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When is a money market fund not a money market fund?

Kerrie Mitchener-Nissen, J.P. Morgan Asset Management

The answer to the headline question is no laughing matter for today’s short-term investor. New money market fund regulations are muddying the waters when it comes to discovering what ‘money market fund’ really means. Kerrie Mitchener-Nissen, Head of Product Development, International, Global Liquidity, J.P. Morgan Asset Management, casts a welcome light on the shifting short-term landscape.

Kerrie Mitchener-Nissen

Head of Product Development, International, Global Liquidity

Treasurers must start asking more questions of their fund providers if they are to optimise their cash investments. It’s a succinct message but one that carries much weight in today’s evolving short-term landscape.

With the new money market fund (MMF) regulations, which must be implemented by managers by 21st January 2019, it will open up the category to include some products that could leave unwary investors short on their security or liquidity requirements. Investment decisions in this space may no longer be as obvious as they once were. Indeed, if short-term alternatives are also considered as part of the mix, finding a balance between the sometimes-conflicting treasury needs of security, liquidity and yield, demands a new level of treasury due diligence from the outset when choosing a fund.

Time is of the essence

For most treasurers, especially those in the UK, a MMF is what the European Securities and Markets Authority (ESMA) calls a short-term MMF. However, ESMA also use the term ‘money market fund’, intending to distinguish between the short-term variant and its longer weighted average maturity (WAM) counterpart.

Historically, the latter product has mostly been for continental consumption, and less focused on a treasury client base. Under the new regulation, both ESMA definitions disappear. Short- and longer-term products will now respectively be called ‘Short-term Money Market Funds’ and ‘Standard Money Market Funds’.

The clarity of distinction is somewhat nuanced to the point where it could be especially confusing for UK treasurers, many of whom will now be faced with an option, where (to all intents and purposes) one did not previously exist. “This creates the potential for an unpleasant surprise,” comments Kerrie Mitchener-Nissen, Head of Product Development, International, Global Liquidity, J.P. Morgan Asset Management. For the sake of liquidity, understanding product differences is now essential.

Previously, treasurers allocating cash for investment have used short-term MMFs, deposits and, depending on their level of sophistication and appetite for involvement, possibly repurchase agreements (repos) too. In a bid to optimise their investments, the last few years has seen an increasing appetite for segmenting cash.

Common definitions of its use include ‘operational’ or day-to-day cash; medium-term ‘reserve’ cash; and longer-term ‘strategic’ cash. Working backwards, each state requires increasing levels of liquidity. Under the new regulatory classifications, the subtle distinction between ‘short-term’ and ‘standard’ could mean the unaware treasurer runs the risk of making an inappropriate investment decision.

The ‘short-term MMF’ is still the fund that most corporate treasurers have in mind when investing their operating cash, says Mitchener-Nissen. The term ‘standard MMF’ is therefore potentially confusing. But it is a longer-dated product and is less liquid, sometimes holding instruments out to two years in a portfolio that has a WAM of six months, rather than the 60 days WAM of a short-term portfolio. The proportion of the standard MMF portfolio that matures within one day and one week may also be significantly lower than a treasury manager expects. “It is important for treasurers to be aware of the distinction, so they know what they are buying,” she states. “There’s nothing inherently wrong with the standard MMF as an asset class, it just needs to be used correctly.”

Importance of segmentation

In this light, it should be easy to see the importance of segmenting the highly liquid needs of working capital, and other cash segments that can be put further out on the curve. Segmenting can open up a discussion on the range of options for each cash-type, says Mitchener-Nissen.

A standard MMF carries less liquidity but may well be a desirable product if it fits the corporate’s cash segmentation profile. Indeed, few would willingly pay for unnecessary liquidity. However, it is vital to understand the new regulatory classifications of MMFs to avoid investing in a fund that unexpectedly adds risk (a fund that could, for example, be using derivatives, deploying leverage, or investing in a currency other than the one required by the investor, where that exposure has to be hedged back).

“It’s down to the treasurer to be specific about what they’re looking for,” says Mitchener-Nissen. This only comes from understanding of their own investment needs; an understanding derived largely from segmentation. “But they also need to look closely under the hood of every MMF they are thinking of investing in.”

Research required

An awareness of the risks that the new regulatory classifications can present – or rather, the risks that confusing the new terms can create – should lead to more attentive reading of the fund manager prospectuses. This should be done in conjunction with treasury’s own investment policy to fully understand what is acceptable.

“It’s important for treasurers to start thinking about this now,” says Mitchener-Nissen. Action should typically take the form of a review of investment policy, ensuring it is at the very least updated to take account of the options under the new rules. Ideally, revisions should be mindful not only of current needs, but also of incorporating sufficient flexibility to take advantage of an evolving short-term market.

Wider options

The traditional stable or constant net asset value (CNAV) fund has been the go-to MMF for most treasurers. Under the new regulation this broadens out with the arrival of a low volatility net asset value (LVNAV), a variable net asset value (VNAV), and a public debt CNAV. LVNAV and public debt CNAV are short-term MMFs only but VNAVs offer short-term or standard options.

Which product is deemed most suitable will be dependent upon a number of variables such as investment objectives, business goals and the cash cycles to which a business is subject, says Mitchener-Nissen. But having the flexibility to be able to respond to liquidity requirements and being able, at a policy level, to invest in any of the new options will go some way to optimising corporate cash.

Whilst MMFs may be part of an investment plan, treasurers could also feasibly include alternatives such as short-duration fixed income funds, longer-dated deposits, or separately managed accounts (SMAs) if a bespoke investment policy is desired.

Private investigations

It should be apparent by now that understanding the new terminology plays an important role in making the right investment decisions. Standard and short term may be confusing but the use of historical terms attached to other fund types, such as ‘cash plus’ or ‘enhanced cash’, demands that treasurers fully investigate what these funds are doing and how performance is achieved.

The suggestion that a fund may deliver ‘extra’ return is perhaps an agreeable one for many investors. “But treasurers need to be aware of the incremental risk that they may have to take in order to generate that extra yield,” says Mitchener-Nissen. “Watching out for that terminology and understanding that there is no standardised definition for their use is important.” It’s not an issue of right or wrong, she adds, “it is simply one of being aware of what the underlying investment is”.

Asking questions

The new MMF regulation requires fund managers to be transparent with their clients about how their fund operates. On a weekly basis, for example, WAM and WAL and the fund’s top investments must be disclosed. “There is a lot of information available for investors now,” says Mitchener-Nissen. “We publish a lot of this on a daily basis including mark-to-market NAV and liquidity levels. This really helps clients understand their investments.”

How to find out what you are really investing in

  1. How does the fund achieve its yield?

  2. Does the fund use leverage to achieve its liquidity?

  3. Does the fund invest in other funds? If yes, what do these funds invest in?

  4. Does the fund invest in currencies other than the base currency of the fund?

  5. Does the fund use derivatives?

  6. Does the fund use independent third-party pricing to value its portfolio?

Even with resources such as J.P. Morgan Global Liquidity European Money Market Regulations Resource Centre, she advises treasurers to ask as many questions as they feel necessary to understand a product. “This will help them feel comfortable with what their fund managers are doing to achieve their results, understand the distinguishing features of each product, and gain awareness of the new opportunities delivered by the new regulation.”

Helping hand

With deadlines for the new regulation looming, J.P. Morgan Global Liquidity is working closely with clients to ensure they are regulation ready. In accessing the resource centre, clients can search for impartial guidance and papers on a number of related topics.

However, she reports that a number of treasurers are now asking for practical assistance with reviewing their investment policies and board presentational materials. Naturally, this is forthcoming, she says. “It’s all about ensuring that the client transition to the new MMF regulations is as smooth as possible.”

To find out more please visit our European MMF Regulations Resource Centre at www.jpmgloballiquidity.com or you can contact us at any time with your questions at jpm_global_liquidity@jpmorgan.com

Short-term MMF vs Standard MMF

Short-term MMF Standard MMF
Public debt CNAV LVNAV VNAV VNAV
Permitted investments Government exposure Government or credit exposure Government or credit exposure Government or credit exposure
Max WAM 60 days 60 days 60 days 6 months
Max WAL 120 days 120 days 120 days 12 months
Max maturity 397 days 397 days 397 days 2 years, with 397 days reset
Daily liquid assets 10% 10% 7.5% 7.5%
Weekly liquid assets 30% 30% 15% 15%

Source: J.P. Morgan Asset Management, as at August 2018