So much has been said about money market reform in the US and Europe over the past couple of years that it is difficult sometimes to know where we are. J.P. Morgan Asset Management’s recent Global Liquidity Investment Forum 2018 in London offered a refreshingly brief update and call to action.
Whether the money market industry needed reform or not, it is happening. At J.P. Morgan Asset Management, in about 22 weeks the new structures and rules will be applied, and treasurers will have to decide what to do next.
J.P. Morgan Asset Management set out its timeline for clients at its recent Global Liquidity Investment Forum 2018 and is aiming for transition at the end of November.
Subject to regulatory approval around the first week of September, its clients will receive a letter laying out the options, mapping the most appropriate path to take under the new regime and establishing a transition programme.
Mapping for this will be based on current fund-type and share-class type, explains Kerrie Mitchener-Nissen, Head of Product Development International, Global Liquidity, J.P. Morgan Asset Management. “If a client is happy with that mapping, there is nothing for them to do.”
After close of trading on Friday 30th November, clients will be shifted over the weekend to their chosen fund options to begin under the new regime on Monday 3rd December. This is all well in advance of 21st January 2019 regulatory deadline, notes Mitchener-Nissen.
From her view as Portfolio Manager, Sterling Strategies, J.P. Morgan Asset Management, Olivia Maguire says the current portfolio strategy will continue as is – dependent upon Bank of England decisions – up to and post-reform.
Credit fund holdings will be split into VNAV and LVNAV, so the new funds will have exactly the same holdings as before, says Maguire. And in terms of investment strategy, from a portfolio management perspective, economic events will still be the driver. “Reform is not having an impact on the strategy,” she comments.
“For the major currencies (USD, EUR and GBP) this means clients will continue to have options of government funds and credit funds”, says Mitchener-Nissen. And depending on personal preferences, transition will open up options for stable NAV (so public debt will take a CNAV structure and credit funds the LVNAV form) or variable NAV (VNAV). “We will be looking to make available both in each space,” she says.
In practice, a US treasury fund will see both stable and variable NAV versions offered. A sterling liquidity fund will similarly have the dual option of LVNAV or the VNAV variant.
Clients may be concerned about a performance differential between LVNAV and VNAV. But, says Maguire, “the regulations do not bring in many fundamental changes as to how we manage a portfolio”.
New rules include maximum percentages for holdings of asset-backed commercial paper, and some repo counterparty diversification limits, “but all of these limits are generally what the funds are managed within today”. Although new regulatory mandated daily and weekly liquidity buckets will be imposed, Maguire says “our AAA rated funds are already subject to a Fitch weekly minimum liquidity of 30%”. The funds will look to maintain a buffer over and above the weekly regulatory minimum but “this won’t be a significant change to how we need to run the portfolio”.
In terms of yield, where current credit funds will split into LVNAV and VNAV, the two new funds will be similarly rated and follow a similar strategy, confirms Maguire. “We expect the yield on the two new funds to be around where the credit fund is today.”
LVNAV funds need to hold a higher mandated minimum level of daily and weekly assets than the VNAV funds and the cost of liquidity to hold a buffer of daily/weekly assets may cause the yield to be slightly lower than where the credit fund is today, she explains.
“The VNAV will be AAA rated and run a similar strategy even though under the regulatory minimums you can have less weekly assets. Therefore, we anticipate that the yield will also be close to where the credit fund is today.”
With the regulations permitting a lower level of liquidity for VNAV, when assessing these funds and spotting one running a higher yield than another, it is important to understand how that yield is being achieved, advises Mitchener-Nissen.
“Knowing what the risk-return trade-off is for that yield is vital. There will be some funds choosing not to apply a rating, or to run closer to those lower liquidity requirements in the weekly bucket,” she adds.
Indeed, these will have a slightly different profile compared to a traditional short-term money market fund; there’s nothing wrong with them per se, just be aware of what’s in the portfolio and the pricing wrapper.
What to do now?
For treasurers, the transition should be “fairly smooth”, says Mitchener-Nissen. For J.P. Morgan Asset Management clients, if the mapping offered is agreeable then nothing needs to be done. Even the International Securities Identification Number (ISIN) is retained in transition. However, discussions may be necessary regarding fund options. “Clients will be given until a week before transition to notify us if they want to choose a different option,” she adds.
Beyond fund choice, she suggests that now is a good time to look at portals and platforms to see if there is anything that needs changing to accommodate the transition. It is also the right time for investors to “have a conversation” with their advisors or auditors and to communicate with their board to ensure the investment policy is updated where required.
Anecdotal evidence offered by treasurers at this event suggested that the conversations of the last few years around the transition will in fact culminate in very little difference for the investor. The views of J.P. Morgan Asset Management’s own experts seem to concur.
Want to know more?
Treasury Today is publishing an exclusive Money Market Funds Talking Treasury Forum in the next edition of the magazine. Within it you will hear from six asset management houses who will provide you with your roadmap for reform.