Welcome to this ACT webinar MMF reform: treasury risks, impacts, actions 19 April 2018 12:30-13:15 BST Sponsored by @actupdate #ACTwebinar
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Agenda Introduction Michelle Price Associate Director, Policy & Technical, ACT Presentation Alastair Sewell, Senior Director, Fitch Ratings Discussion and Q&A @actupdate #ACTwebinar
Presentation Alastair Sewell Senior Director Fitch Ratings
Preparing for European Money Fund reforms Alastair Sewell, CFA Head of Fund & Asset Manager Ratings Europe 19 April 2018
Contents 1 What will happen? 2 What are the risks? 3 What will the reforms mean for corporate treasurers? 4 Conclusions 6
1 What will happen? An introduction to the pending European Money Market Fund reforms 7
Fourth quarter transition peak Applying the US Gov t flow curve to Europe suggests high late flows 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Oct 18 Nov 18 Dec 18 Jan 19 Source: Fitch, Crane Data 8
2 What are the risks? Exploring a reformed MMF landscape, the product options available, their characteristics and associated risks 9
LVNAV gates & fees face multi-layered tests Liquidity fees, gates or temporary suspension of redemption may be introduced Step 1 If weekly liquidity < 30% AND daily net redemption > 10% Step 2 If weekly liquidity < 10% Mandatory implementation of liquidity fees or of temporary redemptions suspension Mandatory move to full VNAV Step 3 If suspension of redemptions exceeds 15 days in any 90 day period Source: Fitch Decided by the fund s board 10
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 Funds already well in excess of reform threshold Recalculating fund liquidity under the pending European MMF reforms Natural weekly liquidity Eligible weekly liquidity Discretionary threshold Mandatory threshold (%) 100 90 80 70 60 50 40 30 20 10 0 Source: Fitch, fund administrators (Fund) 11
<-10-9 -8-7 -6-5 -4-3 -2-1 0 1 2 3 4 5 6 7 8 9 >10 < 20 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 > 40 Probability boot camp: gates & fees unlikely outcome Exceptionally low historic incidence of daily outflows above 10% (Frequency (%)) 30 25 Weekly liquidity above 30% almost all the time (Frequency (%)) 60 50 20 40 15 30 10 20 5 10 0 0 (% Daily net flow) (% Weekly liquidity) Source: Fitch, Bloomberg; Study of 5 years of daily AUM movements in 64 European prime money market funds (EUR,GBP & USD) ending May 23,2017. N = approx. 61,000 observations Source: Fitch; Study of weekly regulatory liquidity levels for 54 European prime MMFs (EUR,GBP & USD) as at quarter ends for 5 yrs to Q1 2017. N = approx. 681 observations Historical data does not reflect likely revised investment guidelines as a result of reform 12
LVNAVs move to variable pricing if collar breached Compared with the effective 50bp corridor in today s CNAVs 1.0030 1.0020-20bps +20bps Move to variable Move to VNAV pricing MTM NAV 1.0010 1.0000 0.9990 0.9980 0.9970 Move to variable Move to VNAV pricing 0.9960 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 (Day) Source: Fitch 13
Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Significant shock needed to breach LVNAV corridor Negligible recent MTM NAV movement (MTM NAV) Max Average Min 1.0010 1.0008 1.0006 1.0004 1.0002 1.0000 0.9998 0.9996 0.9994 0.9992 0.9990 Source: Fitch, fund managers, fund administrators; sample of Fitch-rated European CNAV prime funds 14
3 What will the reforms mean for corporate treasurers? Adapt to changes evaluate your options and take practical steps to safeguard investment 15
Decision time is fast approaching Understand Update Decide Operational issues Accounting issues Rating criteria Ensure investment policy is fit for purpose System changes Identify desired exposures Vote in EGMs Allocate Source: Fitch 16
Operational & accounting issues front of mind Shift in greatest concerns with regards to MMF reform in Europe 2016 2017 Floating NAV Investment guidelines update Implementation cost Liquidity fees and gates Operational/accounting issues Impact on yield Source: Fitch, audience vote at Dec 16 and Oct 17 treasurer events 0 5 10 15 20 25 30 35 (%) 17
Defining Fitch s money fund ratings a money market fund s (or other liquidity/cash management product s) capacity to meet its investment objective of preserving principal and providing ready liquidity through limiting credit, market and liquidity risk 18
Don t forget about rates! Euro Area forward vs. spot yield (%) AAA rated (F) AAA rated (S) 1.5 1.0 0.5 0.0-0.5-1.0 1 2 3 4 5 Source: Fitch, Global Economic Outlook March 2018; ECB; US Department of The Treasury Treasury forward vs. spot yield (%) Treasury yield (F) Treasury yield (S) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1M 3M 6M 1Y 2Y 3Y 5Y Country 2018f 2019f Eurozone 0.00 0.50 UK 0.75 1.25 US 2.50 3.25 Source: Fitch, Global Economic Outlook March 2018; ECB; US Department of The Treasury Source: Fitch, Global Economic Outlook March 2018; ECB; US Department of The Treasury 19
4 Conclusions 20
Key takeaways for corporate treasurers Updating investment guidelines to accommodate the post-reform fund types and characteristics is a priority How corporate treasurers react, and funds manage the transition process will be key sensitivities as we get closer to final implementation The reforms are coming: July 2018 for new funds; January 2019 for existing funds Europe is unlikely to see the massive flows from prime to government funds we saw in the US LVNAV will look and feel much like today s CNAVs but it also has specific, distinctive characteristics which are important to understand Fitch s global rating criteria is applicable to all short-term MMF types 21
Related Research European Money Market Fund Reform dedicated web page www.fitchratings.com/site/fam/mmfr MMF compare: interactive data comparison tool MMFs key risk attributes Graphical peer comparison Published monthly Why European money fund reforms will differ from the US Apr 2017 What investors need to know: European money market fund reform Sep 2017 European MMF reform made easy Oct 2017 Fitch: European MMF reform won t affect corporate cash analysis Nov 2017 Fitch 2018 outlook: global money market funds Nov 2017 European MMF investors await clarity as reform beckons Jan 2018 Fitch: euro LVNAV viability now hinges on higher interest rates Feb 2018 Fitch global economic outlook Mar 2018 Reform gate risk low for European money funds 22
Fitch Ratings contacts Fund and asset management analytical Roger Merritt Global Group Head Managing Director +1 212 908 0636 roger.merritt@fitchratings.com Alastair Sewell, CFA Europe & Asia-Pacific Group Head Senior Director +44 20 3530 1147 alastair.sewell@fitchratings.com Business and relationship management Kathleen Plunkett Associate Director +44 20 3530 1435 kathleen.plunkett@fitchratings.com David Turner Senior Director +44 20 3530 1442 david.turner@fitchratings.com Investor development Charlotte Quiniou, CFA Director +33 1 44 29 92 81 charlotte.quiniou@fitchratings.com 23
Fitch Ratings credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forwardlooking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided as is without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM. 24
New York 33 Whitehall Street New York, NY 10004 London 30 North Colonnade Canary Wharf London, E14 5GN fitchratings.com @fitchratings
Discussion and Q&A Chair Michelle Price Associate Director, Policy & Technical, ACT Speaker Alastair Sewell, Senior Director, Fitch Ratings @actupdate #ACTwebinar
Closing remarks Michelle Price Associate Director, Policy & Technical ACT @actupdate #ACTwebinar
FORTHCOMING EVENTS ACT Treasury Network Hong Kong 23 April 2018 Hong Kong ACT breakfast briefing: Brexit the corporate perspective 25 April 2018 London ACT Treasury Network Singapore 25 April 2018 Singapore ACT webinar: Smarter commodity hedging time for treasury to take action 26 April 2018 Online Celebrating 10 years of ACT Middle East 08 May 2018 Dubai ACT Middle East breakfast briefing: Real cash visibility 09 May 2018 Dubai ACT Annual Conference 15-16 May 2018 Liverpool Benchmark Reform Roundtable 22 May 2018 London ACT Middle East Treasury Summit 16-17 October 2018 Dubai ACT Treasury Forum 14 November 2018 London ACT Annual Dinner 14 November 2018 London treasurers.org/events
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