Frequently Asked Questions: European Money Market Fund Regulation

Transcription

1 Frequently Asked Questions: European Money Market Fund Regulation J.P. Morgan Global Liquidity January 2018 WHAT IS THE IMPLEMENTATION TIMELINE? The regulation provides for an 18-month implementation for existing money market funds (MMFs) 21 July 2017 Regulation in force 15 November 2017 JPMAM announced new fund range Q vote on the Articles of Association Q choose fund structures Q transition to chosen funds 21 January 2019 Implementation deadline JPMAM: J.P. Morgan Asset Management WHAT ARE THE OPTIONS FOR INVESTORS? The Regulation provides investors with a high degree of optionality for investing their short-term cash, providing for two types of money market fund ( MMF ) and three structural options. 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 Standard MMFs reflect the existing ESMA Money Market Fund definition, including a maximum WAM of six 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. Public Debt CNAV LVNAV SHORT-TERM MMF ü ü STANDARD MMF VNAV ü ü 1 European Securities and Markets Authority 2 Weighted average maturity 3 Weighted average life

2 WHAT PRODUCTS DOES J.P. MORGAN ASSET MANAGEMENT PLAN ON OFFERING? CURRENCY USD PUBLIC DEBT CONSTANT NET ASSET VALUE (CNAV) USD treasury CNAV USD government CNAV LOW VOLATILITY NET ASSET VALUE (LVNAV) USD credit LVNAV VARIABLE NET ASSET VALUE (VNAV) USD treasury VNAV USD government VNAV* USD credit VNAV GBP GBP gilt CNAV GBP credit LVNAV GBP gilt VNAV* GBP credit VNAV EUR EUR government CNAV* EUR credit LVNAV EUR credit VNAV *Continuing to evaluate investor demand. Proposed product offering may be subject to change. HOW DOES THE REGULATION COMPARE WITH THE PREVIOUS REQUIREMENTS FOR SHORT-TERM MONEY MARKET FUNDS? CURRENT SHORT-TERM MONEY MARKET FUNDS NEW UCITS 4 /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 LIQUIDITY REQUIREMENTS Daily liquid assets 10% 5 10% 10% 7.5% (min) Weekly liquid assets (min) 30% 5 30% 30% 15% PRICING Dealing NAV places i.e. nearest penny/ cent) places i.e. nearest penny/ cent) 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 20% in deposits with the same Max 5% in money market instruments & ABCP issued by the same body; aggregate max 15% in ABCP 6 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 6 Reverse repo Max 20% per counterparty 7 Max 15% per counterparty Max 15% per counterparty Max 15% per counterparty Other money Max 10% market funds Aggregate diversification Concentration Max 20% in transferable securities, money market instruments & deposits in a 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 Max 10% of money market instruments & ABCP issued by a single body Max 15% in money market instruments, ABCP & deposits with a Max 10% of money market instruments & ABCP issued by a 4 Undertaking for Collective Investments in Transferable Securities as defined under Directive 2009/65/EC 5 Fitch daily and weekly liquidity requirements 6 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. 7 Internal limit

3 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 four 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 two 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 five business days, deposits maturing within five 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. 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

4 WILL THE LIQUIDITY FEE/REDEMPTION GATE TRIGGERS BE THE SAME AS FOR US-DOMICILED MMFS UNDER THE RECENT CHANGES TO THE SEC 2A-7 8 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 recent changes to the SEC 2a-7 Rule for US-domiciled MMFs provide for the use of liquidity fees and redemption gates on al 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). 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. WILL THE NEW JPMAM PLANNED FUND OPTIONS HAVE ANY IMPACT ON AAA CREDIT RATING OF THE JPMAM FUNDS? We anticipate that the changes under the new Regulation will not impact the AAA ratings assigned to JPMAM funds by the Credit Rating Agencies. WHAT DOES THE FIVE-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 Regulation provides that the European Commission must, within five years from the entry into force of the Regulation, 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 Regulation 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 Regulation. DOES THE REGULATION APPLY ONLY TO MMFS THAT ARE UCITS FUNDS? The Regulation applies to any UCITS or AIF 9 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. 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, we fully expect to continue offering our short-term MMFs with same-day liquidity, with a primary focus on capital preservation and with a credit profile that aims to retain its current external AAA MMF rating. Further, our short-term MMFs will operate in line with the new regulations, which are even more conservative than existing rules, and so we believe this will be helpful in supporting their eligibility for consideration as cash and cash equivalents. We would encourage clients to engage with their external auditors in relation to this topic. HOW IS JPMAM HELPING CLIENTS TO NAVIGATE THE CHANGES? Helping clients map out and navigate a clear route to regulatory readiness is always front of mind when working with clients. To help them achieve this, we are supporting clients in four key ways: 1. Helping clients to evaluate the fund structures presented in the new regulations; 2. Working with clients as they amend their existing internal policies; 3. Helping clients to review any operational set-up and reporting requirements; 4. Staying closely connected with clients to minimise any disruption as they implement their chosen new fund offering. 8 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. 9 Alternative Investment Fund as defined under Directive 2011/61/EU

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