EUROPE – Regulatory changes to the way money market funds are valued could lead to significant outflows from the market if they contradict institutionals’ investment guidelines or increase taxes, Fitch Ratings has warned.

The agency said one of the more likely outcomes to ongoing reviews of the sector in Europe – in addition to new rules to combat liquidity risk – would be a move towards partial variable net asset value (VNAV) funds, where assets with a residual maturity of less than three months continue to be priced on an amortised cost basis.

While Fitch said the changes were unlikely to have a major impact on fund ratings, the agency warned that it remained unclear how investors might react to them, or whether the changes could lead to significant disruption of or outflows from the €500bn market.

“Some corporate and institutional investors will refuse to accept VNAV funds if they conflict with their investment guidelines or raise significant tax or accounting hurdles,” it said.

“If so, this could drive significant outflows from the European market, which is split about 50:50 between CNAV [constant net asset value] and VNAV funds.”

Earlier this month, a report published by Moody’s found that the prospect of a prolonged period of low yields was adding to the challenges faced by an already beleaguered industry.

Money market fund managers have taken a number of actions as a result, including fee waivers, refusing new subscriptions and imposing up-front liquidity fees to offset negative yields, according to the ratings agency.

The report went on to say that a manager’s decisions around fee waivers, for instance, could have unintended consequences, such as reducing profitability, increasing redemptions or attracting volatile investors.

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