Once the EU has agreed the new rules, we could see more money fund-managers decide to exit the business rather than make the expensive adjustments required to their offerings. “Regulation is a key factor,” Vanessa Robert, VP, Senior Credit Officer, Moody’s says. “It is weighing heavily on the already challenging landscape for money funds and it might accelerate this trend. The ability for mid-tier sponsors to thrive has been materially reduced.”
At the same time as corporate investors’ choice of asset manager becomes narrower, the range of short-term investment products they have to choose from may be about to get a lot bigger. First of all, a number of asset managers have already stated for the record their interest in establishing LVNAV MMFs, should the final regulation include these products as an option, of course.
“That is something we might be interested in adding to our product portfolio,” Paul Mueller, Senior Portfolio Manager, Sterling and Euro MMFs at Invesco, said in a recent interview with Treasury Today. “In principle, it could have a lot of appeal to clients, not least because of the fact it can still trade at a share price of one. But there are some practical operational details that could have a meaningful impact on how viable this product might ultimately be, for example, what investment securities will be allowable in the liquidity bucket. Also it is crucial that the five-year ‘sunset clause’ set-out in the EP’s proposal is not in the final text because we do not think that this product would be viable if that were to be included.”
Applying similar caveats, J.P. Morgan Asset Management also expects to see an evolution in its portfolio of funds once the new rules have been implemented. “When we finally see the details of the forthcoming regulatory changes in Europe it is very likely that we will need to look again at the funds we offer to investors in the region. That could include the proposed LVNAV MMF. Should LVNAV MMFs indeed become a reality, we could look at launching or even converting our existing funds to be able to offer the product.”
The changes are unlikely to stop with the introduction of LVNAV MMFs either. Even now, while the new rules are still being negotiated, we are seeing an ongoing evolution in asset managers’ portfolio of products, driven by the negative interest rate environment and clients searching for additional yield. Both Invesco and J.P. Morgan Asset Management, for instance, note a growing interest in products with longer investment relative to MMFs, such as managed reserve funds (MRFs) and, especially, separately managed accounts (SMAs).
Given the likely emergence of more new investment products in the coming years, evaluating and updating existing investment policies to better reflect such market trends might be a necessary exercise. In fact, such exercises are already on the agenda for many treasurers. Last year’s, J.P. Morgan Global Investment PeerViewSM survey, for example, found that just under half (46%) of the treasurers surveyed in Europe plan to make changes to their investment policies, an unsurprising finding given that the same survey also discovered that only 44% of the same group of companies allowing for the use of variable net asset value (VNAV) MMFs.
“Upcoming US MMF reforms and eventual updates in Europe are prompting many corporate clients to review their investment policies,” says Beccy Milchem, Director, BlackRock Cash Management, noting the growing demand for alternatives to MMFs amongst the client base. “Those that are able to bucket stickier portions of operational and core cash balances have looked for additional solutions to add to their investment toolkit.”
Treasurers need to work closely with the Board to build an updated policy document detailing a full list of permissible instruments and counterparties. This could mean minor tweaks or a total revamp, depending obviously on the nature of the existing policy and the investment objectives of the corporate in question. For most companies, though, the undertaking would appear to be closer to the latter. Of those respondents in J.P. Morgan’s PeerViewSM survey that said they were planning changes to investment policies, only 18% said the changes would require a minimal level of effort. Meanwhile, 82% described the effort involved in making the necessary policy amendments as ‘moderate’ or ‘significant’.
Time on your side
Given the time consuming nature of identifying the changes that need to be made and then seeking board level approval, it is therefore advisable that treasurers – especially those at corporates that rely heavily on MMFs – to begin the process of review at the earliest opportune moment.
Many treasurers may, of course, want to wait until a final agreement is reached by European policymakers on the future regulation of MMFs before setting anything in stone. That would mean holding off until early 2017, at the earliest and, after the point of agreement, there should be an interim period (anywhere between six months and two years, based on the current proposals). However, it might be sensible to work ahead of that schedule. Indeed, many corporate treasurers have, sensing the general direction of regulation in both Europe and the US, already made the necessary policy changes in order that they can begin familiarising themselves with the new products gradually and at their own pace. That way, once this protracted regulatory saga is eventually concluded – which it surely will be in the coming months – they will be as prepared as they possibly can be.