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The Countdown to 2019 Begins J.P. Morgan’s Global Liquidity 2017 Investment Peer View survey has found that many European respondents need more time to adapt their MMF strategy in line with the forthcoming regulatory changes.

The Countdown to 2019 Begins

The Countdown to 2019 Begins

By Jim Fuell, Head of Global Liquidity Sales, International, J.P. Morgan Asset Management

 

The January 2019 deadline for the implementation of the European money market fund (MMF) regulation is now set in stone, but 44% of European respondents still need more time to understand and adapt their MMF strategy in line with the changes, according to J.P. Morgan Global Liquidity’s 2017 Investment PeerView survey [1] . For Europe’s corporate treasurers, that means now is the perfect time to get to grips with the regulation, its implications for their organisations and the opportunities that it brings.

The broader context of regulatory reform

MMF regulation is undoubtedly a milestone in the evolution of cash investment opportunities, but it is unfolding in the context of wider change. Central bank policy, such as quantitative easing, has changed market dynamics, while interest rate policy, particularly the impact of negative rates, continues to create challenges. Banks themselves are adapting to far-reaching reforms, most notably Basel III, driving a tangible shift in their approach to capital and liquidity. 

Against this backdrop of shifts in the broad market and regulatory change, treasurers need to ensure that their investment policy is flexible enough to keep pace. Reassuringly, almost half of 2017 Investment PeerView respondents say they intend to review their investment policy over the next six to 12 months in response to regulatory change. However, with 82% noting that this process takes time, treasurers may need to take a proactive approach to prepare for the January 2019 deadline.


Optionality and transparency

Reviewing the investment policy represents an intuitive opportunity to reconsider risk appetite and investment objectives and constraints. By outlining a variety of different fund types (Box 1), the new MMF rules give treasurers and treasury committees the power to decide on the right choice of instrument to meet their own risk appetite and investment criteria. Rather than ramping up risk in MMFs, the new rules give investors greater choice, plus the transparency to make more informed investment decisions (Box 2). For example, 74% of 2017 Investment PeerView respondents can forecast cash flow beyond one month, enabling them to segment their cash and take advantage of higher returns by extending duration or increasing credit risk on some of their cash. 

While reviewing new regulations and potentially revising investment policies may be time consuming, treasurers have not been dissuaded from investing in MMFs. The 2017 Investment PeerView survey reveals that 86% of European investors intend to maintain or increase their investment in stable net asset value (NAV) funds, a figure that rises to 96% for variable NAV funds. In addition to an inherent level of investor confidence in MMFs, these findings also reflect the difficulties that many organisations are experiencing when depositing their cash with banks, as the appetite of many banks for short-term cash is changing significantly in order to comply with Basel III. Consequently, with the opportunity to maintain same-day access to liquidity shrinking, the ability to use MMFs is becoming more important than ever.

 

Box 1: MMF types

Box 1: MMF types

Source: J.P. Morgan Asset Management

  

Box 2: Comparison between current and future MMF characteristics

Fig 1  Overview of MMF options

Source: J.P. Morgan Asset Management

 

 

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