Published: September 01, 2012
As investors in offshore money market funds, treasurers increasingly look for disclosure of portfolio holdings from fund providers. But the question remains: How easy is it to compare data across different fund families? The Institutional Money Market Funds Association (IMMFA) recently provided guidance on a standardised portfolio holdings disclosure to help investors make such comparisons, explains Susan Dargan, State Street.
The events of the financial crisis represented a turning point for investors in money market funds (MMFs). Amid the fallout of the Lehman Brothers collapse, and the ‘breaking of the buck’ of the Reserve Fund in the US, investors focused their attention on their potential risk exposures in MMFs. Investors have subsequently shown an increased appetite for disclosure of portfolio holdings, to gain a clearer picture of the assets being held by funds and enable them to assess their risk exposures within a fund structure or across multiple funds.
Historically, investors only had access to portfolio holding data on an annual basis via the Financial Reports, and MMF managers did not typically provide holdings information outside of the annual reporting process. However, the need to help investors understand their exposures and aggregate data has led many fund managers to disclose holdings data more frequently.
As demand from investors has grown for the provision of some form of disclosure — or ‘transparency reporting’ as it is often known — the need for the industry to agree on a standardised dataset has come to the fore. With different types of reporting provided across the industry, the need to achieve comparable datasets has become a significant focus for investors.
In the US, there have been efforts to strengthen regulatory oversight of MMFs. In June 2009, the Securities and Exchange Commission (SEC) amended Rule 2a-7 under the Investment Company Act of 1940, which governs the operation of these funds. The amendments included requiring portfolio holdings to be posted to the fund website at least monthly and maintained for at least six months.
In addition, US registered MMFs are required to provide monthly reporting to the SEC (Form N-MFP), which includes requiring a fund’s portfolio details to be made available on the SEC website. As noted, this information must be updated monthly and made available to the public on a 60-day delayed basis. The following items are included on Form N-MFP: (i) name of the issuer, (ii) title of the issue, including coupon/yield, (iii) CUSIP, (iv) category of the investment, (v) the Nationally Recognized Statistical Rating Organizations (NRSROs) designated by the fund, (vi) maturity date, (vii) final legal maturity date, (viii) whether the security has certain enhancement features, (ix) principal amount, (x) amortised cost value, (xi) percentage of the fund’s assets investing in the security, (xii) whether the security is an illiquid security, and (xiii) explanatory notes.
While the SEC’s amendments to Rule 2a-7 mandated the provision of Form N-MFP in the US, no similar regulatory requirement was imposed by regulators in Europe. In May 2010, the Committee of European Securities Regulators (CESR), now the European Securities and Markets Authority (ESMA), provided a definition for MMFs and guidelines for managing interest rate, credit and operational risks, although there were no requirements or direction on disclosure.
Through its members, the IMMFA was aware of increased investor appetite for disclosure of holdings data. In addition, the lack of consistency across the industry in terms of the dataset contained in disclosure reporting was proving a frustration for investors.
In November 2011, the IMMFA facilitated a working group under the oversight of the IMMFA Operations Committee — comprising investors, promoters and administrators — with a view to providing guidance on a standardised portfolio holdings disclosure. The move came in response to a request from a group of investors for assistance in providing an industry standard holding report for IMMFA members’ offshore funds.
The group worked to clearly understand investor requirements, and engaged with promoters and administrators to agree an appropriate dataset from existing systems and sources. In terms of timing and frequency, the group agreed that the disclosure report would be produced fortnightly on a Tuesday, based on the fund’s portfolio as of the previous Friday.[[[PAGE]]]
The group’s recommendations were provided to IMMFA members on 18 April 2012 and incorporated into the revised IMMFA Code of Practice issued on 30 May 2012. The Code of Practice states that these recommendations are guidelines and currently not mandatory. Set out in Table 1 is the agreed dataset of the standard report.
As part of the initial discussion to determine the required dataset for the report, additional data elements were identified as potentially beneficial for investors: (i) certificate of deposit and commercial paper issuer/counterparty Bloomberg ID, (ii) asset-backed counterparty bank sponsor name, (iii) asset-backed commercial paper bank sponsor Bloomberg ID, (iv) asset-backed commercial paper bank sponsor full credit support Y/N, and (v) asset-backed commercial paper bank sponsor full liquidity support Y/N.
Given that these additional data elements would prove more challenging to source in the short term, and the immediate priority was to issue a minimum standard, the working party agreed to gain broader industry feedback on the initial dataset and enhance the disclosure as part of a Phase II approach.
Significant feedback has been received to date from IMMFA members and investors in relation to the report, and discussions are ongoing. The recommendation by the IMMFA of a standardised disclosure is seen by both investors and promoters as a significant improvement in terms of industry practice. The ability of investors to make like-for-like comparisons across multiple fund ranges has been significantly enhanced. The focus now is on continuing to evolve the standard dataset to satisfy the needs of an even wider audience.
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