An Interview with Travis Barker, Chairman, IMMFA
by Helen Sanders, Editor
In March 2009, Travis Barker, Head of Business Development for HSBC’s money market funds business was appointed as Chairman of IMMFA (Institutional Money Market Funds Association). In this interview, we talk to Travis about his thoughts on the past year and IMMFA’s plans for the future.
How would you reflect on the financial markets over the past year?
It’s been a tough year! The failure of Lehman Brothers and the ensuing crisis had two consequences for money market funds.
Firstly, it led to an extraordinary contraction in liquidity in the instruments in which we invest. This reaffirmed the crucial importance of liquidity management, on both sides of a money market fund (MMF)’s balance sheet: on the asset side by ensuring appropriate levels of natural maturity; and on the liability side by managing shareholder concentration risk.
Secondly, the year also witnessed the failure of a US money market fund managed by The Reserve Management Corporation. This was a timely reminder to investors that money market funds are not risk free and, indeed, different funds exhibit different levels of risk. Investors are now more attentive to their fund provider’s credit process and asset portfolio.
In your experience, how have corporate treasurers’ attitudes to MMFs changed since the crisis?
Despite the challenges described previously, the crisis served as a healthy reminder of the benefits of money market funds.
In a nutshell: the cash assets managed by most corporate treasurers are typically in excess of the amount guaranteed by deposit insurance schemes; therefore, cash deposits result in counterparty risk. That counterparty risk is best managed by diversifying deposits between many institutions and diversification is what money market funds do well. Money market funds meet a real economic need: if they did not exist, they would need to be invented.
Money market funds meet a real economic need: if they did not exist, they would need to be invented.
Of course, treasurers could diversify assets on their own, without the need for a money market fund. But that would require significant credit resources (to distinguish relatively strong counterparties from relatively weak counterparties) and operational resources (to match term deposits with cash flow needs, and to roll those deposits in a controlled way). For many treasurers, it makes sense to “outsource” those credit and operational tasks via a money market fund.
And treasurers have voted with their feet: assets of IMMFA funds increased by EUR 60bn to EUR 407bn over the course of 2008, and in the year-to-date have increased by a further EUR19bn to EUR426bn. In other words, the inflows received since the failure of Lehman and The Reserve demonstrate the confidence of investors in the product. We can observe similar shareholder confidence in 2a-7 funds in the US and “régulière” funds in France.
What does this mean for corporate treasurers in practice?
Treasurers need to appreciate the risks inherent in every investment – including money market funds. To do this effectively, they should perform due diligence before investing, in order to understand their manager’s credit and investment process. This does not mean doing the fund manager’s job – for example, treasurers don’t need to continually review lists of portfolio assets, but they do need to understand the basis on which the fund manager is selecting those assets and controlling risk.