Treasury Today Country Profiles in association with Citi

Money market funds: what’s next?

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As money market funds become more popular across the region, how is the market developing – and what do treasurers need to know when using this type of product for the first time?

Offering security, liquidity and yield, money market funds (MMFs) have much to recommend them – and as such they are widely used by corporate treasurers around the world.

“Treasurers are focused on capital preservation, liquidity and yield,” explains Simon Bourke, Director of Institutional Business for Liquidity at HSBC Global Asset Management. “A money market fund is a product that allows a treasurer to outsource cash management to a professional asset manager who focuses on optimising these factors.”

As Bourke points out, MMFs are run by asset managers with specific core competencies in managing credit, liquidity and interest rate risk for a lower cost than a treasurer replicating the same portfolio themselves while providing money market yields. “This allows the treasurer to run a leaner team and focus on other value-added activities,” he adds.

Driving growth

While MMFs are well established in markets like the US and Europe, they are a more recent arrival in Asia Pacific. Nevertheless, the market for MMFs is growing rapidly in the region – particularly in China, where AUM for MMFs increased from RMB 1.96trn in December 2014 to RMB 5.86trn in July 2017, according to figures published by the Asset Management Association of China.

“While it is regularly said that the MMF industry in Asia is still in its infancy, or perhaps now early teens, it has already grown significantly in a relatively short space of time,” observes Bourke. He explains that most treasurers of sophisticated institutional businesses and multinational corporations are to some extent engaged with money market funds – “if they are not already investing directly, they are certainly contemplating the approach”. Large corporates are a little further behind in terms of adoption, but he notes that there is a growing appetite for alternatives to standard current accounts and time deposits.

Much of this can be attributed to the rising USD interest environment which, as Bourke says, is “driving up the opportunity costs of earning zero on cash”. Other drivers of growth include increased familiarity with MMFs, as well as overall growth in Asian businesses generating more free cash flow that needs to be managed.

The impact of Basel III on the cost of bank deposits is also a consideration, although this trend may be less of a factor in Asia than in other regions. J.P. Morgan Asset Management’s 2017 PeerViewSM Survey found that while 55% of respondents in Europe said their banks had encouraged them to move their cash deposits off balance sheet as a result of Basel III or other factors, only 17% of those in Asia Pacific reported the same.

Furthermore, treasurers may use MMFs in order to meet other specific needs. “PMC does not advise on investments, but we have seen increased use of such funds from large corporates holding excess liquidity who are looking at potential acquisitions or have other potential short-term needs,” comments Gavin Da Cunha, PMC Treasury’s Managing Director in Asia.

The money market fund landscape in Asia

Bourke notes that Singapore and, to a lesser extent, Hong Kong have emerged as regional and international treasury centres for US and EMEA MNCs, as well as becoming large financial centres in their own right. “This has led to significant demand for money market instruments as decision makers are increasingly present in Asia,” he says. “While the strongest demand has been in USD, the larger developed Asian-based currencies such as AUD, HKD and RMB are growing as well.”

One notable development in recent years has been the rise of Chinese fund Yu’E Bao, which is sold on mobile payment platform Alipay. The fund, which was launched in 2013, now has over RMB 1.4trn of assets under management and is the world’s largest money market fund. While the fund is aimed at retail investors, its rapid success has done much to boost the profile of MMFs in the region.

Meanwhile, Bourke points out that the RMB space has become the second largest MMF domicile in the world, according to figures published by Fitch Ratings earlier this year. “This has been primarily due to retail participants’ adoption of MMFs via technological innovation, and institutional demand driven by corporate outsourcing of asset management, capital controls and guidelines limiting bank payouts on deposits,” he adds.

MMF reform in the US and Europe

Last year, the US Securities and Exchange Commission (SEC) introduced new rules stipulating that money market funds must operate on a variable net asset value (VNAV) model, instead of keeping the cost of a share at a constant NAV of US$1. The rules also included the ability to impose liquidity fees and redemption gates if the percentage of a fund’s assets that can be liquidated within a week drops below 30%.

On the other side of the Atlantic, European regulators are likewise in the process of implementing new money market fund rules, although they are taking a somewhat different approach. The European regulation, published in June, introduces a new category of money market fund, the low volatility net asset value (LVNAV) MMF, which uses amortised cost accounting for assets which have a residual maturity of up to 75 days. The new rules also include VNAV MMFs and public debt CNAV MMFs.

Regulatory change

At a global level, MMFs have been subject to significant regulatory scrutiny since the financial crisis. This has resulted in regulatory changes in both the US and Europe, with particular focus on the constant net asset value (CNAV) model of MMF.

How closely are regulators in Asia following these developments? “I would say that the China regulator is very focused on the risks that it sees in China,” says Ben Ford, Executive Director at J.P. Morgan Asset Management in Singapore. “While they are willing to talk to global leaders like ourselves and understand our priorities, I think they are focused on controlling what they can in their own country.”

Past market events had led to the introduction of new rules by China’s Securities Regulatory Commission (CSRC) limiting the exposure that MMFs can have both to single borrowers and to lower rated assets. In October this year, new regulations rom CSRC have focused on concentration and liquidity. “As a retail or institutional investor I would want to know that I’m not in a fund that has a large concentration with one individual investor,” explains Ford. “However, CSRC’s new guidelines introduce additional rules for funds with investors at over 50% concentration, which seems very high – for example, in our funds you wouldn’t hold more than 5% – but there is a realisation that concentration is an issue that needs to be regulated, and this is a first step in that direction.”

Elsewhere in the region, Ford notes that regulators tend to have a “lighter touch” on money market funds than they do on their banking rules. “That said, regulation is still there. In Hong Kong and Singapore, regulations are fairly wide and encompass a wide range of investors,” says Ford.

Overall, though, it would appear that corporate investors in Asia Pacific are less affected by regulatory change than those in other regions. J.P. Morgan Asset Management’s PeerViewSM Survey found that only 33% of participants from Asia Pacific were planning to change their investment policies in light of the current regulatory environment, compared to 58% of European respondents and 46% of those in the Americas. The report notes that this “could be reflective of attractive USD bank deposit rates and fewer regulatory pressures in the region in comparison with Europe and the Americas”.

Barriers to adoption

While the market is growing, there are still many companies in the region that do not use MMFs. David Blair, Managing Director of Acarate Consulting, points out that money market funds are less popular in Asia than in the US for a number of reasons. For one thing, he says that corporates in the region traditionally have tighter bank relationships – while another consideration is “plain old resistance to change”.

Ford points out that while there is a high level of familiarity with money market funds in the US and Europe, Asia is at an earlier stage of adoption. “While multinational treasurers are more familiar with a range of investment products, for local corporates the bank is often driving the relationship and promoting its own products,” he says. Ford notes that where banks are lending heavily to some sectors such as real estate, the corporate cash will likely be held mainly with the lending bank. “Sectors such as pharma and tech tend to have more cash and are therefore more likely to use off-balance sheet/non-bank products,” he adds.

At the same time, Ford says that the lack of familiarity with money market funds can result in a “bigger uphill battle” when seeking to introduce the product – not least because companies’ investment policies may not specify whether money market funds can be used. “Investment policy is another area that we work on with clients,” he adds.

Regulation is another consideration, although Ford does not regard this as a barrier to adoption overall. “We see it as a very good thing in the long-term because it helps investors get more comfortable and understand what these products are for – although in the early stages clients get concerned about what the regulator has highlighted, and it takes time for things to settle down.”

Advice for treasurers

For treasurers using money market funds for the first time, Bourke says the first step is to review current investment guidelines and see if MMFs are even allowed. “Secondly they should develop a framework to evaluate, select and monitor providers or decide if they want to outsource that process as well,” he says. “Also it is important that a treasurer understand the various channels available to invest in the fund, be it via fax, sweep or online portals, and the pros and cons of each.” Bourke notes that it is important to think strategically about a liquidity provider to partner with to ensure the investment and credit approach are in line with the treasurers goals.

When seeking a money market funds provider, there are many different considerations to take into account. The size of the sponsor is crucial, as is its level of experience. As Ford explains, “It’s important to look for a fund that has a sponsor which has been running these products for a significant amount of time, and that has a credit team in place to make sure they are looking at counterparties in the right way. You also want experienced managers who can think about the liquidity and types of risk in the portfolio.”

When companies undertake further due diligence, Ford says they should consider who the regulator is, whether the fund is rated and whether the fund has ever restricted withdrawals. “You should also look at the basic features, such as cut-off times of funds and whether the fund has client service in the region – but the overriding theme is the sponsor of the fund and its track record.”

Future developments

Looking forward, Bourke says that the market will become “bigger faster and more transparent” in the coming years. “As the market matures the adoption rates across the institutional and retail space should increase to edge closer to the US/EMEA levels, which is about 15-20% of the deposit base,” he says. “There will probably be a convergence of the regulatory approach and an increase of pan Asian mutual fund recognition schemes.”

Bourke also predicts that the investing process will become more automated via online portals and tools that will improve ease of investment and transparency of reporting. “Crypto currency and block chain impacts are hard to predict but could be huge disrupters in this space as well,” he adds.

Ford says developments in China’s money market fund industry are likely to have a considerable impact on developments across the region as a whole. He adds, “As regulators get more sophisticated, clients and investors likewise become more sophisticated, which is exciting for us – we would like to see a greater understanding of money market funds across the region.”

Outside of China, Ford says that the market in Japan is more problematic due to negative rates. “Once we move out of a negative rate environment, we will probably see the market for yen MMFs grow,” he says. “Meanwhile, the Australian market is being driven by both retail and institutional investors, and there are certainly corporates who are looking at using money market funds.” In smaller countries, however, Ford says it is currently less clear where growth will come from.

Bucketing cash

Meanwhile, the practice of ‘bucketing’ cash balances into shorter and longer-term balances is becoming increasingly widespread in Asia. By dividing cash into different tranches, treasurers can invest short term balances into same-day settlement solutions such as money market funds, while investing longer-term and strategic cash into products with a longer investment horizon.

Impact of Basel III

Ford notes that to a certain extent, treasurers’ investment choices are being driven by regulatory developments such as Basel III. “We have heard that some banks have created products where you have, for example, a one-month term deposit that converts into a certificate of deposit which could then be sold,” he explains. “So banks are becoming more innovative in order to create evergreen structures that can be viewed by regulators as stable bank deposits.”

Conclusion

Money market funds have gained considerable ground across Asia in the last couple of years. As the market matures, it is likely that more companies will explore the opportunities provided by this type of product. In order to take advantage of MMFs, treasurers should take the time to understand the differences between providers and the impact of the evolving regulatory environment.

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