Global CIO, Liquidity
Jonathan Curry is Global CIO for the Liquidity business and has been working in the industry since 1989. Prior to joining HSBC in 2010, Curry worked as Head of European Cash Management at Barclays Global Investors. He is Chairman of the Institutional Money Market Fund Association and a Board member since 2006, the industry association for AAA rated money market funds. He is also a member of the Bank of England’s Money Market Liaison Group and a member of the European Banking Federation’s STEP Committee.
It has been a long time coming for the US and it will be a while yet for Europe, but the full extent of money market fund (MMF) reform is slowly being realised. However, with the US having shown its hand and Europe still debating the issue, it may seem like a two-part play; either way reform is coming and investors need to understand what the changes mean to be able to make the most of them.
US MMF reform
On 23rd July 2014 reform of the US MMF market was announced. With three of the five appointed commissioners having voted for the proposed amendments to market regulation, the US Securities and Exchange Commission (SEC) requires the changes to be implemented within two years.
The most significant change is the way certain funds are valued; the model is now to be based on Variable Net Asset Value (VNAV) for prime and municipal MMFs held by institutional investors. This will require funds to be valued daily to the four decimal places. This creates a variable share price whereas before, in the Constant Net Asset Value (CNAV) model, funds targeted a stable price of $1 (or £1/€1). Retail funds will be able to continue using CNAV but will be subject to more stringent reporting of market movements. For all funds, the SEC is expecting greater diversification and is imposing enhanced stress-testing.
The other major change, as expected, is the requirement for institutional prime and municipal funds to have the ability to apply discretionary redemption gates and liquidity fees. Designed to protect investors in these funds and to help avert a market panic, these abilities can be levied by non-government MMFs. Although government funds are not mandatorily required to have this ability they can opt in.
In practice, a liquidity fee up to a maximum of 2% may be applied after consideration by the fund’s Board only if weekly liquidity assets drop below 30% of that fund’s total asset value. The fee effectively pays for the cost of liquidity during the period of stress. Additionally, if a fund’s liquidity falls below 10% it can levy a 1% fee on all redemptions. Institutional funds also have the option at the 30% trigger-point to suspend redemptions altogether for up to ten days (the so-called redemption gate). “These mechanisms, in our view, are there to protect investors if the fund is subject to a period of stress,” explains Jonathan Curry, Global Chief Investment Officer – Liquidity at HSBC Global Asset Management.
The reforms are the result of considerable industry-wide dialogue concerning the most appropriate way forward. Over the six months preceding the SEC’s announcement, the volume of that dialogue naturally reduced as the five commissioners convened. Asset managers such as HSBC Global Asset Management kept the channels of communication open throughout this period, but now that the industry knows where it stands, Curry believes the time is right for professional asset managers to further engage with their clients “ensuring they have the understanding and the strategies to optimise investments under the new rules”.
Meanwhile, Europe waits. The key constituents of the regulatory process here are the European Commission (which proposed the changes), the European Council, and the European Parliament. Each player is obliged to formalise its own view of the proposal. To date the only published view is that of the European Commission who drafted the proposed regulation.
In terms of progress, something of a hiatus was witnessed between early April and the end of June as the outgoing European Parliament had been unable to reach a conclusion regarding its position on MMF reform. Sensibly, rather than try to rush through a decision it decided to pass the mantle on to its successor parliament, as voted in by the populace on 22nd May 2014.
The new parliament is yet to commence its deliberations on MMF reform but progress is nonetheless being made, notes Curry. Membership of the Committee on Economic and Monetary Affairs (ECON) has already been agreed. This is an important step as ECON bears responsibility for MMF reform from a European Parliament perspective. This committee had previously seen a fairly balanced set of views with support for both the European Commission’s key proposals and for an alternative approach to these key proposals focused on the use of liquidity fees and redemption gates. The loss of certain key figures, including the Chair of the ECON, the rapporteur (the person appointed as the lead Member of the European Parliament [MEP] on the ‘file’ and the official report author) and three out of the four shadow rapporteurs (the persons appointed to assist the rapporteur) has led to a significant loss of knowledge of this file in the Parliament. The new cohort will need to get up to speed with the issues before making any pronouncements. The expectation, says Curry, is that the work will commence in earnest sometime in September 2014.
Discussion has recently got underway within the European Council which brings together the heads of state or government of every EU country. It requires input from representatives of all 28 member states; coming up with a united position on the proposal will take time as all stakeholders will seek to air their voice in the light of analysis by bodies such as the European Systemic Risk Board (ESRB) and the International Organisation of Securities Commissions (IOSCO).
The seemingly glacial movement of the overall debate means there is still a lot of work to be done by interested parties in this debate, notes Curry. With a new European Parliament now in situ there will need to be considerable engagement on behalf of the industry with the yet-to-be announced rapporteur and his or her shadows. “I can see the second half of this year being very busy for all those wishing to have their opinions heard,” he comments.
The industry, through the Institutional Money Market Funds Association (IMMFA), has played its part, not just through its own representations but also by arranging events in Brussels, bringing investors, MEPs and attachés together so that interested parties on the regulatory side can hear directly the views and concerns of investors.
Once the proposals have been accepted there will be a transition period for all concerned. Whereas the US is allowing two years, the European Commission’s proposal is for six months. “Our view is that this is significantly shorter than it needs to be for all parties,” states Curry, suggesting that a minimum of 18 to 24 months may be required for migration. “It is unlikely we will see a conclusion before the first half of next year.”
There are a number of similarities between the changes now set for the US market and those proposed for the European industry. The switch to VNAV for part of the US industry and rules around diversification and transparency are, for example, broadly in line with European Commission thinking. But major differences also exist. The SEC makes no provision for the use of capital buffers for funds whereas the EC is proposing a 3% buffer for funds not switching to VNAV. To date there are no plans in Europe for liquidity fees and redemption gates. And where amortised cost accounting for assets with maturities shorter than 60 days is permissible for US MMF investors, there will be no such cost accounting at all in Europe.
Regardless of similarities or differences, there does not appear to be any statement of intent by the regulatory bodies on either side of the Atlantic to align their respective approaches to MMF reform. However, Curry suggests that as the US has been the first to break cover, it will now give one side or other of the debate in Europe “some ammunition”. Although convergence is unlikely, he believes that it would be “unhelpful” for the industry if the two sets of reform diverge substantially. “Obviously we need a situation where both regulatory bodies implement reforms that are necessary; we would not support consistency for consistency’s sake. But we want the right reforms to be in place and if that only happens in one jurisdiction then that is preferable to consistency that is consistently wrong.”
Corporate treasurers may currently feel under siege by regulatory reform; the asset management industry is sympathetic. “We know that there is only a certain amount of time that can be devoted to MMF reform, but we do encourage all investors to engage in the debate and to ensure their voice is heard,” says Curry. “There are various forums that facilitate response but for these to have the most impact our investors, particularly Europe, need to raise their voice at the most opportune moments.”
Asset managers will continue to play a vital role in delivering information and offering informed views on actual and proposed market changes. In this respect, HSBC Global Asset Management has a number of educational approaches including one-to-one sessions, group meetings, ‘treasury breakfasts’ and articles in the industry press. “We have a clear view on these reforms and we are sharing that with our investors,” states Curry.
By encouraging investors to understand the impact of MMF reform, and by individually helping them to formulate the most appropriate response, key players such as HSBC Global Asset Management are offering a solid foundation upon which investment strategies can be built. Ultimately, with the protection that these reforms are designed to offer investors, they are also helping to deliver the industry safely into the next phase of its development.