This month we talk to Mark Stockley, Managing Director, Head of International Cash Sales at BlackRock about the risks, rewards and best practices of the money market fund (MMF) industry.
Managing Director, Head of International Cash Sales
Based in London, Mark is responsible for the business development, marketing, sales and client service of BlackRock’s cash management capabilities outside of the US.
Mark joined BlackRock as part of the Barclays Global Investors (BGI) acquisition in 2009. At BGI Mark was Head of Global Cash Sales and the European Institutional Wealth Management distribution channel. Prior to this he has held managerial roles with J.P. Morgan Asset Management, Goldman Sachs Asset Management in Asia and Chase Manhattan Bank in London and Luxembourg.
Mark is an Executive Director across the principle BlackRock Irish domiciled fund umbrellas and was previously the Vice Chairman and Treasurer of The Institutional Money Market Fund Association (IMMFA).
How would you describe the health of the international MMF industry at the moment?
Despite the challenging market conditions that we’re operating in, I consider the industry to be robust and in relatively good health. Look at the demands of the Eurozone environment, the reduction of available suitable liquid instruments, and the issues some of the peripheral currencies and countries within Europe have been facing.
Those hurdles, coupled with a significant change in some of the dollar funding patterns, have made it a difficult environment for MMFs. But as an industry we have stood by our guiding principles of security and liquidity, which has given us a conservative but reliable reputation. So while 2011 was certainly a very difficult year, the industry weathered it well and continues to do so in 2012.
Speaking of the Eurozone crisis, how is it impacting the MMF industry?
Hopefully politicians are working towards, or beginning to achieve, a greater sense of stability but there is a lot of progress to be made from a macroeconomic perspective. Looking at the impact of the Eurozone troubles from an industry standpoint, the concerns largely revolve around credit risks, reduced supply, lower yields, and generally less liquidity in the market.
“Looking at the impact of the Eurozone troubles from an industry standpoint, the concerns largely revolve around credit risks, reduced supply, lower yields, and generally less liquidity in the market.”
There are also difficulties around the selection of suitable investment instruments, particularly in the European government space, as demonstrated by the German and Dutch authorities (issuing paper over the Christmas period at anything up to minus 20 basis points). If you had asked me a number of years ago what the most difficult products to manage are, I certainly wouldn’t have said it would be a government-only euro denominated fund.
Our experience with our clients is that they are largely focused on capital preservation and liquidity, while avoiding being overly exposed to single counterparties through the deposit market. Yield is some way down the priority list at present.
Yes, there has been a lot of press about short-term investment challenges for corporates lately – are money funds benefiting from that?
That’s a good question. If you focus just on funds in the IMMFA market then overall growth in assets in 2011 across all currencies was a healthy 7.2% as industry assets increased to $663 billion from $618 billion. IMMFA fund assets have increased a little under 1% so far in 2012. If I look at it purely amongst our peer groups, BlackRock has navigated this period particularly well – in 2011 we grew our funds around 10% or so from $80 billion to $88 billion, while we’ve had a good start to the year increasing nearly 2% to just under $90 billion in assets1.
“If I look at it purely amongst our peer groups, BlackRock has navigated this period particularly well – in 2011 we grew our funds around 10% or so from $80 billion to $88 billion, while we’ve had a good start to the year increasing nearly 2% to just under $90 billion in assets.”
We feel that we have a very strong credit process in place and an expert portfolio management team. Moreover, we also have appropriate linkages across all BlackRock’s different asset classes to ensure we have a comprehensive view of the markets and this is critical in informing our portfolio process.
Also, being an independent asset manager, a fiduciary, we aren’t beholden to the sponsorship of investment banks. This means we’ve been able to act with our clients’ best interests in mind. That being said, there’s more pressure than ever to be able to navigate that course successfully for clients.
“Being an independent asset manager, a fiduciary, we aren’t beholden to the sponsorship of investment banks. This means we’ve been able to act with our clients’ best interests in mind.”
There has been considerable regulatory focus on MMFs recently. What is the current thinking on both sides of the Atlantic?
The US Securities and Exchange Commission (SEC) has some pending Rule 2a-7 recommendations and it looks like they will come out with some new proposals in the next month or so. It is unclear yet exactly what the draft proposals will be, but there may be a set capital requirement. Whatever happens, it will be interesting to see after that what is adopted or recommended in Europe.
Stepping back a little, immediately following the 2008-9 crisis, regulators in both the US and European markets amended the rules around MMFs. For instance, the SEC introduced some major changes to Rule 2a-7 introducing more stringent guidelines around transparency as well as new or amended rules around credit, liquidity and interest rate risk.
At the same time the European Commission adopted new rules for MMFs as proposed by the European Securities and Markets Authority (ESMA) that categorised funds into ‘money market funds’ and ‘short-term money market funds’. We think ESMA brought some positive clarity to the European industry by doing so, and the consensus from the industry and investors has been that the SEC’s changes in the US market have been positive also.
While these are major steps for the US and European markets, what I can see now is that there is definitely greater trans-Atlantic co-ordination between the various regulatory bodies and greater focus on trying to put some additional regulation in place; in theory, to make money funds safer.
From an industry perspective, there’s been quite a strong leaning towards that synchronisation because post-2008 there have been a lot of piecemeal changes made.
That said, the arguments that many industry groups are putting forward is that the new recommendations being considered, in particular by the SEC, would possibly be detrimental and might negatively impact the industry. So we are already seeing quite a lot of concern and speculation about pending or proposed rule changes because we don’t actually know what they will be yet.
“The arguments that many industry groups are putting forward is that the new recommendations being considered, in particular by the SEC, would possibly be detrimental and might negatively impact the industry.”
In Europe, MMFs are also faced with the focus on systemically important institutions. The question is whether money funds represent a risk to the banking sector and MMFs get drawn into wider debates around ‘shadow banking’ and systemically important institutions.
In contrast to some of the positioning that thinks of MMFs as leading to greater volatility in the financial markets our argument is that they, in fact, provide greater stability.
What you don’t want to do is implement a set of reforms that significantly impact the MMF industry and drive those balances and flows back on to bank balance sheets. This is counterintuitive; given the challenges and failures the banks have had, the last thing that regulation should do is to reduce the investment choices that clients have available to them.
We think the SEC are likely to clarify their thinking around the new proposed changes to Rule 2a-7 sometime in the first half of 2012. They’re likely to put out their proposals and give some time for the industry and other interested parties to comment prior to implementation but at this stage there’s no definite timeline.
What about regulatory changes in the banking sector (eg Basel III) – how has that impacted the short-term credit markets?
I think one of the fallouts from Basel III is that a lot of the banks have been forced to issue much longer, to look for longer-term sources of funding. This is unfortunately a bit of a ‘perfect storm’ when you think about the rules and regulations approach that MMFs are obliged to take.
Just to delve into this a little deeper – following the financial crisis in 2008-9 regulators identified that banks placed too much reliance on short-term wholesale funding, very often in the form of repurchase agreements. When banks became nervous of each other, particularly in 2008, they stopped providing these short-term credit lines to other banks and a number of institutions ran into liquidity issues. Lehman Brothers and Bear Stearns are cases in point here.
“MMFs are big buyers of high quality short-term securities issued by financial institutions and as a result we’ve been faced with diminished supply.”
Basel III really is a direct response to that – the new regulations focus on reducing banks’ reliance on short-term wholesale funding and this has seen more issuance by banks in longer-dated securities and a reduction in short-term debt offerings. MMFs are big buyers of high quality short-term securities issued by financial institutions and as a result we’ve been faced with diminished supply.
Certainly from our perspective, we aim to stay close to our clients, helping them to better understand what’s going on in the markets. At all times we aim to provide our clients with thought leadership and inform them about industry challenges and how they may play out. We also give them access to data and help them to take advantage of strategies like cash investment segmentation.
“For us, MMFs are a product, a wrapper but what we really do is credit and risk management, execution and structuring. We take into account varying components such as understanding clients’ appetite for risk, how liquid they need to be, their duration tolerance, and what kind of returns they require – then offer them different solutions or products.”
For us, MMFs are a product, a wrapper but what we really do is credit and risk management, execution and structuring. We take into account varying components such as understanding clients’ appetite for risk, how liquid they need to be, their duration tolerance, and what kind of returns they require – then offer them different solutions or products.
Particularly when you’re in markets like these, clients are a lot more focused on trying to get greater information and achieve greater control over a broad range of topics. Often some of the subtleties just wouldn’t ordinarily be apparent, so it is the asset manager’s job to make sure the client is as well informed as possible.
Is technology changing the way you sell cash products to your investors and if so, how?
Technology is becoming more important in the industry, whether it is the traditional ways that clients can access and use a money fund; whether they can automatically sweep from their bank account to and from a money fund; whether they use it to access general information on products, on markets, on yield characteristics or whether they start using it to think about risk concentration and transparency. Through using an MMF portal, clients can improve their ability to understand the risk that they are taking on across a number of different MMFs, direct investments or even a dedicated segregated account.
“Through using an MMF portal, clients can improve their ability to understand the risk that they are taking on across a number of different MMFs, direct investments or even a dedicated segregated account.”
From BlackRock’s perspective, we have a market-leading tool out there called the Aggregator. This gives clients the ability to completely look through to all of the underlying holdings, right across a range of different providers. This is currently available in the US and is something that we will be rolling out in Europe in the near term.
So while technological advances are beneficial for transparency and so on, is there need for an advisory service to back up the depth of information that clients can access via a portal?
Clearly there is a growing trend towards transparency as knowing the underlying risk of the entire portfolio is becoming increasingly critical for clients. The issue with some of the technology solutions out there that provide a so-called high level of ‘look through’ is that they are only as good as the way the data has been classified or mapped.
Firstly, you require full transparency and secondly, you need to know what to do next with that data. How are you going to use it and what does it tell you? So, while technology is absolutely an enabler, it does not detract from the need for an advisory offering.
Finally, what other key themes or challenges do you see in the industry right now?
One of the things that will definitely be a challenge for the next year to 18 months will be the final outcome of the regulatory proposals. It’s about making sure that both clients and regulators properly think through and understand what the true impact of any changes will be. After all, the objective of this regulation is to provide an industry that is still efficient while meeting clients’ needs.
“From my point of view, I think the regulators need to be careful what they wish for. I would argue that forcing all of this back on to bank balance sheets may spur on even more questionable accounting rules and techniques.”
From my point of view, I think the regulators need to be careful what they wish for. I would argue that forcing all of this back on to bank balance sheets may spur on even more questionable accounting rules and techniques. We are just going to have to be very careful that the change is actually for the greater good.
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