Britta Hion (BlackRock): The question is, if you apply a doomsday scenario that all investors will exit MMFs, whether the new regulated world is a better place from a risk management, market liquidity and financing perspective? Arguably it’s not. The proposed regulations are going to take an important element of the functioning markets away.

Matt Shelley (3i): Some of the proposals are pretty sensible and actually nobody would argue with them, such as those around transparency, disclosure, prescribed liquidity, etc. No one is going to have a problem with that. Where there is a problem with the proposals is the capital buffer of 3%, which will hurt the economics of the MMFs and which will be passed onto the investor.

There is also the constant NAV (CNAV) versus VNAV debate, although I think that might not be quite as fundamental as people think. I think investors, with the right outcomes around the accounting and tax questions, will be able to get their head around it, although no one I speak to wants to see the change.

Richard Parkinson (TT): What’s the industry going to look like in 18 months?

Matt Shelley (3i): I think it depends on two fundamental questions around the VNAV/CNAV and capital requirement. If those two issues don’t get resolved favourably, then I see the MMF industry potentially being smaller than it is today. I am interested in the BlackRock and J.P. Morgan Asset Management viewpoints on this.

Jim Fuell (J.P. Morgan Asset Management): It’s a difficult one to predict, obviously. Asking the hypothetical question right now – if MMFs are regulated in such a way that the CNAV structure disappears, will you continue to invest? – isn’t necessarily indicative of what investors will do if they are truly faced with this decision. I think prudent investors will look at any regulatory proposal in its entirety and make a decision based on complete information.

I agree with your thoughts around potential changes to the underlying CNAV/VNAV structure. The typical treatment of the CNAV MMF product as a cash and cash-equivalent instrument is critically important for most corporate investors, and they will also want to understand if this is possible in a VNAV MMF. The tax treatment of the gains/losses on redemptions in a VNAV product is also an issue which corporate investors will no doubt want to understand. I don’t totally disagree with your point that you may see a more concentrated market place from a managers’ perspective.

Britta Hion (BlackRock): It’s entirely possible that the market will shrink for a period of time. But then we’ll have to be looking at what options are available in a low interest rate environment, what solutions are managers coming up with, and what is palatable for investors? It’s quite possible that the industry won’t look as uniform as it does at the moment, which in itself wouldn’t necessarily be a good thing because you potentially lose the slightly commoditised element in this space and being able to compare like products with like.

Matt Shelley (3i): Alex, what are you going to do with your US dollars in a negative rate environment?

Alex Fiott (AstraZeneca): I have invested in US T-bills, paying 0% in the last two years, in the short term. It was unpalatable to go for a negative interest rate, so I just looked at the curve where there was a pocket to actually get nothing, rather than negative. It partly depends on the environment we would be in, but probably we’d be prepared to pay negative interest for security.

Britta Hion (BlackRock): Just with government risk or bank risk as well?

Alex Fiott (AstraZeneca): I think just with government risk, straight into US Treasuries. But going back to the question, I think that in the next 18 months we will actually be bringing in-house the management of some of our cash, rather than nearly 100% going to the fund manager.

Britta Hion (BlackRock): I think that is something that we’re definitely seeing across the investor base – they are looking at cash balances much more holistically and terming it out. They are separating out what is doable, where they can take the risk and what needs to be instantly accessible – investors are much more focused on that than historically.

Steve Matthews (Canada Life Investments): I think the environment changes the context in terms of how you hold cash. If you have a general pool of cash, then you have one set of rules for it. But if you’re holding cash for a specific purpose because you’ve switched into cash waiting for a better opportunity, well, the cost of holding that cash then becomes part of your trade, doesn’t it? And then you make your decision as to whether or not you can lose one, two or ten basis points (bps) on a holding for one, two, three months, while you’re waiting for your next investment opportunity.

Britta Hion (BlackRock): And the real yields are negative anyway. Therefore, depending on how long you’re sitting on it, you might be losing value.

Jim Fuell (J.P. Morgan Asset Management): I’m just going to go back and pick up on one thing. There is a level of knowledge which has to be achieved around the concept of VNAV funds. The general assumption is that it implies more risk, but this isn’t necessarily the case. You could, for example, see managers introduce VNAV products where the risk profile is more conservative than that of existing prime MMFs, in order to dampen or even eliminate any underlying market NAV volatility. However, this type of approach will make it harder to deliver the yield element of the triad — capital preservation, liquidity and yield – for which MMFs have been so well known and regarded.

Steve Matthews (Canada Life Investments): It’ll be whether the settlement is T+0 or T+1. That’s what it’ll come down to in the long term. T+1 is not same-day liquidity.

Richard Parkinson (TT): Let me just understand this settlement point. Are you saying that it would always be T+1 for VNAV funds?

Britta Hion (BlackRock): It’s just very challenging to do true mark-to-market with same-day liquidity. You’d have to have such an early cut-off in order to properly price the funds to then provide the same-day liquidity, which might not be feasible from a trading perspective. MMFs might lose some of their usability if you have a very early cut-off, and there could be potential pricing issues during the day. So that’s the real challenge.

Jim Fuell (J.P. Morgan Asset Management): There’s a lot of cash that we manage from investors who don’t always need same-day liquidity. I understand that some need same-day liquidity, but we see a level of cash invested in MMFs by investors that can accept, for example, next-day liquidity. So banks, if I take an evolving short-term angle, have greater appetite for operational balances, and maybe that’s where some investment is placed for that portion of corporate cash for which there is a clear need for T+0 availability. The dynamics continue to underscore the importance of transparency and the ability to tier or segment cash balances.

Alex Fiott (AstraZeneca): I would guess most corporate policies treat MMFs as overnight, which is technically not correct given that, if you needed to redeem your whole cash balance, it would probably take a few days.

Richard Parkinson (TT): Are you saying the industry will offer both same-day and T+1?

Jim Fuell (J.P. Morgan Asset Management): I think the industry recognises that if we want to manage working capital, the ability to deliver on a T+0 basis is critical. Whether or not we operationally are able to get to that is the unanswered question right now. There are some challenges around it, not the least of which is getting accurate market pricing and being able to conclude the determination of the NAV within a reasonable time frame in order to deliver T+0.

Matt Shelley (3i): Are J.P. Morgan Asset Management and BlackRock having more conversations with investors about segregated mandates?

Britta Hion (BlackRock): Yes, we are. And we were having those conversations a few years ago, but it always felt a little bit academic. When it came down to it, after looking at the logistics of setting up the segregated mandates and model portfolios, then typically what we’ve found is that investors actually shy away from it.

Now it feels more real – that it might be something that is actually going to happen. We are sensing that there is a real change in investor appetite. This is also partly in preparation for the potential regulation changes, so it’s not just yield driven.

Richard Parkinson (TT): What are the investors around this table thinking about doing?

Matt Shelley (3i): Well, as I said, we’ve got a similar position to Alex in terms of having high concentrations in MMFs. We have seen banks offer better yields on bank accounts than MMFs, and those are banks whose credit I’m comfortable with. So with yields better than the MMFs, we’ve started to leave our operational cash floats with one bank.

In addition, we’ve looked at evergreen deposits and collateralised deposits, and we’re learning about tri-party repos.

Richard Parkinson (TT): How does an evergreen deposit work?

Matt Shelley (3i): Under the new liquidity requirements, there’s a lot more priority given to liquidity that is ‘sticky’, and particularly for deposits over three months. So an evergreen deposit – where you give notice to the bank to mature the deposit but you receive the cash back in three months’ time, or otherwise the deposit will continue in perpetuity, that helps the bank from liquidity ladder perspective and can support a higher yield. You’ve got to be comfortable with the credit of that particular bank; but if you are, that can help.

Steve Matthews (Canada Life Investments): We currently use evergreen notice accounts (ENAs). We have some that mature over 35 days, over 60 days and some over 95 days, depending on our view of the risk of the counterparties. We hold those on an evergreen basis and we don’t intend to call upon them until they are no longer economically viable from a liquidity, credit or rate perspective.

They’re structured in a way that we want to keep them within our portfolio because they enhance returns. A small amount of extra risk for an appropriate amount of the yield. The only problem with them is that they never mature unless you call upon them. They never march into that sub-30-day bucket.

But if you’re using it as ‘sticky’ money and plan to keep it there for two years, while getting three month LIBOR+10, then you’re getting 60bps for a two-year deposit when you could get 48bps from rolling it every three months into your maturity bucket. So it’s quite a call to make, and you should take all of that into consideration.

Matt Shelley (3i): If you compare the yields that you get on those 35, 60 and 90-day ENAs, does it compare favourably to a three and six-month deposit?

Steve Matthews (Canada Life Investments): We’ve done some and rejected others because the numbers just didn’t work. Essentially what we wanted to do was achieve something around one-year money for something that was staying out there at just three months. Otherwise there was just no point going past three months, which tends to be the ‘sweet spot’. So we look at offers on a case-by-case basis and negotiate from there.

Matt Shelley (3i): The yield curve is so flat and no one’s paying for any kind of duration up to that tenor, so it’s the evergreen – or that kind of deposit category – that creates a small pick-up in yield because it does help the banks in terms of their liquidity ladder.

Britta Hion (BlackRock): Can I ask Alex a question? In terms of everything that you’re doing – taking things back in-house, fairly intensive layering and all the rest of it – presumably that’s more resource heavy from your perspective?

Alex Fiott (AstraZeneca): Yes, most definitely. We just felt that we’ve got to start de-risking ourselves and put some process in place. Whether that will be the case in the long term, I’m not sure; but certainly, given the size of our balances, it makes sense to be able to do a direct repo transaction ourselves. But you’re right – the more you bring it in-house, the more internal credit discussions you will have over what you’re invested in.

Jim Fuell (J.P. Morgan Asset Management): Investors do four things with their cash: deposit it in financial institutions; invest it in pooled funds, such as MMFs; buy direct instruments, such as commercial paper (CP), certificates of deposit (CDs), etc; or establish a separately managed or bespoke investment vehicle, where they engage the support of an active asset manager.

One of the key benefits MMF investors get is the credit and risk management oversight provided by the underlying asset manager.

Steve Matthews (Canada Life Investments): That is the reason why we use you.

Matt Shelley (3i): But it’s not ‘fire-and-forget’ – we still want visibility of strategy and holdings.

Jim Fuell (J.P. Morgan Asset Management): I agree. I look at the investment alternatives we’ve talked about today: bank deposits, CP, CDs and tri-party repo. We buy every single one of those instruments within a MMF. If you’re achieving a greater yield on a direct basis, it may be partially down to the fee a manager charges for the work they do; but it may also be because you’re taking a level of direct risk that your asset manager simply isn’t comfortable taking.

Alex Fiott (AstraZeneca): I think it’s a Catch-22 situation, in the sense that we’ve got too much exposure to bank debt. If I ask a particular MMF why they haven’t got more corporate paper, they say that there’s not a lot out there.

Matt Shelley (3i): Whereas the corporate issuers that are in MMFs are consistently the same names.

Jim Fuell (J.P. Morgan Asset Management): It’s also a function of the MMF design, where we’re managing to a short-dated weighted average maturity (WAM), prescribed liquidity buckets, etc.

Britta Hion (BlackRock): A lot of it is to do with issuances as well. We’d all love to buy it, but it doesn’t sit within the risk framework, it isn’t sufficiently rated.

Alex Fiott (AstraZeneca): But I’m sure if you asked any corporate investor whether they would like to see more corporate names in a particular MMF, I think the answer would be an unequivocal yes.

Jim Fuell (J.P. Morgan Asset Management): Of course.

Britta Hion (BlackRock): It’s the same for providers. We’d love to do more of it.

Richard Parkinson (TT): Are investors also taking or accepting more risk?

Britta Hion (BlackRock): Sadly, I think yes. I’d love to sit here and say ‘no’, but we are seeing that in some cases. Obviously some of the debate around this table is addressing that issue. It depends how you define risk, but we’re seeing that the yield concerns are pushing investors to do things that they wouldn’t previously have done. So yes, I think some investors are heading in that direction.

Jim Fuell (J.P. Morgan Asset Management): I’m not sure I’m sad about it. I think people who want the features that MMFs deliver should be focused on a product that has those characteristics. I think what we’re seeing is connected to the tiering of cash, combined with greater transparency over cash positions. There are strategies that we’re delivering that are offering greater yield and corporate money is starting to be attracted to those strategies. It’s not a replacement for cash investments – it’s a complement to cash investments; and there’s appetite for it, whether in a pooled product or separately managed account form.

Steve Matthews (Canada Life Investments): We don’t believe there is much risk-return out there. As Matt was saying, the curve is flat so there’s not a lot of point going beyond three months – and with many banks there’s no point in going beyond one month because you’re only getting a couple of basis points for trebling your term.

For us, the change to risk happens when you come out of the cash market and look to invest out of a zero-yield area into something where you can get some kind of pick up. But that’s a bond investment decision, which is something completely different to the cash market.

Matt Shelley (3i): What different things are investors doing and what risks are they taking? Is it duration or credit criteria?

Britta Hion (BlackRock): A bit of duration, a bit of a drop in credit quality and liquidity – all of the above. There is a divergence in terms of client type. One of the things that slightly concerns me when I’m talking to clients is that it’s almost a reversion to pre-crisis behaviour, where you see some of the smaller, less sophisticated clients who are much more sensitive to yield, beginning to think about yield again and maybe start venturing into areas that perhaps they shouldn’t be, or where they should conduct some additional investigation before they go down that route.

With regards to Jim’s earlier point, there is obviously a huge discrepancy between client approaches. There are those who are very informed and well-resourced and will take very prudent decisions. But I’m more concerned about the people who don’t have the resources or the experience perhaps, and may be inclined to forget some of the lessons learned over the course of the past few years.

Matt Shelley (3i): It’s interesting looking around this table. I mean Alex is clearly US Treasuries, risk-averse and capital preservation-focused. I’m in the same camp, although focused around MMFs and banks rather than US Treasuries. Steve, are you taking any additional risk?

Steve Matthews (Canada Life Investments): Not particularly. It is not right for our cash funds and our ‘on balance-sheet’ monies don’t need to chase yield.

Matt Shelley (3i): So I think capital preservation is still key for all of us.

Jim Fuell (J.P. Morgan Asset Management): I’m not fully aware of each of your respective investment policies, but I would just say that the approach in the UK does differ slightly when compared to the rest of Europe. As I sit in the UK as well, I do have to sometimes think beyond that. Certainly, from my observations, there is a more conservative investment approach in the UK.

Steve Matthews (Canada Life Investments): There’s also the question around the definition of taking more risk. Is putting money with an A-2 corporate in CP more risky than putting it with an A-1 bank in CP? And you can argue there’s a point where the diversification and the movement away from the banking sector actually decreases your risk, even though it’s got a lower rating.

Britta Hion (BlackRock): Yes, exactly. It depends how you define it.

Jim Fuell (J.P. Morgan Asset Management): There’s a trusted advisory relationship that we have with our clients, which means they’re willing to hear us out on options and alternatives to add incremental yield. Adding incremental yield sometimes puts you into a total return-type structure, which isn’t the way cash investors think. However, there’s an opportunity to pick up yield when you access corporate issuance, with a level of incremental credit risk with which we are comfortable. Additionally, from an interest rate perspective, it can be a key component to push out and/or manage duration to a greater extent.

Matt Shelley (3i): And that’s where your trusted advisor relationship and credibility really comes into play, because a significant number of investors will not actually have the resources or skills to do a really good job on credit risk management.

Alex Fiott (AstraZeneca): We’re considering changing our investing instruments and buying a product that, hopefully, can sensibly increase yield. But it’s very hard to pick up 15 or 20 bps in this low interest environment. The problem for a company is on the liability side, where they may be paying 4.5-5% on long-term debt, then getting 20bps for what could possibly be viewed as quite a lot more risk. It’s just not worth it. Therefore, the liability management side of your business is the one that could be making you twist and do something silly.

Jim Fuell (J.P. Morgan Asset Management): I understand what you are saying – inside the corporate structure and the need to sell it upstream to management – but we are talking 20 to 40bps in incremental return off the back of a commensurate level of risk.

Alex Fiott (AstraZeneca): Oh, it’s meaningful but it doesn’t really cut your negative carry that much when you’ve issued debt five or ten years ago.

Matt Shelley (3i): Well, you can’t do much about that, so I think nominal capital preservation remains key. And looking around the room, I’m sure everyone would agree that the financial markets are by no means ‘fixed’.

Jim Fuell (J.P. Morgan Asset Management): There’s a reason rates are low.

Matt Shelley (3i): Absolutely. Lots of markets are now looking very ‘frothy’ following the monetary easing by a number of central banks.

Richard Parkinson (TT): As investors, you’ve talked about staying short and risk-free. Is negative yield acceptable?

Steve Matthews (Canada Life Investments): Depends on which bucket we’re looking at – with some of my portfolios, I’ve bought assets with negative yields in order to maintain the investment policy but only in certain groups. Towards the end of last year, we bought some negative Dutch T-bills and Bubills (German T-bills). Therefore, sometimes it is a case of ‘well, if that’s where the markets are, then that’s where they are’, but I’ve kept that to an absolute minimum and haven’t needed to do it this year.

There is currently an 8bps difference between reasonable quality three-month bank deposits and Bubills. If that relationship remains if Bubills go further negative, then I can assure you that Canada Life Investments will not be investing directly with a bank at negative rates. We would either maintain our positions with MMFs, or we would go direct into Bubills.

Matt Shelley (3i): We will have to accept negative rates, given our desire for short-term liquidity, either through direct interest rates or forward points on foreign exchange (FX) swaps.

Alex Fiott (AstraZeneca): Are you doing cross-currency swaps for a yield pick-up? No. We have looked at that on the basis that with a dollar base you can invest in Japan with a dollar/yen swap and achieve quite an attractive yield pick-up. But then you look at it more and you realise that you are taking on more bank risk because of a big FX exposure. We considered it because you can transact cross-currency swaps – or you certainly could six to nine months ago with the way the dollar/yen swap worked – to get a yield pick-up through the arbitrage opportunity.

Richard Parkinson (TT): Maybe some final words of advice to the reader as to what investors should be doing right now.

Alex Fiott (AstraZeneca): I think there’s a lot to learn about repos, if you’re going down that direct route. Corporates may have naively thought that they could lend cash to one of their strong counterparty banks and receive US Treasuries as collateral in order to get a yield, but the reality is that it’s not quite that simple. You should have frank discussions with your banks as to how you’re going to play out repo transactions and what securities you will accept.

Jim Fuell (J.P. Morgan Asset Management): I agree with you that there is a little naivety around the use of repo. This is meant with respect, but I suspect that most investors don’t have the ability to analyse the underlying collateral sets, which may limit the capacity that a product like repo can offer particularly for non-government collateral.

Alex Fiott (AstraZeneca): Moving into a space that you haven’t been involved in before means that you should look at a clearing house like Euroclear or Clearstream. Then if you decide to go into direct investments, do you open up a custodian account with one of the big custodian banks? That comes with a lot of associated costs. So then it comes down to why don’t you let the experts – the BlackRocks and the J.P. Morgan’s of this world – manage your cash? Doing it by yourself can be very expensive.

That’s where we are at the moment. We haven’t fallen into either camp but we want to de-risk ourselves, so we are exploring both camps in order to make a decision from there.

Matt Shelley (3i): My advice is to get ahead of all the regulatory changes that are coming. They will have direct impact on your company, but will probably also have an indirect impact because they will change the markets. You may not get to a position immediately where you’re 100% happy with the impact of the regulations, but at least you can get to the point where you understand where it’s not clear, why it’s unclear and what the likely impacts might be. Many treasurers will have to spend quite a large percentage of their working week dealing with regulation now, which wasn’t true historically.

Jim Fuell (J.P. Morgan Asset Management): I’ll just say that the benefits of a trusted advisor relationship are becoming increasingly important and investors should take advantage of it now. It’s not that we have all the answers but I think the relationship brings with it a dialogue. Therefore, if you’re thinking about changing your investment policies, you shouldn’t do it in isolation. There’s a lot of interconnectivity in short-term markets and our expertise can often assist corporate investors as they think through and evaluate the evolving landscape. And we welcome the opportunity to talk with clients about these issues.

Steve Matthews (Canada Life Investments): I think the risk-return calculation has come back more into play recently, especially with the yield curve compressing so much – and it’s going to become more difficult before it becomes easier. My advice at the moment is to remain short and wait for the opportunities to invest to come around. If you go chasing after yield and suddenly the regulations come in and the marketplace changes, you could find yourself holding the wrong assets.

I don’t think we’ve seen the last of the trials and tribulations in Europe and there are more echoes to come around and hit the UK market.

There are no answers out there at this moment, therefore in the meantime I’m just keeping short. The problem with that is the additional pressure on banks to take longer cash. So, continue talking to all of the people that you can talk to and explore other options with the banks that you’ve got on your counterparty list. You can almost guarantee that there’s someone within that organisation that will have an idea as to what else you can do with them that meets their requirements and gives you a better pick-up in yields, without necessarily taking more risk.

Britta Hion (BlackRock): We do see there are opportunities out there and we’ve discussed some of them. Perhaps if you go a little bit further out on the curve and think flexibly about what you can do in this environment, then that needs to be worked through in terms of policy and risk appetite with your partners – banks, fund providers, etc. You just have to be fairly creative and come into it with an open mind-set. The feedback loop is very important and then we can come up with solutions that will work over the longer term and are hopefully fairly ‘future-proof’.

Richard Parkinson (TT): Thank you everyone.