Keep Calm and Keep Investing

Industry Reflections on European Money Market Funds

In September 2017, six leading money market fund (MMF) providers were joined by corporate treasurer Séverine Le Blévennec from Honeywell and Justin Meadows, CEO of portal provider NEX Treasury, to discuss the forthcoming MMF reforms and wider themes in corporate cash investment. Here follows an edited transcript of the event. We would like to thank BlackRock for kindly hosting this event, and NEX Treasury for their support.

Participants

• Séverine Le Blévennec, Director Treasury, EMEA at Honeywell
• Justin Meadows, CEO, NEX Treasury
• Beccy Milchem, Head of International Corporate Treasury Cash Sales, BlackRock Cash Management
• Reyer Kooy, Managing Director, Deutsche Asset Management and Chair, IMMFA
• Hugo Parry-Wingfield, EMEA Head of Liquidity Product, HSBC Global Asset Management
• Jim Fuell, Managing Director, JPMorgan Asset Management
• Kathleen Hughes, Global Head of Liquidity Solutions Sales at Goldman Sachs Asset Management
• Ian Lloyd, Head of Liquidity Distribution, Legal & General  Investment Management
• Chair: Helen Sanders, Editor, TMI

 

Helen, TMI
Now that the detail and timing of the long awaited new regulations for European MMFs have been published (figure 1 - see page 2), what has the industry response been? 

Kathleen, GSAM
The details of the final regulations have been very well telegraphed, which in many respects are a codification of practices that are already in place, so there’s nothing too surprising. The one big difference is the introduction of a new fund type, the low-volatility net asset value (LVNAV) fund. If you compare the US with Europe, investors had the option of not changing at all, whereas in Europe, everything is going to be different. So there is more for the industry to do, and more for clients to understand.

Séverine Le Blévennec

Hugo, HSBC AM
Like other fund providers, we have been communicating proactively with clients to provide information, dissecting what the new regulations mean, and how our products and proposition will be affected. This is an iterative process: initially, we outlined the features of the regulation and where the impact was for our clients. This has now developed into the more practical considerations, which in turn will evolve into more concrete information and support on what the new products will look like and how clients can take advantage of them. 

Séverine, Honeywell
From a corporate perspective, it is the practical aspects that create the biggest worries initially. For example, at this stage, it is not clear whether the LVNAV will be considered as cash or cash equivalent for accounting purposes, so we will need to liaise with our accounting team, auditors and fund providers on this. We are a US corporation, but we invest from our in-house bank in Belgium, so we need to seek assurance on the accounting treatment both from a Belgian and US perspective, which adds another level of engagement and complexity.

Automation is also an issue. We execute MMF transactions through NEX Treasury with a high level of straight-through processing to our treasury management system (TMS), so we need to achieve the same degree of efficiency in the future, both for LVNAV or any other funds in which we invest. Personally, I have fewer concerns at a strategic level. While fees and gates are a possibility, in practice it was already the case, and ultimately it is the investor who benefits from greater investment rigour. We will, of course, need to consider the tax treatment, review our investment policy and explain the changes to our board. 

 

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Fig 1  Overview of MMF options Source: J.P. Morgan Asset Management, Proposal for a regulation of the European Parliament and of the Council of Money Market Funds, as at 30 November 2016. WAM: Weighted average maturity; WAL: Weighted average life. VNAV: Variable Net Asset Value.

 

Ian, LGIM
I would say that most clients are looking at the LVNAV as an alternative to the CNAV and like Séverine, Honeywell, most are very comfortable with the new instrument. In reality, leading MMF providers are adhering to most of the investment guidelines of LVNAV already. However, clarity around the details of tax, accounting treatment and standardised reporting needs to be hammered out.

Justin Meadows

Reyer, Deutsche AM
Yes, it would definitely be useful to have some centralised guidance on the accounting treatment of LVNAV, but in the absence of this, I think we can take some comfort from the fact that even VNAV funds are accepted as cash equivalents in jurisdictions like the United States and France where these instruments are very well-established.  Meanwhile, it will be at auditors’ discretion, who hopefully will take guidance from their experiences in other jurisdictions.

Beccy, BlackRock
We are encouraging clients to engage with their auditors early on. In reality, LVNAV has tighter liquidity requirements than current prime funds, which is an important justification for continuing to treat these instruments as cash equivalents, so it is important to explain this to auditors.

Jim, JPMAM
I would agree: the intention with LVNAV is to deliver a AAA-rated, T+0 product, with a continued focus on capital preservation and the avoidance of any erosion in principal value, which all contribute to the case for accounting treatment as cash and cash equivalents. When considering the new regulations, I would urge investors ‘keep calm and carry on’. These are already regulated products, and nothing is changing without shareholder or investor notification. Furthermore, the 18-month implementation is there for a reason: to work on these outstanding questions, and smooth the transition. 

Hugo, HSBC AM
Absolutely, and this period is crucial in enabling treasurers to explain the changes to the board and making any changes that are required to the investment policy.

Helen, TMI
During the transition, in which we may see new funds introduced, as well as a potential transition from existing to new funds, the ability for portals and TMS to support this process will also be important.  

Justin, NEX Treasury
Absolutely – not only should treasurers be engaging with their fund providers, but also their technology providers. From a NEX Treasury perspective, clients are coming to us for assurance that we will support LVNAV and other fund types that are introduced in which they may invest. This is likely to require additional data points to be collected from fund providers and distributed to clients, which will require collaboration between portal, TMS and fund providers.  We have already started working with both buy- and sell-side clients to build a business requirements specification in order to support the timescales for new funds and new reporting and accounting requirements.

Reyer, Deutsche AM
A key issue for all stakeholders, whether fund provider, investor or platform provider, is the degree of consistency in how funds convert to LVNAV and how these funds will operate day-to-day. 

Beccy Milchem

Beccy, BlackRock
I agree, and I think most providers are working to try and keep everything as similar to the current operational model as possible. In the US, while some funds migrated ahead of the deadline, a large proportion left the migration to the end of the implementation period. As providers, we need to work with clients to determine the best approach to migration, and, if the current view that LVNAV funds are likely to be the favoured option continues, I'm sure many fund managers will look to migrate existing prime funds to LVNAV, as opposed to launching new funds. 

Helen, TMI
We mentioned new data points earlier: what does this mean in practice?

Kathleen, GSAM
Some of this data is already available, such as shadow NAVs, liquidity levels, redemptions. The issue will be to make sure that it’s accessible and reflect triggers on fees and gates based on liquidity levels, coupled with net outflows. These data points will be important in enabling investors to model risk scenarios and compare fund managers. 

Séverine, Honeywell
One of the problems we experience now is that while fund managers provide regular portfolio reporting, they report at different times and at different intervals, so we do not always have comparable information across funds.

Reyer, Deutsche AM
I think we will see a more standardised approach to reporting to fulfil regulatory requirements, which will in turn allow investors better analysis of their funds. It is likely that this will include clarification on the frequency and timing of reports, which would address this problem.

 

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Helen, TMI
While regulatory change is one factor that is impacting corporate investment strategy, the ultra-low interest rate environment is another. Are corporates thinking about these issues together when shaping their investment strategy? 

Séverine, Honeywell
We are largely looking at these issues independently of each other, except insofar that we need to be aware of, and equipped for the practical implications of any investment strategy decision. We are taking steps to address the challenges associated with ultra-low or negative interest rates, and the new MMF regulations are a driver to push these initiatives a little bit faster. For example, we are negotiating with banks to avoid negative rates on account balances and discussing time deposits, so cash investment has become a far more important relationship issue than in the past. These are not the only issues influencing our cash investment strategy, however. Banks are being impacted by wider regulatory change, such as Basel III, which is affecting their attitude to cash and leading to new instruments. At the same time, there are a range of new opportunities emerging as a result of developments amongst fintechs. For example, we are seeing a growing range of products that leverage the supply chain, which are attractive to highly-rated corporations with large cash balances. However, practical challenges exist for these products in the same way as for new funds. In fact, these challenges are often more pronounced as we need to engage with other parts of the business, such as accounts payable and receivable, which are not managed within treasury. 

Reyer Kooy

Reyer, Deutsche AM
The ultra-low yield and negative rate environment, as well as changes to regulation and bank appetite, is encouraging treasurers to explore other types of product. This could leave a lasting legacy of greater flexibility in corporate investment strategy, reflected in a broader proliferation of solutions that treasurers will rely on for liquidity. As far as the fund industry is concerned, I think that this will lead to a broader range of funds that we will be able to discuss with treasurers in the future.

Justin, NEX Treasury
We receive regular contact from companies introducing new investment products. While yield is one of the factors that is influencing corporate interest in these emerging solutions, another is a loss of confidence in the ability and willingness of banks to take cash in all circumstances post-Basel III, which is a particular worry for corporations with large cash balances.

Jim, JPMAM
Many of these products are emerging in a euro-denominated environment where the desire to avoid negative returns has been a catalyst for a change in corporate investment behaviour and a greater willingness on the part of corporates to take incremental risk. The interesting point will be whether this wider range of solutions continues to be attractive as interest rates normalise in the future. The spread differential between products has not necessarily changed, but corporates are still looking at alternatives. What remains important for corporates is that they refrain from looking at any single factor, whether interest rates or regulations, in isolation.

Hugo, HSBC AM
The situation is not helped by the fact that some banks are still protecting certain investors – mostly large multinationals, from euro negative rates. Although this is declining, it warps the market because the economics behind that do not necessarily make sense in isolation but reflect global relationships with these clients.

Justin, NEX Treasury
The difficulty is practical as well as economic. Companies using an investment portal such as NEX Treasury have become accustomed to a streamlined and consistent approach to dealing, reporting, analysis and straight-through processing. However, the wider the proliferation of products, which are structured differently, with different workflows and processes, the more difficult it becomes to achieve the same level of consistency. Treasurers therefore need to consider their priorities, and whether a small pickup in yield justifies exceptions in their transaction workflow.

 

Hugo Parry-Wingfield

Hugo, HSBC AM
We have to remember what MMFs are - or rather what short-term MMFs are, and what their objectives are. Is there a place for other products? Absolutely, but the mainstay of corporate cash investment, and what we're talking about today, is the very short-term, highest underlying credit quality product with daily liquidity. This does not change fundamentally with the new rules and the introduction of LVNAV funds.

Jim, JPMAM
I think a challenge for us as fund managers is to ensure that treasurers understand what it is that they are buying: often, they think of investing in a fund in the same way as buying a product, but a fund is not equivalent to a deposit. Not only is the risk profile quite different but effectively, the treasurer is outsourcing the company’s credit and risk management. With the proliferation of alternative products, treasurers will need to decide whether they are comfortable with effectively insourcing the management of their money in an environment which is arguably getting more complex, or whether they should rely on third-party fiduciary managers. This has a major impact on how treasury is structured and the resources that are required. During our conversations with clients, lack of resources is often a challenge, and these constraints are likely to become greater rather than less.

Séverine, Honeywell
I think the key here is flexibility. We rely on a mix, so that we can respond to different investment conditions across currencies and across markets. While this may result in some additional complexity, we also gain greater investment capacity and agility, which is important for a multinational corporation with large cash balances.

 

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Helen, TMI
How consistent do you think your experiences are compared with other, possibly smaller or less sophisticated corporate treasuries?

Séverine, Honeywell
In many cases, we have been early adopters of new products, often co-developing with banks, so in this respect we are unusual. However, once these products have been developed and bedded down, it is far easier for other corporations to adopt and implement them. What is essential is that investment products are easy to understand, a vital lesson from the financial crisis.

Justin, NEX Treasury
I absolutely agree that is essential to keep things simple. But even so, Jim, JPMAM’s point about whether to outsource credit and risk management is a crucial one. We often find that clients rely on their portal providers for this, but this is not the role of a portal: our role is to provide information and facilitate analysis, but interpreting the data and translating this into decisions is the treasurer’s role, which requires particular competencies. What concerns me is if people are lulled into a false sense of security as a result of having lots of data and the ability to manipulate it, which is not the same as understanding it or using it to inform decisions. My concern is that if we see a proliferation of investment products, the risk that treasurers are dealing with products that they do not really understand increases. This goes back to the reason why MMFs were created in the first place. While regulations and markets have changed, the fundamental value of these funds has not changed.

Beccy, BlackRock
I agree, but the ultra-low yield environment means that companies are looking for a complement to MMFs, such as seeking higher yield in exchange for small compromise on liquidity. So yes, we are seeing an expansion in the range of investment products that are available to corporate investors, which include new funds in the step-out MMF and short- duration bond fund space. These offer additional yield or duration benefits whilst remaining pooled, rated investments managed by a third party fund manager, therefore avoiding the need to add credit risk management resources.

Helen, TMI
So how are MMF providers differentiating themselves in this new environment?
 

Jim Fuell

Jim, JPMAM
Beccy’s point is an important one here. The traditional value of MMFs is capital preservation, liquidity and yield. The pressure on MMFs as a result of both MMF reforms and wider banking regulation is on the performance component of money market funds, so investors – and fund managers – are finding alternative ways of generating yield. So when we talk about new products that are coming to market, this includes new investment solutions that we are offering to enable investors to outsource their investment management and benefit from a suite of short-term fixed-income solutions. When we step out into short-duration products and so on, taking incremental credit risk and adding a little volatility to generate return, these remain anchored in an understanding of corporate investment priorities. I think every fund manager will seek to differentiate their offerings in this respect.

Ian, LGIM
I agree that fund managers need to be clear about the suitability of the range of cash investment products. Post-reform, the CNAV public debt and LVNAV offerings will continue to offer a short-term low risk cash investment solution for corporates. Many corporates continue to hold record levels of cash and therefore there is an opportunity to segment cash balances and invest for longer periods of time, typically into liquidity plus or ultra-short bond funds. This can assist in enhancing returns and in turn reducing the cost of carry. By taking a low level of risk, corporates could see a yield enhancement of two to three times over what is currently offered from short-term money market funds, while still being able to access cash within a few days’ notice. These products are typically more suited and utilised by those corporates with larger cash balances or better cash flow visibility. I certainly expect to see more use of these products post-reform.

Beccy, BlackRock
One element of differentiation we have already touched on is transparency and reporting, and I'm assuming there will be a gold standard amongst the industry in how we provide this information to portals. There are still some clients that do not use portals who rely on their investment managers to provide information directly. Therefore, accessibility of information, usability of websites and quality of reporting mechanisms and client tools will be important.

Jim, JPMAM
The cash investment space is not homogenous today, and is not going to become more so in the future. This puts the onus on corporates to truly understand what they're investing in. For example, how is liquidity being created in that fund to meet T+0 redemptions? Does the portfolio manager use leverage to meet redemptions? If a fund has a variable NAV, how is that NAV being calculated? Do they utilise independent third-party pricing providers or are they reliant on less transparent internal models? There are a lot of questions that corporates need to think about as they step out.

Helen, TMI
Clearly it is essential that corporate investors start to engage with fund providers as we move towards the MMF reform implementation date, but what other advice would you offer?

Kathleen Hughes

Kathleen, GSAM
Make sure you understand what’s coming, but to Jim’s earlier point, ‘keep calm and carry on’. It’s important to build optionality into your investment guidelines, as something that's available today may not be available tomorrow. Changing an investment policy is laborious and time-consuming, particularly when having to align proposed policy revisions with board and committee meetings, so give yourself as much flexibility as possible. Although the implementation deadline is some time away, you may only have one shot between now and when the new regulations take effect to get it right. 

Hugo, HSBC AM
I would re-emphasise the value of short-term money funds. So absolutely, keep calm and consider the options but remember that managing that very short-term cash is typically treasurers’ primary responsibility. Look at how liquidity and risk management objectives can be supported through LVNAV at the same time as considering the other options that will be available and how well these match your risk tolerance, the acceptability of capital loss, your liquidity profile, cash flow, your ability to forecast cash and your actual cash flow on a retrospective basis.

Ian, LGIM
MMF reform offers a timely opportunity for corporate treasurers to review their cash investment policies and potentially include additional products;  these may be  fund manager-led or bank sponsored. If and when you invest in a new instrument, it is vitally important to understand the nuances of the instrument while being comfortable with the provider. I believe that IMMFA member firms will continue to be the gold standard in terms of short- term money market funds. However, researching and understating your investment manager is important: the depth and experience of the investment management team, the credit research process and commitment to the asset class.

 

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Beccy, BlackRock
I would definitely echo that. We have concentrated largely on the LVNAV space today, which is where we think the majority of the clients will end up, but both for LVNAV and also short-term VNAV or VNAV funds, understanding how an investment manager has interpreted the framework and how they are going to implement and invest that product becomes critical. Although MMFs are often considered to be a commoditised product, there are differences, particularly once you step outside the prime fund world. While I agree with the ‘keep calm and carry on’ advice, I would echo Kathleen’s advice and suggest a degree of urgency is placed on reviewing options under the reforms and starting those conversations sooner rather than later, given that many companies only have an annual review of treasury policy.

Ian Lloyd

Ian, LGIM
It also takes time to educate the board and key decision-makers:  concepts such as LVNAV will not be familiar to most people not directly connected to the industry.

Justin, NEX Treasury
Treasurers need to engage not only with fund providers, but also with their technology partners. Access to lots of data does not necessarily lead to informed investment decisions, so make sure you fully understand the instruments in which you invest today, or may do so in the future. 

Reyer, Deutsche AM
Leading on from this, I would just reiterate that investors should not lose sight of the nature of the outsourcing involved in investing in a money market fund. So while funds may appear quite commoditised, it is important to drill down into how the money is managed, the scale of the credit operation, and the stability of the portfolio managers to inform your choice of fund managers.

Helen, TMI
Having heard from our fund managers today, what are your reflections?

Séverine, Honeywell
I remain an advocate of the role of MMFs and they will remain a vital product in the future, particularly given that the world is not becoming any less risky. We have some work to do ahead of the MMF reform implementation deadline, with the support of our fund managers and technology partners, but we will make it work. There are some positive elements to the new regulations, not least issues such as more frequent portfolio disclosure, so we need to emphasise these positive aspects, work around the more difficult points and ensure that we continue to support the corporation’s risk, liquidity and yield objectives.    

 

NEX Treasury is the cash and FX liquidity management centre for treasurers who need the right amount of cash, in the right currency, in the right place, at the right time. Our fully-automated platform streamlines end-to-end trading for increased transparency and control over treasury operations. Dedicated to the treasury industry, NEX Treasury is an award-winning multi-product, multi-bank, multi-currency liquidity management solution for trading – on a single platform.  NEX Treasury is part of NEX Group, a forward thinking, technology-based services company committed to empowering financial markets. For more information visit www.nex-treasury.com