Funding & Investing

Money funds: what does the future hold?

Published: Nov 2011
Talking Treasury Forum group photo

Not sure what to make of the noise around money market fund regulation? Considering using a money market fund portal? Then, read on. In this Talking Treasury Forum, four seasoned industry professionals look at key money market fund issues including investor priorities, regulatory threats and the growing need for transparency.

Participants

Portrait of Mark Stockley, Managing Director, Head of International Cash Sales, BlackRock

Mark Stockley

Managing Director, Head of International Cash Sales
BlackRock
Portrait of Jennifer Hole, CFA, Head of EMEA Cash Business, State Street Global Advisors

Jennifer Hole

CFA, Head of EMEA Cash Business
State Street Global Advisors

Andrew Tunks

Head of Money Markets, Currency and Risk Oversight
Portrait of Jim Fuell, Executive Director, Head of Global Liquidity EMEA, J.P. Morgan Asset Management

Jim Fuell

Executive Director, Head of Global Liquidity EMEA
J.P. Morgan Asset Management

Chair

Portrait of Richard Parkinson, Managing Director, Treasury Today

Richard Parkinson

Managing Director
Treasury Today logo

Richard Parkinson (TT): Are corporates continuing to invest in money funds with yields being so low?

Andrew Tunks (SWIP): We are certainly seeing that corporates are interested in investing in constant net asset value funds (CNAV). Yes, yields are low; however, it’s the liquidity that attracts investors as well as the diversification that these funds offer.

Mark Stockley (BlackRock): The fundamentals haven’t changed. Corporates still have the same concerns, if not more heightened in the current environment, around making sure that they’ve got capital protection, credit diversification and liquidity. The harder question out there, particularly in the US dollar space, is whether or not to be in a treasury or prime vehicle given the narrowness of the return differentials.

Jennifer Hole (SSGA): Before the crisis you often heard providers talk of the three objectives of money market funds: security, liquidity and yield. More often than not these days, yield is less of a focus and security and liquidity are the priorities.

Jim Fuell (J.P. Morgan Asset Management): In comparison to time deposits, money funds also continue to deliver capacity to larger investors without the need to spread cash around to multiple counterparties.

Jennifer Hole (SSGA): And of course when comparing funds to deposits, one should consider the research into the issuer: often the corporate treasurer’s credit research department will review the bank where they’re placing the deposit just when the investment decision is being made, rather than on an ongoing basis. There won’t be any form of ongoing credit research, or surveillance. An investment into a fund offers that with one trade: the credit team sitting behind it will be reviewing the portfolio on an ongoing basis.

Richard Parkinson (TT): Are corporates taking more of an interest in what’s going on behind the scenes now, for example, in your credit processes?

Jim Fuell (J.P. Morgan Asset Management): Since the beginning of the credit crisis, investors have started ‘looking under the hood’ more to understand the process. They’re more informed in terms of the questions they ask, more articulate in terms of the information that we provide them and the transparency around what we’re doing, so it’s becoming a more fluid conversation in general.

Jennifer Hole (SSGA): Absolutely. Transparency has become a core theme for our industry.

Andrew Tunks (SWIP): Corporates are also taking a greater interest in exposures. Post the Irish banking crisis, the situation in Greece and the knock-on effects in other peripheral European markets, there is definitely a greater interest around that.

Richard Parkinson (TT): Does this impose an additional reporting burden on you?

Portrait of Andrew Tunks
Andrew Tunks, SWIP

Mark Stockley (BlackRock): A key underlying theme is, as Jennifer said, investment transparency. In the US, the SEC now requires that publication of shadow or mark-to-market NAVs, along with other detailed portfolio information takes place on a monthly basis, albeit with a 60 day lag. The likelihood is that similar types of data transparency will move into the international space and the ability to aggregate holdings across providers and analyse risks by geography, individual issuer, asset type and duration will become more important to investors. This will in turn require managers to provide more detailed reporting and greater analytic capabilities.

Jennifer Hole (SSGA): This is now part and parcel of being in this business. If you want to play in this space, you need to be transparent and provide the reporting. It comes hand in hand with having a strong portfolio management and credit process. Ultimately, it’s what investors expect.

Richard Parkinson (TT): How have money funds fared post-crisis? Are corporates still interested in investing in them and are they attracting many new investors?

Jim Fuell (J.P. Morgan Asset Management): We have certainly seen a flight to quality during the credit crisis. Some came from a pure asset allocation trade from investors who were not traditional cash investors, however corporate investors have always been cash investors and have continued to have an appetite to invest in money market funds.

Andrew Tunks (SWIP): One of the key issues from the credit crisis was that corporates understood that having all your money in two or three banks was a high risk strategy. The number of corporates investing in money funds has therefore increased substantially.

“One of the key issues from the credit crisis was that corporates understood that having all your money in two or three banks was a high risk strategy.”

Andrew Tunks, SWIP

Mark Stockley (BlackRock): Money funds have navigated a very difficult period well whilst the same cannot be said about the banking sector. Post the financial crisis, corporates de-risked by moving out of higher yielding, longer dated investments and enhanced cash, increasing their allocation to prime-style and government/treasury based funds. At the same time, there was a lot more focus and analysis on individual providers, their track record, commitment, depth of resources, and credit research capabilities. Corporates are more cash rich now than ever and many are at the limits of what they can place with banks. They continue to invest but look to do so with a very high degree of confidence around preserving their capital. That’s the first challenge. The next one is the rate of return.

Richard Parkinson (TT): If corporates are cash rich, are you seeing a demand for funds in other currencies?

Mark Stockley (BlackRock): Definitely. In fact, we recently launched new products denominated in Australian dollars, Canadian dollars, Indian rupees and Taiwan dollars.

Jim Fuell (J.P. Morgan Asset Management): This is reflective of the success of the product and how corporates view it from a credit and risk perspective: they’re more comfortable investing monies in a money market fund regardless of what the domicile is than they are in a deposit product with perhaps a Chinese bank in China. In a perfect world, corporates will always seek to pull cash back to the centre and use it to offset obligations. So, as they have higher levels of cash and growing businesses in markets where cash is naturally trapped, money market funds are an ideal solution.

Andrew Tunks (SWIP): Depth of market and secondary liquidity is one of the real challenges out there as you move away from well-developed markets/currencies. There are some nuances and differences, some access problems, tax considerations and so on. It’s complicated. Breadth of client base is also a requirement.

Jennifer Hole (SSGA): There are circumstances where there is demand from clients but not sufficient liquidity in the market, so there’s an imbalance. The trick is in ensuring that you’re ready to launch a new fund at a time when there is sufficient market liquidity and depth for it to be viable.

Richard Parkinson (TT): Moving to the subject of regulation, could you summarise what the current regulatory issues are and when we can expect any decisions to be made?

Mark Stockley (BlackRock): They are different, depending on your regulatory jurisdiction and product domicile. The US is a more homogenised market where, through the newly formed Financial Stability Oversight Council (FSOC), regulatory agencies such as the Federal Reserve, Treasury, and SEC have a clear remit to collectively oversee and control risks attached to US-based dollar denominated products. Globally, central banks are looking for areas of perceived systemic risk and one of the products they’ve focused on is money market funds.

Put simply, the focus at this point centres on the industry either providing some form of capital support or moving the product to a variable NAV (VNAV) model. Our feeling is that some form of capital will be required. The drive towards VNAV has softened, but is dependent upon coming up with a suitable capital model. One area that hasn’t been clarified to date is how the pricing of underlying securities will work and what accounting standards will apply ie use of amortised cost versus mark-to-market.

Andrew Tunks (SWIP): I agree. The regulators have grasped the interest rate risk issue but not the liquidity issue or the credit issue with this particular product.

Mark Stockley (BlackRock): During the 2008 crisis, when clients were redeeming from money market funds the French industry, which is based on VNAV, was impacted by outflows just as much as the international industry and its CNAV products. It is a misconception that VNAV offers greater client protection or liquidity than a CNAV fund. Risk for a fund is principally driven by the investment strategy and not the distribution or pricing policy.

Jennifer Hole (SSGA): And I think the regulators are now realising that a VNAV solution is not going to resolve the issues we saw through the crisis.

Mark Stockley (BlackRock): CNAV portfolios have changed significantly over the last two years – they are now run with shorter maturities, new rules around liquidity and improved credit risk, together with offering greater transparency. How much more do they really need to be changed? It’s somewhat a question of ‘wait and see’ at present. It’s thought that the SEC would like to have agreement in principle of regulation changes for US money market funds by the end of this year.

Richard Parkinson (TT): Going back to your comment about the accounting treatment of assets within the fund Mark, are you saying that you feel that regulation should be going further?

Mark Stockley (BlackRock): The issue is no different: if you’re in a deposit and want to withdraw early then the bank will make the liquidity available, typically including a breakage penalty. If you are providing a highly liquid pooled vehicle and there’s a point in time where a systemic-type event takes place, then a run on the vehicle may occur. Whether a money market fund offers a VNAV or CNAV shares will not change the amount of liquidity that can be generated from its portfolio securities.

To somewhat paraphrase the regulatory discussion it seems that if you want investors to think of money market funds purely as investment products, then they need to be offered as VNAV funds using full mark-to-market pricing, rather than amortised cost thereby allowing the fund’s NAV per share to truly fluctuate. At the same time it’s possible that the regulators might say that a CNAV fund can keep using amortised cost accounting and retain its stable NAV but it will be required to hold capital as a buffer against any adverse price volatility in the underlying portfolio.

Richard Parkinson (TT): Is all this regulation going to make the product safer for the corporate investor?

Jim Fuell (J.P. Morgan Asset Management): From our dialogue with regulators, we expect them to desire some sort of incremental structural reform and they seem to be going down a path where the preferred option may be a capital option of some description.

Jennifer Hole (SSGA): Of course, the capital needn’t necessarily come from the sponsor. The capital could come from investors in the fund.

Mark Stockley (BlackRock): Yes, it could be client-driven, sponsor-driven or market-driven. However the clear feedback in the US is that we need to narrow down the options to a model involving some amount of capital support if we are going to continue a CNAV based offering in the future.

Andrew Tunks (SWIP): There is no certainty that they will opt for the capital guarantee option. A distressed market redemption levy is another option. Why do you need a capital buffer? The problem with a capital buffer is that by definition it will restrict the size of the industry. There will be an awful lot of people who will pull out.

So there’s a vested interest in the larger houses to push for a buffer. Somehow the sponsoring entity is going to have to get a return on that buffer, which would imply to me that costs for the corporate will go up. After all, if the number of providing houses falls, market forces will push that to occur and therefore the client will end up with a significantly lower return, increased costs and less choice.

Jennifer Hole (SSGA): That’s assuming that the sponsor needs to provide this capital. It’s quite possible for capital to come from within the fund, peeling off a bit of yield every day to create some type of NAV buffer within the product itself. Just as a realised gain would be held in a fund.

Andrew Tunks (SWIP): Indeed, but that would take a long time to build up unless you have the capital buffer given by the sponsor, which is then drawn down as the interest rate levy grows. Given the success of the industry in terms of avoiding breaking the buck and the default situation, is this really what our clients want?

Jennifer Hole (SSGA): It’s not necessarily what the industry wants but staying with the status quo is not good enough and in terms of finding a solution, it really hits back to the issues that we had at the time of the credit crisis. We realised VNAV wasn’t the solution and the other options are pretty limited.

Andrew Tunks (SWIP): A liquidity driven redemption levy could work, without costing the client anything. It would keep the size of the industry where it is and maintain current returns. You may have to have a scenario whereby there is an external party that will dictate when that levy is introduced.

Jennifer Hole (SSGA): That could almost be considered a form of capital, because that redemption levy gets paid back into the fund. The statement of capital is very, very, broad.

Andrew Tunks (SWIP): Yes, but it would only occur at points of strain and only for clients who demand their money out at that point. It’s not actually a physical buffer that is there every day – only when either the market is in general crisis, such as a Lehmans event, or when an individual fund is in crisis.

Jim Fuell (J.P. Morgan Asset Management): I hear what you’re saying, but a redemption levy could also supress the size of the industry as levies may discourage corporate investors.

Andrew Tunks (SWIP): Investors should be aware that these funds are not a no-lose situation. They aren’t magic funds that are able to generate a constant NAV. Any structure that promotes education so that investors fully understand what they’re buying, and what they should expect to get out, has to be a good thing. A capital buffer is interesting but it may not be big enough to be able to support a crisis.

Mark Stockley (BlackRock): There are plenty of mechanisms that already exist within prospectuses for funds to be able to suspend redemptions and apply redemption levies, both of which are highly undesirable for money market fund investors.

Richard Parkinson (TT): But none of you have done that?

Portrait of Jennifer Hole
Jennifer Hole, SSGA

Jennifer Hole (SSGA): We wouldn’t be sitting here today if we had.

Andrew Tunks (SWIP): That’s the dilemma. The second a practitioner draws on it, effectively their business model is dead, which is another reason why an external arbiter would probably need to be found to confirm a redemption levy needs to be applied.

Mark Stockley (BlackRock): The regulators’ and central banks’ concern is that investors in money market funds have a strong perception that the stable price provides a level of implied guarantee. Money funds are therefore under pressure to come up with some form of capital solution, assuming that moving to a VNAV is not in the interests of investors. Clients are very clear – they want to be able to segregate capital from income for a number of operational reasons: tax, reporting, ease of use, and so on. There’s very strong support for the CNAV product continuing.

Richard Parkinson (TT): Are we saying that the regulators are definitely going to require some form of regulatory capital?

Andrew Tunks (SWIP): No. There is definitely a move for the regulators to take action. It is up to the industry to ensure that the action that is taken is in line with the interests of our clients and also the interests of the industry.

Jennifer Hole (SSGA): Change is certain and it is difficult for the offshore money market fund industry body (IMMFA) to represent the industry as a whole since there is not one firm view on the way forward.

“Change is certain and it is difficult for the offshore money market fund industry body (IMMFA) to represent the industry as a whole since there is not one firm view on the way forward.”

Jennifer Hole, SSGA

Richard Parkinson (TT): For the investor, is the advice to sit and watch?

Andrew Tunks (SWIP): If they have an interest in the continuation of the CNAV industry, it would be better if they made their opinions known. There is a business secretary who could have influence so there are various bodies to whom they can make their views known.

Mark Stockley (BlackRock): Some investors are frustrated about how long the uncertainty has gone on. They’ve been more vocal, particularly in the last six months, about the importance of the product and of not wanting to go back to depending upon deposits. Money funds grew up for a very clear reason; investors wanted an alternative to putting money on bank balance sheets with the associated concentration of risk. The product driver is as strong as ever but the ongoing uncertainty about how these are regulated in the future is not in the client’s interest.

Richard Parkinson (TT): If capital is going to have to be provided what is the likely impact on the yield?

Mark Stockley (BlackRock): It depends on where it comes from and how much will be required. In terms of the amount of capital, 0.5% to 1% of a fund’s assets is a conversation that the industry is having. Beyond that, you’re beginning to put the product into a very difficult position. However, until there is some greater clarity around how the capital could be structured, over what time the capital would be required to be built, who and how it would be funded, it’s hard to know.

Richard Parkinson (TT): If that amount of capital has to be put up and has to have a superior yield because it’s going to be subordinated debt what is the impact on the yield to the other investors?

Jennifer Hole (SSGA): It depends how it’s executed. There are a multitude of ways this could be executed.

Portrait of Jim Fuell
Jim Fuell, J.P. Morgan Asset Management

Mark Stockley (BlackRock): The cost of the product in this scenario will go up. If you took a normalised yield environment in dollars, let’s say where we’re running at a 3% type return, on average the difference between treasuries and prime vehicles such as money funds has been ten to 15 basis points. If the impact of the capital cost to the fund’s return is greater than that differential, what’s the point? One of the questions that investors will be forced to consider is whether they really need same day liquidity? Do you really need a constant NAV vehicle? Some clients might not think these features are as important as others and may look to transfer some monies into investments offering slightly different liquidity and cost characteristics.

Jim Fuell (J.P. Morgan Asset Management): The maintenance of a stable NAV has a cost to it. We all agree that a stable NAV is critical and regulators may allow it to continue in force but it’s likely going to come off the back of structural reform.

“We all agree that a stable NAV is critical and regulators may allow it to continue in force but it’s likely going to come off the back of structural reform.”

Jim Fuell, J.P. Morgan Asset Management

Mark Stockley (BlackRock): We are likely to end up with investors who are prepared to incur a small cost premium associated with a CNAV same day vehicle and those who’d prefer to utilise slightly longer dated liquidity in a VNAV fund without the capital support.

Jim Fuell (J.P. Morgan Asset Management): So clearly a more diverse product offering is coming down the pipe to meet different needs.

Richard Parkinson (TT): Some of which will not be CNAVs?

Andrew Tunks (SWIP): That’s right.

Mark Stockley (BlackRock): Yes, and clients will benefit from working out exactly what their liquidity requirements are.

Richard Parkinson (TT): Are we talking about the enhanced funds we saw a few years ago?

Mark Stockley (BlackRock): Not necessarily. We are talking about investors focusing on their cash flow forecasting to predict their liquidity requirements, then segmenting the cash into what they need today, as opposed to tomorrow or in the future. Once they’ve analysed their cash-flows they should be able to invest in different types of vehicle for more and less liquid buckets – these vehicles may be both CNAV for more liquid and VNAV for less liquid buckets, with the latter having a different or higher return dynamic in part due to their lower operating costs from not requiring capital behind them.

Andrew Tunks (SWIP): That’s the benefit you get if the client is prepared to give up a degree of liquidity: you can increase the return on those funds.

Richard Parkinson (TT): On the subject of increasing costs, do you compete on fees at the moment?

Andrew Tunks (SWIP): There’s a difference between being competitive and correctly priced in the market within a range and trying to buy or build market share based on giving it away. You’re looking at quality providers who are not interested in running a discounted product.

Jim Fuell (J.P. Morgan Asset Management): It’s not an ingredient for long-term success.

Jennifer Hole (SSGA): These days, clients are more focused on the quality of the resource, the size of the resource behind the product and the processes, than they are necessarily on a basis point here or there. Some have short memories, but a lot of people are well aware of where to look and what to focus on, and it’s not just a few basis points in fees or additional yield.

Richard Parkinson (TT): I’m reminded of the conversations that I’ve had with bankers in the past along the lines of, ‘we’re facing increased capital ratios and we’re going to have to pass the cost on to the corporate’, and they do and the corporate walks. Then, lo and behold, they bring their pricing back down again. Do you see that happening here?

Mark Stockley (BlackRock): Products and markets evolve. We’re at an inflection point and we need to work out what the impact will be of any new regulations. It’s not in the clients’ interest for regulation to squeeze the life out of the industry. If money is driven back onto bank balance sheets, that’s not good for the client in terms of choice and diversification and it will impact the returns regardless.

We are trying to find a suitable solution that balances clients’ needs and industry needs whilst keeping the existing breadth of the market and respecting the very reasons why money funds developed in the first place and why they are a popular investment choice.

Richard Parkinson (TT): Is the industry body, IMMFA, doing a good job?

Jennifer Hole (SSGA): IMMFA has done a lot of work over the last few years in terms of education. Many more clients are asking if we are a member of IMMFA which is a direct result of the focus on promotion of the Code of Practice. One of the challenges IMMFA faces is a membership body with different objectives.

Mark Stockley (BlackRock): IMMFA is still a relatively young industry body and has had to navigate a very difficult time period, during which it has demonstrated well co-ordinated activity, involvement and consensus-building in a European environment, where pan-European regulation for money market funds has historically been quite limited.

With no equivalent for the SEC’s Rule 2a-7, providers in the international markets have had to implement self-regulation. In terms of achieving consistency, implementing self-regulation and managing communications during the credit crisis, IMMFA has been very successful.

None of the IMMFA funds broke the buck and all of them survived the worst crisis when a large number of banks, insurance companies, structured products and bond products didn’t fare particularly well. We’re now at a different, but just as challenging point. If regulators introduce the requirement to provide capital or change CNAV funds structurally, each IMMFA member will be impacted differently. It is therefore very difficult to balance members’ individual needs.

Richard Parkinson (TT): What role do you see IMMFA playing going forward?

Mark Stockley (BlackRock): They just made more modifications to the IMMFA Code of Practice, so there is now broad consistency with US 2a-7 funds. The questions that IMMFA is focusing on now are on the options that are being considered by the central banks and regulators and how best to respond, working with the other member states and securities bodies, to come up with a best fit, which is not easy.

Jennifer Hole (SSGA): Yes. Their role has been evolving and it continues to do so.

Andrew Tunks (SWIP): As members, there’s a responsibility on us to help IMMFA come up with a common solution. Bespoke solutions cannot be created for individual members. We said earlier that clients are increasingly asking if we are members of IMMFA. There is therefore a driver behind providers coming to an agreed solution. If the option was that you go with the agreed solution or you leave IMMFA, it would be a very interesting situation.

Jennifer Hole (SSGA): I don’t think that’s completely off the table. I think you may well see quite a change to the IMMFA membership in three years’ time.

Jim Fuell (J.P. Morgan Asset Management): To a certain extent, the code of practice set out a minimum set of standards that we all adhere to, much like ratings agencies do. If investors simply relied on that, it wouldn’t be sufficient. With the emergence of a new regulator in Europe, IMMFA needs to evolve as an organisation and ensure that it is seen as the first port of call for regulators when they are reviewing and considering changes to money market funds. The historical purpose of the code of practice no longer stands.

Jennifer Hole (SSGA): And certainly clients should never rely on that. It’s one of the many indicators to how a fund is being managed, but looking deeper into underlying processes is always the way to go.

Mark Stockley (BlackRock): Some members have expressed the desire to do nothing, make no changes and carry on educating the market. The likelihood of that succeeding with the momentum and scrutiny around this from a banking and regulatory perspective is nil. Doing nothing is not an option.

Jennifer Hole (SSGA): IMMFA are doing a good job of attempting to educate the membership on current discussions with regulators. This includes letting members know that regulators don’t feel that retaining the status quo is really a viable option.

Richard Parkinson (TT): What role are the rating agencies playing in all this?

Jennifer Hole (SSGA): The ratings agencies continue to provide a level of oversight and surveillance of the products. Many corporate treasurers require at least two ratings on a fund; however, I don’t think many providers view the rating agencies as helping to manage the funds better. That’s absolutely driven by internal processes. And again, that’s where clients should be focusing and not just taking the ratings stamp as a confirmation that the fund is robust. There’s a role for ratings agencies to play but it’s not necessarily as broad as sometimes assumed.

Richard Parkinson (TT): Have the rating agencies changed at all?

Mark Stockley (BlackRock): They’ve changed their guidelines for CNAV money market funds over the last couple of years. One or two agencies initially proposed completely different ratings criteria, which were not deemed appropriate by the industry, as they focused on parental sponsorship and availability of supporting capital. Fortunately the agencies took on board the feedback from the industry and investors and their frameworks now largely look and feel similar to IMMFA’s framework and some of the other regulatory frameworks such as The European Securities and Markets Authority’s (ESMA). IMMFA did a very good job of making sure that the changes made were sensibly rolled out in a feasible timeframe without impacting underlying clients.

Richard Parkinson (TT): They were talking at one stage about if there is an implicit support it ought to be explicit?

Mark Stockley (BlackRock): The end result was a little more subjective. As well as applying a quantitative framework they will look at funds and ask, ‘Do you have the resources, the skills, the tools, the technology and the commitment to the business?’ It’s not something that can be exactly quantified, but they’ve been more explicit about its importance.

Jennifer Hole (SSGA): They’re very much making that assessment themselves rather than asking for any confirmation from the fund provider or sponsor.

Jim Fuell (J.P. Morgan Asset Management): Yes, they backed off some of the changes they were seeking to push through, which would have caused investment policy disruption.

Richard Parkinson (TT): Yes, well, it would have done the regulator’s job perhaps?

Jennifer Hole (SSGA): Some of the changes would just have been difficult to execute operationally for those invested in the funds, for example changing the symbolism of the rating.

Andrew Tunks (SWIP): Because in their internal guidelines they don’t have those criteria.

Mark Stockley (BlackRock): There was a sense that the rating agencies were quite heavily criticised throughout the crisis and they obviously defended their position and decided they would make even stronger changes to the way that they rated the industry. Some of those were deemed impractical or not operationally sensible, particularly in the eyes of clients, and had to be modified.

“There was a sense that the rating agencies were quite heavily criticised throughout the crisis and they obviously defended their position and decided they would make even stronger changes to the way that they rated the industry.”

Mark Stockley, BlackRock

Richard Parkinson (TT): What additional impacts is regulation of the industry having?

Portrait of Mark Stockley
Mark Stockley, BlackRock

Jim Fuell (J.P. Morgan Asset Management): Regulation is also taking place which has implications for the short-term investment products that we buy into funds. These investments may also suffer from yield compression on the back of things like Basel III, which will put pressure on short-term yields across a variety of products. So the scenario isn’t just one of money market fund yields going down and yields on everything else staying the same.

Mark Stockley (BlackRock): One of the consequences of banks being forced by Basel III and other regulation to seek longer term funding is that it’s getting harder and harder for money market investors to find high grade, quality, liquid instruments that are short-term and aligned with the investment guidelines for their funds. So if issuance and origination is forcing financial institutions to fund themselves through longer dated debt and yet ratings requirements, regulation and guidelines are mandating funds to invest in shorter-dated maturities, you’re creating quite a mismatch between demand and supply.

Andrew Tunks (SWIP): Once again, clients must look at their demand for liquidity and if they can accept situations whereby they have a proportion of their money in a daily liquidity fund and a proportion of their money that can go longer but still require a degree of liquidity, then the industry will be able to produce products that can take advantage of those high yields in longer terms but they can’t do it all in daily liquidity funds. There will be a return incentive to do this.

Richard Parkinson (TT): Yes, and perhaps a larger gap there which means that the corporates will have to start looking at it more seriously?

Andrew Tunks (SWIP): They don’t have to, but obviously the return driver is there. They will have to give up a degree of liquidity and a constant NAV on that longer term cash holding but they can still have the diversification and the rating that the CNAV fund has.

Mark Stockley (BlackRock): Cash flow forecasting and analytics are critical here. It’s less about taking increased credit risk to drive return and more about investors correctly assessing and segmenting their cash flows and then taking appropriate amounts of duration risk for their cash ‘buckets’ through using different products. I’m sure you’ll see an evolution of products and the increased use of segregated accounts to achieve this.

Andrew Tunks (SWIP): It’s very important to state that the return is not the same as we had in the enhanced money fund products of three or four years ago that were chasing credit. These will be funds that chase longer term durations and will be invested in the same entities/issuers as the CNAV daily liquidity fund but they will have longer maturities within them.

Richard Parkinson (TT): And the yield curve is going to be sharper?

Andrew Tunks (SWIP): That’s the logic.

Mark Stockley (BlackRock): There are noticeable step-out points when you go up the curve, for example, when you hit six months there’s a different profile, when you go beyond 397 days, which is the 13 month maximum maturity typically that money funds can invest in, suddenly there is a step-up in the return characteristics. How you achieve returns going forward may well be more about duration management rather than credit or structural management.

Richard Parkinson (TT): Is there evidence of banks putting pressure on corporate investors to use their own money funds?

Jim Fuell (J.P. Morgan Asset Management): We’re part of a large global banking organisation that seeks to deliver a global suite of products to its global clients. But sitting in an asset management business it’s really incumbent upon us, on the distribution side of our business, to make sure our investors are investing in the product because they understand the risk associated with it.

Richard Parkinson (TT): What role are portals playing in the industry now and where are we going with them?

Mark Stockley (BlackRock): The role of portals will continue and will be increasingly important as clients demand more transparency and want to aggregate and look across different vehicles, for example, direct investments, segregated accounts, money fund holdings, and so on. Transparency and risk analytics are going to be critical in the future. We have talked about a more expensive industry going forward. In this environment, it’s not realistic for portals that don’t have true underlying distribution capabilities and clients to charge a premium as though they’re a financial intermediary, when actually they’re really just providing settlement, enablement and operational ease of use.

Jennifer Hole (SSGA): What continues to be an issue with some portals is transparency through to the clients themselves. Knowing our clients and having a relationship with them is essential in order for us to better understand how they’re going to use the funds.

Andrew Tunks (SWIP): And understanding what they need from a liquidity perspective.

Mark Stockley (BlackRock): Portals which behave responsibly through client education and investor transparency have a role to play. Also, keep in mind that rating agencies are now challenging us on shareholder diversification whereby we have to be able to demonstrate a diverse base of clients. We have to know the underlying nature and characteristics of clients. There are some portals that have actually done an excellent job on transparency and they’re good partners to work with.

In the end, we can only manage the money effectively if we’ve got a very good vision of the underlying clients. Take that away, add volatility to it and promote switching between providers and it’s very difficult for a manager to look after their clients’ best interests.

Richard Parkinson (TT): If you’ve got a corporate treasurer sitting in front of you and you just want to give them one word of advice on money funds right now what would it be?

Jim Fuell (J.P. Morgan Asset Management): It’s the same as it always has been, ‘know your manager’. That applies to the funds, the credit risk management process that underlies everything they’ve done, historically and to date, and to the view they have around impending regulation and how it’s likely to impact their business model.

Mark Stockley (BlackRock): To understand that there is change underway. As Jim said, work with providers that you know and make sure that you understand properly what their process is. In the same way that if you were to go and undertake a review of your banking provider or you were to make a direct investment, really look through and understand their processes. As BlackRock said in an article some time ago, ‘don’t just kick the tyres’. More so than ever, you really need to understand who you’re working with, what their commitment is in the space, their track record and the resources they apply.

Jennifer Hole (SSGA): I would echo Mark’s sentiments – there’s never a dull moment in the money fund industry at the moment. We’re hoping the industry becomes boring again!

Andrew Tunks (SWIP): Know your liquidity is another key message. Understand exactly what it is you want your money to do and you’ll find that you’ll get a better risk return reward for that.

Richard Parkinson (TT): Thank you everyone.

Thanks again to our participants

BlackRock
State Street Global Advisors
J.P. Morgan Asset Management

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