Published: August 01, 2014
In this edition, we are delighted to welcome Paula Stibbe, who took on the role of Head of Global Liquidity Sales, Asia Pacific at J.P. Morgan Asset Management earlier this year. As part of this move, Paula relocated from New York to Hong Kong, with regional offices in Shanghai, Singapore, Tokyo, and Sydney. In this interview, Paula talks with Helen Sanders, Editor, about some of the ways in which the regulatory environment is impacting on corporate investors’ cash investment strategies in Asia Pacific, particularly in their use of money market funds (MMFs).
Asia Pacific (APAC) is still a relatively new market for cash and liquidity solutions other than traditional bank deposits which typically have been the most popular investment solution for corporate investors. Since J.P. Morgan Asset Management founded its Global Liquidity business in APAC 10 years ago, we have been committed to offering a similar range of investment solutions to our clients consistent with the options available in other regions. While the larger proportion of our client base continues to be multinational corporations headquartered in North America and Europe, we are seeing a growing number of corporations headquartered in Asia developing more diverse investment portfolios, particularly as awareness of investment solutions such as MMFs and customised separate account solutions increases.
One of the challenges of doing business in Asia is dealing with the differing regulatory environments across the region; some countries are still more controlled than others, such as China. Although China is such a significant growth market for many of our clients, it has traditionally been difficult to repatriate cash, resulting in growing balances that are effectively ‘trapped’. While there have been recent regulatory developments to allow corporations to transfer cash offshore, such as changes to intercompany lending rules, attractive interest rates and a growing array of financial products make it desirable for corporates to leave cash onshore rather than repatriate. Consequently, corporations are increasingly seeking cash investment solutions that meet their stringent security and liquidity requirements, but also generate a competitive yield. This may be difficult to achieve using traditional investment instruments such as bank deposits, whose rates are set by the People’s Bank of China (PBoC) for multiple different maturities from overnight to five years. As a result, China’s path to interest rate liberalisation has created more investment opportunities beyond traditional state directed and proscribed interest rates.
With the ability to invest in China’s shadow banking market, MMFs are not subject to the same ‘ceiling’ as deposits, so investors are able to enjoy market-driven yields, with a tax exempt return. Furthermore, there are recent, highly significant changes in the nature of MMFs in China. Until recently, fund managers were only able to offer money market funds to institutional clients on a T+1 settlement basis. This regulation has now been relaxed allowing fund managers such as our joint venture, China International Fund Management Company (CIFM), to offer institutional clients same-day settlement on redemption via their most recently launched fund.[1] While there is an impact on the yields that will be available through MMFs settled on a same-day basis, as investment managers will need to hold a larger proportion of cash, this is likely to be a major advantage for investors that are already accustomed to same-day access to liquidity using MMFs in other markets.[[[PAGE]]]
While the recent SEC Money Market Reform announcement in the United States will impact 2a7 onshore funds, MMFs in other regions continue to be regulated according to the rules of the markets in which they are domiciled. Consequently, investors in APAC are unlikely to experience any particular change to the MMFs in which they invest as a result of the announcement. Changes to European rules would have an impact on funds domiciled in Luxembourg, although any potential changes would require a consensus agreement across multiple regulatory bodies which no doubt will prove to be challenging. Consequently, it is likely to take a long time for any changes resulting from the Reform to be adapted and applied to Luxembourg domiciled MMFs. In fact the SEC’s amendments to US domiciled MMFs will also take time to implement and the major changes will not go into effect for another two years (3Q 2016). The amendments aim to address the risk of investor runs in institutional MMFs and include applying a liquidity fee and redemption gate, and moving to a Floating Net Asset Value (NAV).
While it is not yet clear what the precise implications will be as Basel III is not yet a mandatory requirement, it seems likely that investment in MMFs will increase amongst corporate investors. Basel III’s introduction of liquidity standards fundamentally changes the way banks value liquidity and will require that banks qualify the deposits they receive as operating or non-operating cash, with the latter carrying significantly higher costs. Short-term operating cash will be attractive to banks so they are likely to incentivise investors through improved returns. The opposite applies to non-operating cash which may translate into something beyond lower returns for these balances; it may result in banks having no appetite for these types of balances at all. Consequently, while deposits have recently out-performed MMFs in terms of yield in most markets, we would envisage that the gap will close and even reverse. This is likely to result in a larger number of corporations seeking alternatives to deposits for investing at least a portion of their cash.
As Basel III is implemented across the region, we anticipate banks having a much greater need to add MMFs onto their platforms; enabling them to offer off-balance sheet alternatives to minimise the impact of the new Basel III requirements, but allow them to remain competitive with end-to-end cash solutions for their clients. Many of these discussions have already begun, and we expect them to intensify as corporate treasurers’ investment behaviour will become clearer when the liquidity coverage ratio becomes a requirement around the world, such as in Australia on 1 January 2015. For investment managers such as J.P. Morgan Asset Management, the increased demand for MMFs fuelled by Basel III is likely to prove a significant opportunity with third-party distribution likely to develop into a similar channel as those already well established in the US, UK and Europe. J.P. Morgan Asset Management is the largest provider of AAA-rated liquidity funds in Asia Pacific, and globally.[2] With funds in 11 currencies, more than 30 dedicated people and USD 16.5bn in assets under management (AUM) in-region supported by a global business of USD 493bn in AUM, J.P. Morgan Asset Management funds are an increasingly attractive opportunity.[3]
Notes
[1] The Fund is managed by CIFM and JPMorgan is a registered distributor.
[2] Based on AUM for the Asset Management (JPMAM, PCS, PB) division of JPMorgan Chase & Co. as at 30 June 2014.
[3] Based on AUM for the Asset Management (JPMAM, PCS, PB) division of JPMorgan Chase & Co. as at 30 June 2014.
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