Convergence and Change for Money Market Fund Investment?
by Helen Sanders, Editor
Cash investment continues to be an important priority for treasurers globally. Large corporations in particular continue to build large cash balances while ensuring security and availability of cash remains a priority for companies of all sizes. Over recent years, money market funds (MMFs) that were initially popular in USA and UK have gained in popularity across all regions. In particular, investors are attracted to the high level of security that MMFs offer, together with same-day access to liquidity. Few corporations have the scale or appetite to deploy comparable risk management resources as the major investment managers that offer MMFs, so these instruments have proved a convenient means of accessing high-quality investment and risk management expertise.
However, as the articles in this Special Report illustrate, there are a variety of trends that are already changing the MMF landscape and will continue to do so. These trends will in turn impact on corporate treasurers and their cash investment policies and procedures. Perhaps most significantly, proposed regulatory change in both US and Europe is likely to have a major impact on MMF investors and providers if adopted in its current form. Regulatory convergence across regions is a positive step forward for investors, but there are some elements of the proposals that are causing some concern amongst industry bodies representing both MMF providers and investors. These are outlined in detail in the EACT and IMMFA responses to the proposed regulations in this special report. For example, both EACT and IMMFA argue against the proposed 3% capital buffer requirement for constant net asset value (CNAV) funds in Europe. IMMFA suggests that this measure will result in these funds no longer proving viable, despite their attraction to corporate investors. Both organisations suggest that improved disclosure together with liquidity gates and fees would provide the necessary bolstering of MMFs without creating the same degree of market disruption. This measure would align European MMF regulations with some of the proposals in the US. The EACT also warns against the bar on the use of external credit ratings on MMFs. While investors are now more aware of the potential limitations of using credit ratings alone, these ratings do provide an initial filter on fund choice, at which point corporate treasurers (and their investment managers) can then conduct their own risk analysis.
There are related implications of the proposed regulations on corporate investors. With growing cash balances, and little immediate prospect of an increase in interest rates, corporate treasurers are pressed more than ever before to find appropriate repositories for cash. Deutsche Asset & Wealth Management, BlackRock and MyTreasury explore the various implications of both the proposed regulation on corporate cash investment policies and procedures and wider market trends. As Joe Sarbinowski, Deutsche Asset & Wealth Management argues, changing regulation will result in corporate treasurers needing to boost their risk management provision. Although there is a cost associated with this, it could be a catalyst for treasury departments to expand their risk management function within the organisation, such as performing more of an enterprise-risk management (ERM) role. Another potential implication is the need to refine liquidity management policies in more detail, such as determining when CNAV or VNAV (variable net asset value) may be most appropriate for investing liquidity, strategic or core cash assets.
As both MMF investors and providers will need to adapt their short-term tactical behaviour and longer-term strategic planning, there is also likely to be a change in fund choice and availability, which affects MMF portals, as Justin Meadows, MyTreasury discusses. Throughout the likely market and regulatory changes, however, as Britta Hion, BlackRock illustrates, building good relationships between providers and investors will be essential for treasurers in order that they can continue to meet their current and future cash investment needs.