Transparency for Money Market Funds
by Susan Hindle Barone, Secretary General, IMMFA
In the myriad dissections of the credit crunch – What caused it? Could we have avoided it? How do we prevent another one? – a recurring theme is transparency, and how better transparency might lead to a more robust financial system.
But what do we understand by transparency? How does it help? And more specifically, what does it mean when we’re talking about money market funds?
At the most fundamental level transparency is simply openness about what a fund is holding and how it operates.
In the case of money market funds this would cover:
- What assets is the fund holding?
- How much liquidity is there in the fund?
- How are the assets valued?
IMMFA MMFs have made a great progress in the amount of information they share with investors in the years since the credit crisis.
“It’s very important for investors to have full insight into what they are buying,” said Jonathan Curry, chair of the IMMFA Board. “If investors are looking for an MMF to handle daily cash operation, then they need to be vigilant. These funds should prioritise capital preservation and provision of daily liquidity ahead of all other criteria such as yield. Some MMF providers may give the impression that they are selling a money market fund by using names which imply ‘cash’ or ‘liquidity’, but which in fact either take on more risk or don’t genuinely have the ‘in-built’ liquidity which an IMMFA MMF must have.”
Pre 2007 there were no specific rules governing MMFs in Europe. Following the crisis the ESMA Guidelines were introduced (2011), but these confusingly had two different categories of funds:
- Money Market Funds
- Short Term Money Market Funds
Only ‘Short Term Money Market Funds’ have the profile that most IMMFA investors would recognise as a same-day liquidity fund.
Beyond following the ESMA Guidelines, all IMMFA funds also follow the IMMFA Code of Practice which is much more exacting. Amongst various other criteria the Code of Practice asks for certain best practice standards of investor reporting. However, most IMMFA fund managers are currently providing investors with even greater amounts of information.
However standards are highly variable across other money market funds in Europe. This level of disclosure – particularly with regard to the list of holdings, the available liquidity and the concentration of exposure to any related institutions – is not included in the ESMA Guidelines. The upcoming European Regulation for Money Market Funds presents an excellent opportunity to make the provision of such information compulsory.
What can transparency achieve?
Casting our minds back to the stressful days of 2007/2008 or even 2012, investors were vexed not only by the known problems – the insolvencies or downgrades – but by the concern about what they didn’t know. Is my MMF holding paper from that particular bank? What is its exposure to a certain country?
Money market funds are the choice of risk-averse investors – those looking for an investment opportunity where preservation of capital, easy operation and provision of daily liquidity are key, and only once these have been accomplished does return become a consideration.
Consequently these cautious investors with minimal risk tolerance are likely to be highly sensitive to a deterioration in the overall credit environment. Given any uncertainty, the easiest thing for them to do is to move to an even more conservative option, to ‘fly to quality’ - by moving their investment to an MMF restricted to investment in government-backed debt for example.