Proposals on money markets, Ucits V raise worries

Money-market fund recommendations proposed by the International Organization of Securities Commissions (Iosco) last month would be “catastrophic” for the industry, says ICI Global.

London-based ICI, in Hong Kong last week for the first meeting of its Asia-Pacific chapter, also highlights worries about Europe's planned Ucits V rules.

The funds association launched a year ago and is becoming increasingly active in Asia, as is also reflected by the signing-up of its first Chinese member, HuaAn Asset Management HK, last week.

ICI, which represents the views of the asset management industry on regulatory issues, recently also set up a committee to focus on exchange-traded funds (ETFs), which met for the first time in Asia last week.

The new chapter will convene on a quarterly basis in various cities in Asia with the aim of getting input from members on global issues such as the Foreign Account Tax Compliance Act (Fatca), cross-border trading, ETFs and more.

Areas of discussion for the ETF committee, for example, include concerns over product approvals in Hong Kong and issues around access to Chinese securities for asset managers. 

Another hot topic is treatment of money-market funds, following proposals made last month by Iosco.

ICI Global is, like the US Securities and Exchange Commission, against Iosco recommendations that would see MM funds counted as part of the shadow-banking industry.

The proposal to apply bank capital-type remedies to fund managers would be a “catastrophic outcome that can't be permitted to happen”, says Dan Waters, London-based managing director of ICI Global.

If the $4 trillion MM fund industry is treated as having capital and managers are turned into “quasi-banking organisations”, he notes, it could be uneconomical for them to offer the short-term financing they have long provided to investors, from local governments to pension funds.

The most problematic proposal is to force funds that offer stable net asset value to switch to variable NAV, where possible, with the aim of avoiding the kind of run that happened in the 2008 financial crisis. ICI argues there is no evidence that stable NAV funds are more prone to runs than their VNAV cousin.

“We have been working to offer banking regulators the hard data and facts that explain how these funds work," he notes, “but it has been an uphill struggle.”

The move would affect MM funds in China and Japan, among many other jurisdictions, and ICI is discussing the issue with regulators in those countries as well as in Europe, the UK etcetera.

Meanwhile, the next iteration of the Ucits rules on collective investment schemes are under negotiation in Europe and are slated to come into force in July next year. Ucits is a fund structure viewed as suitable for retail investors and is accepted in several Asian jurisdictions.

Ucits V covers three broad areas – depository and custody rules, compensation of fund managers, and sanctions – and aims to align Ucits with the Alternative Investment Fund Managers Directive (AIFMD). Discussions on Ucits VI are already under way as well.

One big area of debate around Ucits V has been about the role of the custodian or depository of assets and how capital is charged. For example, what is their responsibility if assets are lost due to bankruptcy or fraud?

There needs to be a balance between investors having protection but not putting depositories in a position where they are effectively insurance companies, says Waters.

“We don't want to see smaller custodians driven out of the business [due to costs being too high], or too much concentration in large custodians due to high costs,” he adds. “We also don't want to prevent investors from investing in certain countries or asset types.”

A problem is that Brussels is taking too much of a “top-down” approach in trying to replicate the AIFMD rules within Ucits, says Waters. This is stirring a great deal of debate among policymakers.

“We see a need for some consistency, but the European Commission needs to recognise the differences between types of funds,” he adds. AIFMD was written for hedge funds and Ucits for retail investments, he notes, so it isn't appropriate to apply a 'one-size-fits-all' approach to both.

Another big issue is how and to whom asset managers outsource operations cross-border, including delegation of trading, portfolio management and other services. Many Asian equity funds use Ucits structures, and European firms operating in Asia should not be forced to use Europe-based service providers, says Waters.

"We think that would be a bad place to land," he adds, "both from the point of operational efficiency and from the point of view of investors, who will pay for more complex service provision."

ICI Global argues that the European Securities and Markets Authority's advice to the European Commission on this – dubbed the 'letterbox entity test' – is "not perfect, but workable”. That is perhaps to be expected, though, given that the advice represents a “hard-fought compromise” between the 27 member state committees under Esma.

But the EC has diverged significantly from Esma's suggestions, by proposing quantitative and qualitative tests for delegation of cross-border services, he says. These additional tests will impose unnecessary costs and may even render unfeasible services now being provided without problems.