MMFs in the Spotlight
by Robin Page, Chief Executive
Welcome to the 2011 edition of TMI’s Guide to Money Market Funds, which we are delighted to be publishing in association with the Institutional Money Market Funds Association (IMMFA) and which I am sure will live up to its predecessors in providing a readable and authoritative tour d’horizon of this increasingly important segment of the financial sector.
Money market funds have indeed come a long way since their first introduction in the United States in the early 1970s, and they now constitute a well-established item in the treasurer’s toolbox. Their use is expanding fast: they represented almost one third (€5.8tr) of the global funds industry at their recent peak, and within the UCITS MMF market IMMFA funds alone have almost doubled their assets under management in the last five years. This emerges from a study, commissioned from PwC by the Association to assess the contribution of its funds to the global money markets, which is discussed in an article by Nathan Douglas, the IMMFA Secretary General.
Like almost all the products at the disposal of treasury, MMFs have come under ever-increasing scrutiny by regulators in the wake of the worst financial crisis in recent history. How they will be managed in the light of the new Basel III framework is the subject of a second article by Douglas, who points out that although Basel III is designed for banks it will have significant impact on both the funds and their investors, with fund managers likely to place greater emphasis on the provision of security and liquidity. The Association will be asking its members to provide additional disclosures to allow investors to identify a suitable money market fund. Regulation is also the topic of the article by IMMFA Director David Rothon, who surveys the key governance provisions and the new rules which provide that after July this year any fund based in Europe which refers to itself as a money market fund will have to adhere to specific investment parameters.
Jim Fuell, of J.P. Morgan Asset Management, opines that interest rates are likely to “rise quite steeply and for a prolonged period from their current low levels”. JPMAM has focused its most recent Liquidity Insights paper on the relationship between cash management and the interest rate cycle, and Fuell provides an interesting evaluation of the best place for cash when interest rates are on the up. Mark Stockley of BlackRock describes his firm’s approach to credit evaluation, which embodies a strong commitment to fundamental research, with a research team who follow a rigorous process when assessing the creditworthiness of a security, using both qualitative and quantitative analysis plus various proprietary tool to support the research process.
Further articles from the IMMFA include an examination by Joanna Cound, Chair of its Distribution Committee, of the reasons why constant net asset value (NAV) funds are continuously popular – one significant benefit of such funds is that, by maintaining a constant value, the accounting and taxation rules applicable to any investment in such an MMF are relatively simple. Looking at the funds as ‘cash equivalents’, Richard Norval, IMMFA Treasurer, considers their constituent parts in order to show how they should be categorised, as well as the findings of staff papers prepared by the International Financial Reporting Interpretation Committee (IFRIC), which together have guided the Association to the opinion that “provided the cash is held to meet short-term commitments, investment in an IMMFA money fund should be considered as a cash equivalent under IAS 7”.
This is all extremely helpful material for treasurers, deluged as they are with a constant flow of new regulations, definitions and accountancy dilemmas. And as such funds grow increasingly popular, treasurers have begun to set up accounts with multiple fund providers. This in turn has led to an expanding use of MMF trading platforms, which provide a convenient single gateway for treasury investors to access and trade their fund accounts electronically across all their fund providers, often vastly preferable to the traditional methods of trading MMFs by phone or fax. But beware! As Justin Meadows, Chief Executive of MyTreasury, points out, there are significant differences between portals, and his article provides a valuable list of ten searching questions that treasurers should ask before committing themselves to the use of any particular platform.