Neil Stirling, Treasury Dealer, Weir Group, responded:
If the proposed changes by the regulators are implemented and money market funds (MMFs) are forced to switch to variable net asset value (VNAV) then we can see this having serious implications with the likelihood that we will stop using MMFs going forward.
Currently, constant net asset value (CNAV) MMFs provide a very useful cash management tool and one that we favour using at Weir Group. This is primarily because we view them as a low risk, secure investment, giving counterparty diversification and easy access to our cash on a daily basis. Furthermore, we value the credit ratings provided by the rating agencies – both for the fund itself as well as the underlying assets – as they provide us with an independent evaluation and credit analysis.
Despite the current benefits offered by MMFs, the proposals, including the 3% capital buffer for fund providers, seem to suggest that all funds will be forced to switch to VNAV. I personally cannot envisage how fund providers would be able to continue to offer a CNAV fund in its current form, due to the higher costs associated with this and especially in the current low yield environment.
If all MMFs are switched to VNAV then there are a number of implications that may lead to us no longer investing in the funds. Firstly, with security of principal of paramount importance, a large problem would be posed by the fact that we would no longer be able to guarantee a full return on our investment. In addition, accounting issues may arise as we currently classify MMFs as cash or cash equivalents and if the funds were required to switch to VNAV we may not be able to continue in this way. Also, with fund providers required to mark-to-market their assets and the operational issues that this may bring, the high liquidity currently offered from CNAV funds may significantly reduce. This would have implications for corporates who want to invest in low risk, highly liquid funds. Finally, the removal of a fund’s credit rating will cause a problem for corporates like ourselves who rely on credit ratings for our investment policies.
Should the changes occur, we will need to revisit out investment policy to consider whether the use of MMFs is a suitable tool for managing our liquidity. Should the decision be made to no longer invest in MMFs, then I expect we would initially revert back to using bank deposits for our surplus cash as an alternative.
Ultimately, I can see no advantages of a switch to VNAV from a corporates perspective. If the regulations are imposed as being suggested then I believe this will have serious implications for corporates investing in MMFs going forward – which will have a knock-on effect for the MMF industry as a whole.
Britta Hion, Head of EMEA Corporate Cash Sales, BlackRock, commented:
As extensive debate continues globally with regard to the regulatory reform of MMFs, it is prudent to consider that this cash investment vehicle in Europe may be required to move its accounting methodology from CNAV to VNAV. Should this happen, the impact on corporate treasurers could be significant but we do not believe it will be unmanageable or insurmountable. Further, any imposed change will almost certainly include a long lead time, giving treasurers time to adjust and adapt.
While it may appear a drastic change, we expect a VNAV MMF will be very similar to a CNAV MMF. At BlackRock, we would continue to manage our MMF portfolios with the same credit and risk process resulting in an approved list of securities and counterparties. Therefore, we do not anticipate the composition of our funds to change and there will be no change to the style of investing we employ. We will continue to minimise any mark-to-market movements in the NAV and meet investment expectations.
Enhanced reporting and disclosure over the past few years has provided investors with increased knowledge about their MMF investments and most industry providers have been publishing their mark-to-market NAVs daily for some time. This has demonstrated how little the VNAV fluctuates on a daily basis, highlighting the conservative nature of the underlying investments.
More importantly, there may be some potential operational implications for treasury functions to consider such as tax and accounting treatment as well as the trading and settlement cycles of funds. However, it is currently too early to predict the outcome of the regulatory process and in the meantime, fund providers, industry bodies and accounting firms should work together to minimise impact on the corporate investor.
Change also signals opportunity and throughout this process many managers and end investors are working together to explore innovative solutions in the cash investment space – such as separately managed accounts or different fund structures. Even if the industry does switch to VNAV, we believe that MMFs will continue to provide many shareholders with an important source of short-term liquidity and investment diversification. We remain committed to the MMF industry with the goal of providing an investment vehicle that meets the needs of our clients whilst preserving the benefits to the broader financial ecosystem.
Matthew Tatnell, Head of Liquidity, Aviva Investors, answered:
A number of reforms to MMFs are currently being pursued by European regulators aiming to prevent another bank run similar to 2008. The most significant is the proposal that all CNAV funds start carrying a 3% capital buffer or switch their fund to a VNAV basis. We believe this is very likely to force MMF sponsors to switch funds from CNAV to VNAV.
In a CNAV fund, investors are incentivised to pull their money out first under extremely stressed conditions. If they wait there is a danger the fund ‘breaks the buck’ further down the line and access to cash is delayed until the fund can be wound down in an orderly manner. In contrast, a VNAV fund can essentially lift the lid off the pressure cooker, as the price of the fund will rise and fall depending on market conditions, removing the incentive for investors to pull their money out first. We believe this significantly reduces the risk of an investor run on the fund.
In the short term, investors are unlikely to see many differences switching from a CNAV to a VNAV fund. For example, the inability to obtain same day liquidity is often cited as an effect that investors will experience should the switch occur. Yet at Aviva Investors we have been running a VNAV fund for five years and have been able to offer this to our clients. I therefore believe, if asked, the vast majority of our investors would say they have seen little difference from investing in a CNAV fund.
If all the changes are enforced, then corporates may see other effects. For example, the European Commission is proposing a ban on MMF sponsors soliciting an external credit rating. Investors may be affected by this change if they have an internal credit or investment policy, which states that an external rating is needed for any fund they invest in. Under these new conditions investors may wish to rewrite their investment policies and possibly place a greater emphasis on due diligence – making sure that their MMF sponsor has policies and an infrastructure in place suitable for managing their money.
An alternative to MMFs is something we have seen become increasingly popular over the last six to nine months with our investors who ask their investment manager to manage their cash on a segregated or direct basis with banks or corporations. This strategy has two key advantages: firstly, it frees the investment manager from the constraints of a MMF to explore new ways to obtain higher returns on their investors’ cash. Secondly, the strategy is bespoke, so investors can personalise their requirements and continue to enjoy piece of mind that their investment manager is using specialists to perform detailed credit assessments on their investments – after all it could take many lifetimes to recover a defaulted investment in the current low yield environment!
The proposals are not set in stone, yet the outlook surrounding MMFs is quite negative. We believe it would be of benefit to investors, the money markets, and the industry as a whole if the proposed regulations were softened in certain areas. Despite this, I do remain positive about the future of MMFs. Even if the full range of changes is implemented, the basic requirements for treasurers who have cash to invest will remain the same. Because of this, I believe we will continue to have a market that is thriving.
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