Treasurers scope out the potential of money market reforms

Treasurers seek both the safest and the most profitable outcomes for their funds, but in doing so there are many operational issues to be considered.

There was a swift movement of money from prime to government vehicles after the implementation of new Securities and Exchange Commission (SEC) rules in the US covering money market funds (MMF). 

Impending EU reforms now have highly liquid corporates facing a similar dilemma.

Fernando Vicario, head of EMEA corporate banking at Bank of America Merrill Lynch (BAML), says treasurers have a lot to think about, adding: “Debt markets continue to be highly liquid and investors sitting on cash have to deploy their liquidity. Issuers have a wealth of choice between public and private debt markets. 

"For public debt instruments, they need to have a public rating from one or more rating agencies. This also requires additional ongoing work to keep the rating agencies posted of any developments which would push their rating up or down.”

The JPMorgan Global Liquidity 2017 Investment PeerView Survey recently recorded results from 378 respondents in CIO and senior treasury positions.

Jason Straker, managing director, global liquidity, at JPMorgan Asset Management, says there have been numerous changes treasurers have had to take into account since the last survey.

“In light of the current regulatory environment, 46% of respondents plan to change their investment policies in the coming six to 12 months, up from 38% in 2015,” he says.

“They have been expanding investment products, in particular away from deposits in light of Basel III, and adjusting for the lower credit ratings that have been assigned to banks and countries globally. For most treasurers, these changes have all been part of a healthy review typically conducted annually.”  

The JPMorgan study found 48% of respondents are now permitting floating net asset value (NAV) funds, a rise from 32% in 2015. Following the implementation of the SEC rules, there was a move away from floating NAV funds to government funds, with those who switched stating comfort level and concerns over gates or fees as the reason for the change. 

However, around half of respondents would now consider moving back if they could see a yield of between 15 basis points and 50bp.

Straker says there is a lot of interest still in all types of funds.

“When compared to common alternatives such as bank deposits, investors in funds benefit from a well-diversified, tightly risk-managed investment product which offers a competitive yield combined with a high degree of liquidity," he says. 

"Funds also offer an easy way to transact which is normally standardized across multiple currencies and fund types. In our survey, nearly two-thirds of respondents said they will select MMF for their cash investments if bank deposit rates lag.”

Not all have made a move yet: 44% of respondents to the JPMorgan survey said they wanted more time and information to make their final decision on investment options. For those looking into new structures, 43% stated they see risk of gating or liquidity fees as the biggest influence on their eventual decision.

Focusing on the European market, a State Street Global Advisors survey – A Shifting Cash Landscape: EU Reform Investor Survey – looked at the changes in the market brought on by impending EU reforms. 

These reforms will see the recategorization of funds. While the European MMFs have traditionally offered constant NAV (CNAV) and variable NAV (VNAV) funds, the use of CNAV will be restricted to government portfolios only. Instead, European MMFs will have the use of the low volatility NAV (LVNAV), a new structural fund.

Investors can purchase and redeem at a stable NAV to two decimal places, as long as it falls within set changes in the basis points. The changes are set to take effect from July 21, 2018, for new funds, and January 21, 2019, for existing funds.

The report acknowledges that investors will need to review their investment policy statements and look at whether their systems can handle the NAV variations. Corporates will have to consider upgrading their accounting software to handle the NAV changes.

Will Goldthwait, portfolio strategist, fixed income cash currency at State Street Global Advisors, says the changes will be positive for treasurers, making MMF safer and more liquid.

“The rule changes will impact all fund types and create a standard by which MMF will operate in Europe," he says. "This standardization helps clients understand exactly what fund types they are invested in in each jurisdiction.”

Of the respondents, 79% stated they have not thought in detail about the impact of the reform, or do not see the urgency in doing so.

Goldthwait says: “This is in line with what we saw in the states prior to the US reform deadline of October 2016. Clients see no urgency in their analysis because the deadline for the rule changes is still over a year away.”

Looking to the potential impact of the changes, Goldthwait says it depends on the currency being used, adding: “Right now, managers are anticipating that clients in CNAV prime funds will remain in those funds as they transition to LVNAV funds in 2019, but it is still too early to know for sure. 

"Different currencies and the rates in those markets will also impact client’s decisions. Euro clients tell us mitigating negative yields is a priority. Some interpret this to mean a move towards standard VNAV strategies. US dollar clients are in a rate hike cycle for the first time since 2006. This could push them towards a more conservative CNAV investment strategy as rate hikes are providing more income.”

For treasurers looking at their cash management strategies, the new regulations and change of funds are unlikely to impede their operations, in both the US and the European markets.

Goldthwait says: “The rule changes that will impact European domiciled MMF do not have a significant impact on the strategies of those funds. Although it is expected the liquidity in the funds will rise slightly given the new rule, the duration and credit quality of the funds will not change due to the new rules.”

JPMorgan's Straker adds that the US market will continue as usual.

“The use of funds should not have a significant impact on a treasurer’s ability to forecast cast flows," he says. "This is driven by cash needs within the company and expected future cash balances. According to the survey, 74% of respondents can forecast their cash flows out for a month or longer.”