MMFs are meant to be a safe asset class where corporate treasurers can park their surplus cash sure in the knowledge of instant liquidity. But when markets crashed last year, MMFs got caught in the eye of the storm, coming under real stress in a repeat the sector felt during the GFC. The rush to exit last spring posed a risk in terms of financial stability and reform is now on the agenda. Speaking at the recent Association of Corporate Treasurers’ Annual Conference, Andrew Bailey, Governor of the Bank of England, talked about the need for reform, particularly giving investors like corporates more clarity on the type of product they are investing in.
He attributed much of the stress MMFs came under at the beginning of the pandemic to their ambiguity and tendency to get caught between a cash and investment product. Some MMFs are purely cash instruments; their assets are liquid and investors can be confident they can withdraw their money at will. On the other hand, some MMFs are more illiquid; they are investment funds and should not be badged as liquid, he said. A third seam of MMFs behave somewhere in the middle of this spectrum – mostly liquid except in times of stress.
“It is an area where we feel we do need to arrive at a much clearer understanding of what is under the lid,” he said, adding that he sees a role for both types of funds but that labelling needs to be clearer so that investor pay-outs are consistent and well understood.
Four key areas
There are currently four key areas under review in the reform process, explains Natalie Cross, Senior Client Portfolio Manager at Invesco. Firstly, these include the operation and structure of liquidity buffers, secondly the process is looking at the structural changes with all funds moving to a variable NAV structure, thirdly capital buffers, or mandatory membership of a liquidity exchange bank are under the microscope, and lastly rules may change surrounding sponsor support.
“We believe that some of the reform options being considered such as de-linking liquidity buffer thresholds from the potential application of liquidity fees or redemption gates, and making clearer existing rules prohibiting sponsor support, would help to strengthen further the robustness of MMFs,” she says. “We are engaging with policy makers and regulators through the official channels as well as working with our industry bodies to ensure we are contributing to the discussions on how best to take any additional MMF reforms forward, for the best interests of all investors.”
She added that treasury teams should keep abreast of the process and start to prepare for change. “Whenever changes to money market fund regulations are on the table, it’s important that investors are kept up to date on any proposed changes. Changes to key attributes of MMFs, including structural changes and changes to settlement cycles, would have a very significant impact to corporate treasurers. It’s important the industry stays engaged with investors to understand the potential impact of any changes. This also ensures appropriate messaging back to regulators and policy makers before final reforms are set.”
Amin Rajan, Founder CEO of CREATE–Research, a UK based think tank that specialises in future trends in global fund management, concludes with a warning that the reform process won’t be able to cut out risk altogether. “Any reform will help. But it’s worth bearing in mind that no asset class – other than cash – is truly safe while markets remain so frothy.”