In recent years, money market fund (MMF) reform has brought major changes for the industry in the US and Europe. What do these changes mean for treasurers in Asia – and could the region’s money market funds be subject to similar reform in the coming years?
MMFs present an attractive alternative to bank deposits, with many offering liquidity, security and – in some case – competitive yield. As such, money market funds are an important cash management tool, used extensively by corporate treasurers around the world.
“Money market funds (MMFs) are safe places to store cash with a good stable return,” explains Christopher Emslie, Asian Regional Treasurer at General Mills. “They take risk out of your investing strategy, and in many instances give a better return than just having your money in the bank.”
In Asia, money market funds are less established than in the US and Europe – but recent years have seen considerable growth, particularly in China where Yu’e Bao has rapidly become the world’s largest money market fund following its launch in 2013. For many investors, money market funds are seen as an area of opportunity: the 2017 J.P. Morgan Global Liquidity Investment PeerViewSM survey found that 53% of firms in Asia Pacific planned to add stable net asset value (NAV) money market funds to their investment policies.
In other regions, however, regulatory reform has been a major focus for money market funds for the last few years. Following major rule changes in the US and Europe, what is the impact of these changes for treasurers in Asia – and could similar changes be introduced in the region in the future?
At a global level, money market funds have been something of a moving target of late. First came reform in the US. The financial crisis, which saw the Reserve Primary Fund ‘breaking the buck’, resulted in a run on US money market funds. In 2016, this led to a programme of reform by the Securities and Exchange Commission (SEC), with constant net asset value (CNAV) funds required to move to a variable net asset value (VNAV) model.
The impact of the changes was substantial: prime fund investors in the US withdrew over US$1trn in assets ahead of the reform, with funds flowing into treasury funds and government funds. Subsequently, J.P. Morgan’s 2017 PeerViewSM survey found that only 37% of US-based respondents were invested in a prime money market fund, compared to 63% in 2015. While prime fund volumes have improved in the last couple of years, progress has been slow: SEC figures show that volumes stood at US$764bn at the end of 2018, compared to US$1.7trn before the reform.
In Europe, regulatory reform took a slightly different path and almost seven years of discussion. With numerous different options on the table, regulators eventually opted to introduce a new low volatility net asset value (LVNAV) model which would largely replace the previous CNAV model. Final rules were agreed in November 2016 by the European Commission, European Parliament and European Council, coming into effect on July 21st 2018 for new funds, and on January 21st 2019 for existing funds. Unlike the US reform, the new EU rules are not expected to bring a major exodus of cash.
Funds required to adopt a VNAV model – in other words, the value of the investment is no longer fixed at US$1 per share.
Ability to impose liquidity fees of up to 2% if the percentage of a fund’s assets that can be liquidated within one week drops below 30%.
A 1% redemption fee to be imposed if weekly liquidity drops below 10%.
Introduction of redemption gates which temporarily prevent redemptions if weekly liquid assets fall below 30% of the fund’s total assets.
Three types of short-term money market fund now available: VNAV MMFs, public debt CNAV MMFs and LVNAV MMFs.
LVNAV funds able to use amortised cost accounting for assets with a residual maturity of up to 75 days, with mark-to-market or mark-to-model valuations required for longer dated instruments.
Funds required to maintain a minimum weekly liquidity of 30%.
Liquidity fees, redemption gates and suspension of redemptions may be adopted if liquidity falls below 30% and daily net redemptions exceed 10% of the fund’s total assets.
Mandatory fees and gates apply if weekly liquidity falls below 10%.
In Asia, the regulatory environment for MMFs is more diverse: the region includes many different countries, some of which have currency restrictions and capital controls.
“MMF regulations vary significantly across the Asia Pacific region, from countries with very detailed and prescriptive rules to other countries with no rules at all,” comments Aidan Shevlin, Head of Asia Pacific Liquidity Fund Management at J.P. Morgan Asset Management. “Compared to the well-established MMF industries in the US and Europe, MMFs are relatively young in Asia.” He adds that this is particularly the case for MMFs with an institutional focus, which are designed to meet the demands of corporate investors who focus on liquidity and security as their key goals.
Michael Larsen, Asia-Pacific Head of Liquidity Product at HSBC Global Asset Management, draws a distinction between MMFs in the region’s restricted and unrestricted markets. “The restricted markets usually require an MMF to be domiciled in the country and follow the local rules, which can vary significantly from country to country,” he comments. “What is an MMF in one country is not an MMF in another country.” He adds that representative countries include China, Indonesia, Thailand, Malaysia and India.
Unrestricted markets – which include Hong Kong, Singapore, Australia and to a lesser extent Japan – are more open and usually allow for selling of offshore fund products to locally domiciled companies. “These markets also usually have a local MMF industry as well,” Larsen explains.
In light of these variations, Larsen says there are few pan-Asia MMF providers that can cater to a regional treasury with operations in multiple countries. “Finding the right asset management partner to navigate these restrictions and help institute a consistent cash management strategy is key.”
While the recent reforms have affected treasurers in Asia less than their counterparts in the US and Europe, there have nevertheless been some changes. As Shevlin points out, “Only Asian corporate treasurers holding MMFs which are domiciled in the US or Europe have been directly affected by the recent MMF reforms. The US SEC reforms have impacted domestic USD MMFs, while the EU reforms have impacted any funds domiciled in Europe – including several Asia-Pacific currency funds.”
Larsen adds that for treasurers in Asia, MMF reforms in the US have only had a material impact on companies with large US subsidiaries. “The US funds are primarily available and sold to US residents/corporations with a very low adoption rate from Asian multinationals,” he explains. “So most treasurers were not really aware of the exact rules or reforms.”
Money market funds (MMFs) are safe places to store cash with a good stable return. They take risk out of your investing strategy, and in many instances give a better return than just having your money in the bank.
Christopher Emslie, Asian Regional Treasurer, General Mills.
However, Larsen says that the EU MMF rules are having an impact on Asian treasurers – including treasurers of US and EU multinationals based in Asia as well as local treasurers using MMFs. “The majority of MMFs sold in the unrestricted markets are EMEA-based MMFs,” he says. “While most asset managers have been communicating to their customers, it is still somewhat foreign for many Asian treasurers to be impacted so directly by non-Asian rules.”
As such, Larsen says the experience has been something of a learning process for treasurers in Asia. “As most EU-based treasurers are living and breathing the rules on a daily basis, it is something of a non-event for them,” he says. “For Asian treasurers, it has taken more time to get comfortable with the new concepts of LVNAV funds and how they still deliver the same risk profile to a treasurer.” Despite the challenges, he notes that so far there has been no across-the-market move of investors from the new LVNAV structure to CNAV government funds as was seen during the US MMF reform.
Shevlin says that while the reforms did create a degree of disruption and required changes in terms of how funds are used and managed, “overall they have been positive – offering investors more choice, liquidity and security.” He also points out the indirect impact of reforms in Europe and the US, which have impacted short-term interest rates markets across the world, “changing the demand and supply for different instruments and maturities”.
Could similar reforms be seen in Asia at some point? Shevlin says that while money market funds have been relatively static across the region for many years, “recent regulatory changes in the US and Europe have triggered discussions in some markets about whether local MMF rules are still fit for purpose” – although, as he notes, any changes will take some time to implement.
He also points out that while the types of changes adopted in the US and Europe could theoretically be adopted in Asia, caveats apply. “While the ultimate goals of all MMF regulations are similar – to make funds more liquid, safe and robust – US and EU MMF rules and standards are based on the unique characteristics of their markets,” he says. “Asia-Pacific markets vary in depth, liquidity and the range of investment opportunities available – and these need to be considered before any significant changes can be made.” Shevlin adds that while having safe and liquid funds is a key priority, “ensuring cash is investible and funds can achieve a competitive level of return is also important”.
Larsen agrees that for many restricted markets, such changes would be many years off, “and would take a significant modernisation of the regulatory environment in those countries.” However, he notes that China is an exception: the country, in an effort to liberalise the market and attract offshore investment, “is already on a convergence path”. Hong Kong, likewise, could see greater convergence with EMEA rules in the future. Developments in both markets include the following:
“MMF rules were originally established in 2004 and remained broadly unchanged for several years,” says Shevlin. “But the popularity, rapid growth and current size of RMB MMFs have made them systemically important – and increased regulatory scrutiny.” As such, he says that the China Securities Regulatory Commission (CSRC) has introduced several major changes to MMF regulations in the last few years. These changes “have significantly tightened the rules, de-risking the industry while bringing RMB fund guidelines closer to their western counterparts”.
Larsen says that for Hong Kong there is an expectation that the SFC will issue new rules more in line with EMEA standards. “Several new hires into the regulator are from EMEA-based regulatory bodies and bring with them the knowledge and mindset to standardise the rules towards international standards,” he says. “Hong Kong is also pushing to be a major fund domicile and if they want to market their funds across Asia and into EMEA and the US they will have to adopt similar rules.”
For other unrestricted Asian markets, Larsen says there is less of a push to be a major fund domicile for institutional MMFs – and consequently, less of a focus on specifically aligning local rules with those in Europe. “They will probably be content with allowing EU product to be distributed into their countries by locally licensed entities and sales people, rather than trying to compete as a full-fledged fund domicile location,” he adds. “Effectively this means EU rules may be adopted in-country by default.”
Regulatory reform is not the only factor affecting the direction of travel for money market funds. Shevlin notes that Asia – particularly China – “has been at the forefront of new and innovative MMF distribution methods”, adding that moving to digital platforms has given clients more choice and flexibility. “While these innovations have primarily targeted retail investors, corporate investors can also benefit from some of these improvements,” he says.
Larson notes that MMF portals that previously only operated in the US or EU are now setting up outposts in Asia. “These MMF supermarkets allow clients to invest in multiple funds via one interface, and often automatically integrate with a client’s bank accounts,” he says. “In that same vein, most banks and custody providers are not offering automated sweeps into their own, and third party, money market funds – essentially automating a large piece of a treasurer’s cash management responsibilities.”
In Asia ex China the adoption rates of money market funds are in the low single digit percentages. This compares to about 20% of corporate cash in the US and 10-15% of corporate cash in Europe that makes its way into MMFs.
Aidan Shevlin, Head of Asia Pacific Liquidity Fund Management, J.P. Morgan Asset Management
In addition, Larson says there is a growing trend within the treasury management system (TMS) provider space to allow for direct investment into funds integrated with their accounting and other modules – a development which Larson says “has potential to greatly simplify a treasurer’s life”.
Other developments include several cases where MMFs have been launched as ETFs, which Larson says is consistent with moves in other asset classes. “To date the adoption rates have been low, but it does seem to be a growing trend,” he says. “It remains to be seen if the costs of running these funds are lower than the existing fund approach – and if treasurers can add ETFs as an asset class within their cash management investment guidelines – but it is a space to watch.”
Alongside these developments and opportunities, treasurers should also be aware of potential challenges – not least of which is the issue of low or even negative interest rates in markets such as Hong Kong, Singapore and Japan. “When rates are negative, even an MMF cannot make that a positive return without taking undue risk, so the launching of new funds is in most cases not commercially viable,” comments Larsen.
Looking forward, Shevlin predicts that the use of MMFs will continue to grow over the coming year, particularly among treasurers of local corporates. “As the implications of credit and counterparty risk become more important, the benefits of MMF to improve diversification due to their restrictive guidelines and disciplined investment methodologies should help treasurers achieve their goals of a competitive yield balanced against good security and high levels of liquidity,” he says.
Larsen likewise predicts that the use of money market funds will grow fairly significantly as treasury departments in Asia become more sophisticated, generate more free cash flow and run up against counterparty limits. “In Asia ex China the adoption rates of MMFs are in the low single digit percentages,” he concludes. “This compares to about 20% of corporate cash in the US and 10-15% of corporate cash in Europe that makes its way into MMFs. If those figures are the benchmark, then Asia has a long growth period ahead of it in the MMF space.”