“The EU presidency released a new consultation to regulate European MMFs on Monday [10 November],” said Alastair Sewell, Fitch’s senior director of fund and asset manager ratings, at his firm’s cash management conference held in London’s Canary Wharf financial district.
The change from constant net asset value (CNAV) instruments to variable (VNAV) mirrors the US in various ways. However, there are transatlantic differences too with the US Securities and Exchange Commission (SEC) not favouring a 3% capital buffer for funds that insist on still using CNAV and Europe undecided on the use of liquidity fees and redemption gates.
“It’s certainly a topical subject,” added Sewell, when introducing his debating panel. Representing MMF investors was Anne Coghlan, head of treasury at Weybourne Partners – the family office of vacuum cleaner designer Sir James Dyson – while advisor and providers had a mouthpiece in Kevin Cook, a partner at advisor AgFe, and Jonathan Curry, global chief investment officer (CIO) for liquidity at HSBC Global Asset Management.
“Regulation would change how we record and act as an MMF investor,” said Coghlan, referring to the proposed move towards VNAV instruments in Europe and the debate surrounding the possible imposition of a 3% CNAV capital buffer and/or the use of liquidity fees and redemption gates in Europe. “We probably know which way it is generally heading by looking at the US situation [where MMF regulation is more advanced],” she added, but the panel admitted there would be trans-Atlantic regulatory differences.
“Obviously, there will be an operational difference involved in the move from constant to variable NAVs and a change in mind-set from treasurers will be necessary too,” said Cook, “but in and of itself the switchover needn’t be too disruptive.”
Coghlan intends to continue investing in European MMFs, although she places her money in sterling or other non-euro funds. “I use MMFs for immediate liquidity purposes so the possibility of redemption or liquidity fees and so forth would be significant for me. I’d still continue to use MMFs but such rules could curtail my ability to access my full funds [lessening the tool’s risk usefulness against catastrophic events] … We might therefore need further diversification.”
Getting the balance right between yield and access to liquidity is never easy for treasurers or other investors in MMFs, but as Cook added: “There is increasing awareness that all your cash shouldn’t be in the same bucket.”
Stifling the Potential
Traditionally, European treasurers have used MMFs less than their US peers, instead relying on banks and other streams. This was illustrated by Kieran Davis, head of short term credit trading at Barclays Capital, during his conference presentation. He reported corporate sector in Europe was worth about 10-12% of the MMF segment versus 30% in the US. “There is therefore room for growth in the European corporate MMF sector,” said Davis. “It also feels like more corporates want to access the market directly as investors as well [not just issuers] …in what is an evolving reform landscape.”
The predisposition towards using banks to lodge cash in Europe may also be dissipating due to the new Basel III capital adequacy regime; particularly the collateral requirements, which impose extra costs on banks holding large deposits. MMF usage in Europe should therefore rise, but more stringent regulation of MMFs could mean the ‘bucket’ of investment and cash lodging options will necessarily need to increase – away from banks and funds – towards other new instruments such as repos.
The potential to use third party repo agreements as an alternative cash option was later discussed by the panel at the 2014 Fitch cash management conference. Coghlan said she’d consider using such secured investments “because it helps to diversify my portfolio … you don’t necessarily need hundreds of millions now either to get into repos.”
For Jonathan Curry, global chief investment officer (CIO) for liquidity at HSBC Asset Management, repos aren’t yet a threat to MMFs’ popularity. “But repo does offer high quality collateral against the pending Leverage Coverage Ratio (LCR) requirements under Basel III,” he said, adding that it was presently hard to predict, however, how much repo supply would actually be available in the evolving investment environment.
Audience Polling Results
Much of the debate at the conference centred on a series of live polls of the 150 finance professionals attending at Fitch Rating’s Canary Wharf headquarters.
Interestingly asked the question ‘What is the biggest cash investment challenge treasurers’ face?’, the audience responded by citing counterparty risk as their primary concern over MMF regulation:
- MMF regulation: 30%.
- Counterparty risk: 39%.
- Banking regulations (such as the Basel III capital adequacy regime): 18%.
- Other: 12%.
“Banking regulation is less of a concern this year, versus the 2013 polling results, which surprises me a little […as Basel III is closer and the changing collateral requirements will have an impact],” said moderator Sewell.
Q. If MMFs did move to VNAVs would your allocation to MMFs:
- Stay the same: 57% (vs. 2013 poll result: 6%).
- Decrease: 43% (vs. 2013 poll result: 75%).
- Increase: 0% (vs. 2013 poll result: 19%).
The change since last year would indicate that European treasurers, financiers and MMF participants are perhaps growing accustomed to the idea of variable NAVs becoming the norm as the developing regulations take shape.
The new European MMF regulations could also include future demands for more transparency involving daily real-time portfolio reports, as opposed to the weekly updates prevalent at the moment. The investment environment is certainly changing quickly and it appears that European treasurers have one more regulation to worry about.
Coghlan wondered aloud where “the Apples of this world lodge their hundreds of billions” and how others manage the balance between yield in a low interest rate environment versus access to liquidity. It’s a pertinent point in an era where the MMF option is becoming ever more regulated and other options, such as repos, may consequently gain enhanced popularity.
Cook explained that Apple conducts its own asset management to some extent, as it is a large enough multinational corporation (MNC) to do so. “They have a broader risk profile, using MMFs to some extent, but also direct investing,” he said, which reinforced the final live audience polling result of the day:
Q. Where would you invest your cash outside of MMFs?
- Banks: 17%.
- Segregated accounts: 13%.
- Unregulated pooled products: 17%.
- Direct investing: 22%.
- Other cash alternatives: 30%.
A decline in the return on capital employed of globally listed companies over the last decade has been noted in recent EY and PWC reports. This is despite businesses taking an increased focus on balance sheets since the financial crisis in 2008.
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