Money Market Funds
CNAV features in the US and the EU compared
After separately reviewing the regulation on Money Market funds (the Regulation), the European Institutions (the European Parliament, the Council of the EU and the European Commission) are holding trialogue discussions on the latest draft. Originally proposed as part of a set of reforms to the UCITS regime, the Regulation will affect all European domiciled money market funds (MMFs). In the US, the SEC last year introduced changes rules governing US MMFs which seem to have been the inspiration for some of the changes introduced into the European version, particularly the new rules for Constant Net Asset Value (CNAV) MMFs.
US CNAV MMFs
In the US, the SEC’s revised rules restrict the use of amortised cost and/or ‘penny rounding’ to government, retail funds and institutional prime money CNAV MMFs holding securities with a residual maturity of less than 60 days. They may also continue to use a constant NAV (usually $1). All other MMFs are required to convert to using a floating or variable NAV, calculating their market-based NAV per share to the nearest basis point. This level of precision is 10 times greater than that required for other mutual funds and is 100 times greater than the penny rounding method currently utilized by money funds.
The SEC’s rationale for introducing the floating NAV was to mitigate the ‘first mover advantage’ and to reduce unfair dilution which could occur during periods of market stress when ‘first mover’ investors redeem shares at a constant NAV and remaining shareholders receive less.
EU CNAV MMFs
Similarly, in the EU, the draft Regulation provides for three types of CNAV MMFs whose scope broadly reflects the three types in the US: retail, public debt and Low Volatility NAV (LVNAV). In addition to calculating the actual NAV per unit or share according to the mark-to-model or mark-to-market methods as is the case with variable NAV MMFs, these three may also display a constant NAV when: the amortised cost method is used to value assets with a residual maturity below 90 days only and the assets are rounded to two decimal places. However, the authorisation of these MMFs lapses 5 years after the MMF Regulation comes into force.
The European Institutions are currently holding trialogue discussions on the current text of the Regulation.
In the US, amendments to the SEC’s revised rules became effective 60 days after their publication in the Federal Register on 14 October 2014. Compliance is required on a staggered basis: 14 July 2015 for the new Form N-CR, 14 April 2016 for amendments to diversification, stress testing, disclosure, Form PF and Form N-MFP, while compliance date for the floating NAV amendments and the fees and gates amendments is 14 October 2016.