or above) from a credit rating agency Manager must conduct internal credit quality assessment; ratings issued by credit rating agencies may be considered, but may not be solely nor mechanistically relied upon Manager must conduct internal credit quality assessment; ratings issued by credit rating agencies may be considered, but may not be solely nor mechanistically relied upon LIQUIDITY REQUIREMENTS Daily liquid assets 10% 6 10% 10% 7.5% (min) Weekly liquid assets (min) 30% 6 30% 30% 15% PRICING Dealing NAV Constant NAV (rounded to 2 decimal places i.e. nearest penny/ cent) Constant NAV (rounded to 2 decimal places i.e. nearest penny/ cent) Constant NAV (rounded to 2 decimal places i.e. nearest penny/ cent), provided dealing NAV does not deviate from mark to market NAV by >20 basis points Valuation Amortised cost Amortised cost Amortised cost for instruments 75 days; Mark to market for instruments >75 days DIVERSIFICATION REQUIREMENTS Money market instruments and asset backed commercial paper (ABCP) Sovereign instruments Deposits Max 10% in the same body, provided the aggregate of positions over 5% does not exceed 40% Max 100% per sovereign, agency or European supranational, diversified across a min 6 issues with max 30% per issue Max 20% in deposits with the same institution Max 100% per sovereign, agency or European supranational, diversified across a min 6 issues with max 30% per issue Max 10% in deposits with the same institution Max 5% in money market instruments & ABCP issued by the same body; aggregate max 15% in ABCP 7 Max 100% per sovereign, agency or European supranational, diversified across a min 6 issues with max 30% per issue Max 10% in deposits with the same institution Manager must conduct internal credit quality assessment; ratings issued by credit rating agencies may be considered, but may not be solely nor mechanistically relied upon Variable (rounded to 4 decimal places) Mark to market Max 10% in money market instruments & ABCP issued by the same body, provided the aggregate of positions over 5% does not exceed 40%; aggregate max 15% in ABCP 7 Max 100% per sovereign, agency or European supranational, diversified across a min 6 issues with max 30% per issue Max 10% in deposits with the same institution Reverse repo Max 20% per counterparty 8 Max 15% per counterparty Max 15% per counterparty Max 15% per counterparty Other money Max 10% Max 5% per MMF Max 5% per MMF Max 5% per MMF market funds Aggregate max 17.5% Aggregate max 17.5% Aggregate max 17.5% Aggregate diversification Concentration Max 20% in transferable securities, money market instruments & deposits in a single body Max 10% of debt securities of the same issuer; max 10% of money market instruments of the same issuer N/A N/A Max 15% in money market instruments, ABCP & deposits with a single body Max 10% of money market instruments & ABCP issued by a single body Max 15% in money market instruments, ABCP & deposits with a single body Max 10% of money market instruments & ABCP issued by a single body TRANSITION MECHANICS When will the transition occur? Clients will be transitioned into the new fund ranges over the weekend of December. At the opening of fund dealing on 3 December, clients will be invested in the new fund structures. How will J.P. Morgan Asset Management communicate with clients regarding the new regulations? A letter has been sent to all clients on 3 September, outlining the changes that will be made to the funds and how J.P. Morgan Asset Management intends to transition clients to the new structures. 5 Undertaking for Collective Investments in Transferable Securities as defined under Directive 2009/65/EC 6 Fitch daily and weekly liquidity requirements 7 Following finalisation of the forthcoming European Union Regulation on Simple, Transparent and Standardised (STS) Securitisations, the aggregate of all exposures to securitisations/ ABCP shall not exceed 20%, with max 15% in securitisations/abcp not compliant with the criteria for STS Securitisations. 8 Internal limit

5 How will clients be migrated from their current funds to the new funds? Client holdings will be mapped to a fund structure based on the fund and share class in which they are currently invested. If clients are happy with this mapping, they do not need to do anything their holding will be transitioned automatically into the new fund. If a client wants to choose a different fund, they must notify J.P. Morgan Asset Management as soon as possible in order for their holdings to be transitioned according to their instructions. When will clients need to notify J.P. Morgan Asset Management of their choice? The final date for clients to notify J.P. Morgan Asset Management of their chosen fund is 23 November. This has been detailed in the client letter, which was mailed out on 3 September. What happens if a client does not respond to the letter? If J.P. Morgan Asset Management does not receive alternative instructions, the client is deemed to be in agreement with the mapping set out in the client letter, and their holding will be transitioned into the new fund. At any time after the transition, a client may elect to move into a different fund by contacting J.P. Morgan Asset Management. Will clients need to sign a new application form? Clients are not required to complete a new application form. However, for clients who do not wish to follow the suggested fund mapping set out in their letter, they will need to provide J.P. Morgan Asset Management with written instructions by 23 November. J.P. Morgan Asset Management would need to receive a transaction order to either redeem or switch into a different share class/sub fund. In addition, dividend options and payment details may need to be reconfirmed. What will the arrangements be in respect of ordinary subscriptions and redemptions during the days before the transition? Clients will be able to subscribe and redeem as usual throughout the week. OPERATIONAL CONSIDERATIONS Are dealing cut off times expected to change? For public debt CNAV funds and LVNAV funds, the end-of-day dealing cut-off times will remain the same for as the current range. For VNAV MMFs, the NAV must be calculated before a redemption payment can be made. J.P. Morgan Asset Management will set multiple NAV strikes per day for distributing share classes, and hence there will be multiple dealing cut-offs per day; there will be one NAV strike and one dealing cut-off per day for accumulating share classes. For clients transitioning into the VNAV accumulating share classes, those clients will be subject to an earlier dealing cut-off time than they currently have on the existing accumulating share classes. CUT-OFF TIMES FOR ACCUMULATING AND DISTRIBUTING SHARE CLASSES MMF RANGE UNDER NORMAL MARKET CONDITIONS (CONSTANT NAV PRICING) USD Treasury CNAV 17:00 New York N/A USD Government LVNAV 17:00 New York 15:00 New York USD Liquidity LVNAV 17:00 New York 15:00 New York GBP Gilt CNAV 10:00 London N/A GBP Liquidity LVNAV 13:30 London 13:00 London EUR Liquidity LVNAV 14:30 Luxembourg 14:00 Luxembourg AUD Liquidity LVNAV 14:00 Sydney 14:00 Sydney** SGD Liquidity LVNAV 12:00 Singapore 12:00 Singapore** UNDER VARIABLE NAV PRICING* * Subscription of Shares of LVNAV MMFs are normally carried out at a price that is equal to the Constant NAV of the relevant Class, provided that the Constant NAV of the relevant Sub-Fund does not deviate by more than 20 basis points from the Variable NAV of that same Sub-Fund. In the event the deviation exceeds 20 basis points from the Variable NAV of that same Sub-Fund, the following subscriptions will be undertaken at a price that is equal to the Variable NAV of the relevant Class. ** Payments will be made on t+1

6 CUT-OFF TIMES FOR ACCUMULATING AND DISTRIBUTING SHARE CLASSES MMF RANGE USD Treasury VNAV USD Liquidity VNAV GBP Liquidity VNAV EUR Liquidity VNAV DISTRIBUTING SHARE CLASSES 8:00 New York 12:00 New York 15:00 New York 8:00 New York 12:00 New York 15:00 New York 10:00 London 13:00 London 10:00 Luxembourg 14:00 Luxembourg ACCUMULATING SHARE CLASSES 15:00 New York 15:00 New York 13:00 London 14:00 Luxembourg How many times per day will the NAV be calculated? For public debt CNAV funds and LVNAV funds, the NAV will be calculated once per day. For VNAV MMFs, the NAV must be calculated before a redemption payment can be made. Therefore, J.P. Morgan Asset Management will set multiple NAV strikes per day for distributing share classes. Accumulating classes will strike a NAV once per day. Will intraday, same-day settlement be available for distributing share classes? For public debt CNAV funds and LVNAV funds, intraday redemption batch payments will continue throughout the day as usual. For VNAV MMFs, the NAV must be calculated before a redemption payment can be made. Therefore, J.P. Morgan Asset Management will set multiple NAV strikes per day, and hence there will be multiple dealing cut-offs per day. Redemption payments will be made same-day where requests for redemption are received prior to the final dealing cut-off of each day. What will be the settlement cycle for accumulating share classes? Accumulating classes will continue to settle t+1. Will the new MMF structures be eligible for treatment as cash and cash equivalents? Much like the current MMF regulations, the new rules are silent when it comes to cash and cash equivalents treatment. However, J.P. Morgan Asset Management expects that short-term MMFs with same day liquidity will continue to be available in the product range. The funds will aim to have a primary focus on capital preservation and with a credit profile that seeks to retain its current external AAA MMF rating. Further, J.P. Morgan Asset Management's short term MMFs will operate in line with the new regulations, which are even more conservative than existing rules, and so J.P. Morgan Asset Management believes this will be helpful in supporting their eligibility for consideration as cash and cash equivalents. Clients are encouraged to engage with their external auditors in relation to this topic. LIQUIDITY FEE AND REDEMPTION GATE When might a liquidity fee or a redemption gate occur? Similar to existing rules and practices in Europe, the Regulation provides for the use of liquidity fees and redemption gates to protect MMFs in times of stress. These apply to Public Debt CNAV MMFs and LVNAV MMFs only; they do not apply to VNAV MMFs. EUROPEAN MONEY MARKET FUND REGULATION LIQUIDITY FEE AND REDEMPTION GATE PROVISIONS If the level of weekly liquid assets falls below 30% and net redemptions from the fund exceed 10% in one day, the MMF board may enact one of the following options: Do nothing, or Apply a liquidity fee to redeeming investors, equal to the cost of liquidity Restrict ( gate ) redemptions to 10% per day for up to 15 days Suspend redemptions for up to 15 days If the level of weekly liquid assets falls below 10%, the MMF board must enact one of the following options: Apply a liquidity fee to redeeming investors, equal to the cost of liquidity Suspend redemptions for up to 15 days

7 Will the liquidity fee/redemption gate triggers be the same as for US domiciled MMFs under the 2014 changes to the SEC 2a 7 9 Rule? The liquidity fee/redemption gate structure under the European Regulation will not be the same as for US domiciled MMFs. Under the European regulations, redemption fees/liquidity gates apply to Public Debt CNAVs MMFs and LVNAV MMFs only; they do not apply to VNAVs MMFs. The 2014 changes to the SEC 2a 7 Rule for US domiciled MMFs provide for the use of liquidity fees and redemption gates on institutional prime VNAV MMFs and retail MMFs; government CNAV MMFs are not required to apply liquidity fees/redemption gates, but may opt into them if properly disclosed. Liquidity fees Fund boards may impose fees up to 2% on all redemptions if: US SEC RULE 2A 7 LIQUIDITY FEE AND REDEMPTION GATE PROVISIONS The fund s level of weekly liquid assets falls below 30% of its total assets and the fund s Board determines that such a fee is in the best interest of the fund Fund boards must impose a 1% fee on all redemptions if: The fund s weekly liquid assets fall below 10% of its total assets Exception: The fee does not have to be implemented if the fund s Board determines that such a fee is not in the best interest of the fund or that a lower or higher (up to 2%) liquidity fee is more appropriate. Redemption gates Fund boards may suspend withdrawals from the fund if: The fund s level of weekly liquid assets falls below 30% The fund s Board determines that imposing such a gate is in the fund s best interest Gates are limited to no more than 10 business days in any consecutive 90 day period. The rules for fees/gates reference the level of net redemptions from a MMF. What about subscriptions? The Regulation refers to the level of net redemptions (i.e. total daily redemptions less total daily subscriptions). RATINGS Have MMFs been prohibited from being rated? European policymakers have not prohibited MMFs from soliciting or carrying an external fund rating. MMFs may continue to carry external fund ratings, and the manager must disclose in the prospectus and marketing materials that the rating has been solicited or paid for by the manager. Is there an expectation that ratings agency criteria will change? The ratings agencies have indicated that they do not anticipate changes to their criteria as a result of the new regulations. Which funds will be rated and by which rating agencies? J.P. Morgan Asset Management anticipates maintaining the current schedule of ratings, and would similarly anticipate having the same ratings between LVNAV & VNAV funds, and between CNAV & VNAV funds. Will the new J.P. Morgan Asset Management planned fund options have any impact on AAA credit rating of the funds? J.P. Morgan Asset Management anticipates that the changes under the new regulations will not impact the AAA ratings assigned to J.P. Morgan Asset Management Luxembourg domiciled MMFs by the Credit Rating Agencies. 9 On 23 July 2014, the Securities and Exchange Commission (SEC) approved changes to Rule 2a 7 under the Investment Company Act of 1940, which governs the operation of money market funds.

8 NEXT STEPS For further information, please contact your J.P. Morgan Global Liquidity Client Advisor or us at NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional/wholesale/professional clients and qualified investors only as defined by local laws and regulations. The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of writing. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other EEA jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited (Co. Reg. No K), or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd (Co. Reg. No E); in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number Kanto Local Finance Bureau (Financial Instruments Firm) No. 330 ); in Korea by JPMorgan Asset Management (Korea) Company Limited; in Australia to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN ) (AFSL ); in Brazil by Banco J.P. Morgan S.A.; in Canada for institutional clients use only by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA/SIPC.; and J.P. Morgan Investment Management Inc. Copyright JPMorgan Chase & Co. All rights reserved. LV JPM / c02a8206c1f6