January 21st 2019 was the last date for existing Money Market Funds to transition to the new Money Market Funds Regulation (MMFR) regime. MMFR will transform the risk management framework of MMF managers by introducing new categorisation, a dedicated filing and a complete review of the risk and credit management processes. It will also change how fund liquidity is managed by introducing risk monitoring of the liabilities.
The ‘Know your customer’ policy – knowing who the final investor is – stands out from the entire regulatory package. Although not binding at first glance, it is more complex to implement than initially expected. It should be taken all the more seriously as it is likely to be rolled out to other fund categories afterwards.
New regulatory constraint
Alongside the regulator’s desire to move towards a flattening of the custody chain in order to target the final investor, the new requirement seeks to evaluate the fund’s dependency on a restricted number of investors, and the redemption triggers that could destabilize its liquidity. The fund or manager is accordingly obliged to perform a global investor due diligence at compartment level. Yet this is qualitative information that could be difficult to gather, especially when the fund has no nominative registrar. Where should it come from? How can one ascertain the quality of the information provided by intermediaries?
Due diligence challenges
The challenges to implement MMFR are diverse and complex. First, there is a real open question about the definition of “single investor”. The only investor that a Management Company is aware of is the shareholder nominee at the Transfer Agent (TA) level. Even if no nominative registrar exists, the TA is often able to provide more detailed breakdowns. If the “single investor” is the beneficial owner (like in any other regulation), the due diligence at nominee level might could not be considered sufficient.
MMF managers should at least make the following improvements to internal organization:
- Efficient investor database: Maintain an accurate investor database with records from the intermediary banks and its providers (TA, processing agent, distribution network, etc.), with the ability to create alerts and controls on an ongoing basis on investor holdings thresholds.
- Transparent communication: Promote transparent communication with all stakeholders before and after the Go Live of the regulation. Collaboration between the teams and with intermediaries is critical.
- Well-organized internal process: Define ownership of the overall KYC / due diligence process, and how tasks and responsibilities are allocated. There is heavy dependency on information from external sources (TA, intermediaries), so communication between teams must be as transparent as possible.
MMFR is a constraint – but also presents a real opportunity. For example, once managers have overcome the challenge of gathering data from multiple sources, they have outstanding business intelligence at their disposal about investors – and can unlock value in this information using data analytics or visualization to forecast in and out flows, adapt strategy to demand, streamline distribution channels, and predict and minimize the investor churn rate.
Other MMFR requirements like Liquidity monitoring, valuation or Credit Quality Assessment strengthening are also compelling in that they upgrade controls and security for the investors in MMFs. But the enhancement of liabilities monitoring is a move towards strict traceability of the fund investors, for which the market must be better structured.
To read the complete article about MMFR, visit MMFR: the Investor Knowledge Paradigm.