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A Measured Response to Regulatory Change

by Christopher S. Martin, Global Head of Liquidity Product, HSBC Global Asset Management

Over the past few years, the financial media have been dominated by headlines forewarning significant changes to treasurers’ short-term investment practices as a result of regulatory change. Specific regulatory changes relating to particular instrument classes, such as money market funds (MMFs), and to providers, such as banks under Basel III, have fostered the implication that treasurers will simply have nowhere to invest their short-term liquidity in the future. In reality, while new regulations will undoubtedly have an impact on providers’ and investors’ policies and behaviour in the future, it is important to avoid too myopic (or sensationalist) a view.

Taking a long-term view

Many of the recent headlines have been around the US Securities and Exchange Commission (SEC) announcement in August 2014 for new rules for 2-a7 money market funds.  However, the ruling announced by the SEC relates purely to MMFs that are domiciled in the US, not to international or ‘offshore’ MMFs in USD or other currencies, including in Europe.  There are a number of key parts to the new rules that the SEC has adopted.  For example, all Prime Institutional and Municipal MMFs have a mandatory conversion to a floating Net Asset Value (NAV), and are required to have the ability to apply a liquidity fee and redemption gate in times of stress. However, government and Treasury MMFs are not required to convert to a floating NAV, can continue to seek to maintain a constant NAV and use amortised cost accounting, and are not required to have the ability to apply a liquidity fee or redemption gate.

In addition, a transition period of two years has been announced to allow 2a-7 MMF providers, suppliers and investors to prepare themselves for these new regulations.   As there does not appear to be an early mover advantage for asset managers or their clients migrating to new funds before the 2016 deadline, treasurers should have sufficient time to engage with their fund providers and review the implications of the new regulations, and to make any necessary changes to their investment choices, investment and accounting policies, and to make any modifications to their treasury systems.