The Status of Money Market Funds in 2007

Variation in MMFs

As an investment instrument, there are three key areas that MMFs offer a return on: security of investment, liquidity, and yield. As treasury might, at any one time, place a higher value on one of these features, there are different varieties of MMFs to cater for different corporate needs. In his article Different MMFs for Alternative Treasury Goals, Andy Kelly from Fidelity offers definitions of three different types of MMF. Kelly says: “At one end of the spectrum are liquidity funds, which invest exclusively in high credit quality and liquid investments. This type of fund has a typical weighted average maturity of 60 days or less, and provides daily liquidity as well as a stable net asset value (NAV).” Further along this spectrum are ‘cash-plus’ funds, which invest in more illiquid instruments of slightly lesser credit quality, extend portfolio maturity further out onto the yield curve, or sacrifice same-day liquidity to aim to produce higher returns. Cash-plus funds are more suited for capital that a corporate may wish to invest on a six to 12 month timeline. And finally, at the far end of the MMF timeline, are enhanced cash funds. These invest a portion of their assets in riskier, more volatile or less-liquid assets, such as asset- or mortgage-backed securities, or apply less stringent restrictions on the credit quality of their investments in order to boost returns. The main focus of enhanced cash funds is to generate maximum yield, and is suited for corporate treasurers with a longer-term investment of at least one-year minimum.

In her article Liquidity Funds Hit Their Stride, Kathleen Hughes from JPMorgan Asset Management examines the benefits of liquidity funds, particularly when compared with investing the same cash into a regular bank account. According to Hughes, liquidity funds differ to bank deposits in that the risk to money invested is spread across dozens of different securities. She says: “Credit is diversified and volatility reduced through a broad portfolio mix, with a maximum of 5% of the fund placed with any one issuer and diversified across industries.” Furthermore, the securities in which liquidity funds are invested can help many funds obtain a triple-A rating from Moody’s, Standard & Poor’s and Fitch. This contrasts with banks, whose own ratings are typically double-A or worse.

Cashing In

Clearly, as a short-term investment instrument, MMFs have a lot to offer corporate treasury. In her article MMF Portals – Becoming a Reality in the European Market, Kate Baldridge, of Institutional Cash Distributors (ICD), notes that MMFs in the US hit an all time high in May 2007, with assets of around US$2.5 trillion.

But this record-breaking success cannot simply be down to the choice and innovation of product offerings available, the continued growth of MMFs also reflects what is happening in the market as a whole. Peter Knight of HSBC draws attention to this in his article #gtnarticle(6791)#, noting: “Over the past decade, the amount of cash held by S&P500 companies has risen from US$100bn to US$600bn. The result of a prolonged global economic boom and a growing tendency to retain cash rather than make expensive acquisitions, this trend means that corporate cash is now equivalent to about 7% of the S&P500’s total market capitalisation.” With such vast amounts of cash available, it is understandable that treasurers are investing in a variety of MMF products. This was clearly a factor in May’s US record high, and is also being seen in other global markets.

The continued growth of MMFs in the US has come at a time when some aspects of the economy would not necessarily seem to encourage it. George Hagerman of CacheMatrix identifies two of these market trends that MMFs have bucked in his article Converging Factors Boost US Institutional MMFs. Hagerman says: “The first factor is the relative strength of the US stock market. In general, a rising stock market typically means that cash positions fall as investors put more money into equities markets. Yet with major market indicies moving generally upward over the past few years… MMFs have also continued to rise.” Hagerman also draws attention to the growth of aggressive company stock buy-back programmes, and how MMF take-up has still grown despite this.

Regional Trends

MMFs have increased in popularity in Europe throughout the past decade. In his article The Current State and Future Potential of European Offshore MMFs, Justin Rose of Standard Life Investments explains that: “European offshore MMFs under management grew rapidly from US$70bn in 2000 to US$496bn. The key growth factors were a combination of corporates building up unprecedented cash reserves… and a relatively stable, historically low interest rate environment.”

However, even despite this large and quick growth in Europe, Fidelity’s Kelly points out that, “MMFs still only represent 4% of European broad money supply (M3) compared to 25% of M3 in the US.” Clearly there is still vast potential growth left in the European MMF market, and Kelly mentions that some analysts believe in the next five years MMF assets under management in Europe could hit US$1 trillion. This would still appear to leave the US as the major home for MMFs, looking at the record total of assets under management previously mentioned.

With regards to liquidity funds, Hughes, from JPMorgan Asset Management, describes how the European market for these has been increasing roughly 50% yearly. Hughes suggests that: “Increasing merger and acquisition activity [is a] potential driver behind the surge in European demand for very liquid strategies. Demand in recent years has also lead to the creation of many other markets, particularly in Asia and South America, with the development of local currency liquidity funds.” As the market for MMFs continues to grow at high rates in the US and Europe, it does seem to be a natural consequence that they will take hold in more emerging economies also, provided the infrastructure to support the market exists. One cautionary note on this topic is provided by HSBC’s Knight, who warns that: “Processes and systems in Asia remain highly fragmented – particularly given the high levels of foreign exchange control in markets such as China and India.”

Regulatory Support

Regulations that govern MMF structures have always been important in supporting the growth of these investment instruments – something that has been seen historically and is still seen today. Standard Life Investment’s Rose notes that Rule 2a-7 in the 1940 Investment Company Act was crucial for the growth of MMF market, providing it with a regulatory structure. In contrast, the European MMF market has been lacking an equivalent to the Rule 2a-7. But, in recent years, some European legislation has contained elements that should have a positive knock-on effect on MMFs. But Rose notes: “To date, the sizeable new investment flows expected from regulatory changes, such as the risk weighting changes under the Basel II-inspired Capital Requirements Directive (CRD), have yet to materialise. Although Basel II came into effect on 1 January 2007, its implementation needs to be viewed as a process, as the regulators allow financial institutions to gradually release capital. For example a 100% capital floor for the Internal Ratings Based (IRB) Advanced Approach does not come into effect until 2010.”

So regulatory progress in Europe may be somewhat slower than appearances suggest. However, Fidelity’s Kelly emphasises a positive development: “As a consequence of the CRD, many MMFs having a triple-A rating are being put in line with bank deposits in terms of regulatory treatment. Furthermore, from November 2007, custodians holding client money will be able to place it in certain MMFs under the Markets in Financial Instruments Directive (MiFID), rather than being restricted to bank deposits.” Regulatory support such as this is key to the European MMF market reaching a similar level of maturity as its US counterpart.

And there is some positive news from Standard Life Investment’s Rose as well: “The Undertakings for Collective Investment in Transferable Securities (UCITS) Directive now accommodates MMFs and legitimises the use of amortised accounting. This has been a step towards the goal of an integrated market and, if European regulators can remove the administrative and regulatory frictions that slow down cross-border market access, a functioning pan-European integrated market may yet be achievable.”

Delivering MMF Performance

As with every area in modern cash management, MMFs should provide the best returns as efficiently as possible for the treasurer or investor. This means automation, and the most popular form of automation in the MMF marketplace is to use an Internet-based platform ‘portal’. As Standard Life Investments’ Rose explains: “MMF portals have become an important part of the European MMF industry as they clearly offer the right service for some clients.” Rose continues: “Portals will continue in importance as institutional investors are likely to be more performance driven than retail investors and they will utilise portals as they demand speed of execution, transparency, larger size tickets, lower transaction costs, later cut-off times and straight-through processing (STP).”

In terms of the future for MMF portals, ICD’s Baldridge identifies three key developments for this technology – the development of a comprehensive cross-market trading platform that can offer STP, the addition of confirmation matching to MMF portals, and the ability to offer a selection of different enhanced funds. She suggests that these additions would help to create a “complete short term liquidity tool.”


The global MMF industry is in good health, with record levels in the US, European take-up rapidly advancing and new funds emerging in regions such as Asia and South America. The regulatory environment is making MMFs more appealing to investors that would previously have used bank deposits but are now encouraged to take advantage of the variety of MMFs available, depending on their investment requirements.

But does the growth in the MMF market necessarily indicate that it is the best place for cash rich companies to invest? Of course not, but when considered in the context of an overall cash management policy MMFs do have a lot of attractive elements. Corporate treasurers need to ensure they have a well thought out and responsive cash management policy – something that HSBC’s Knight covers, by setting out his five principles of global cash management. These are: 1) manage cashflows effectively; 2) forecast cashflows accurately; 3) tranche cashflows intelligently; 4) establish an appropriate investment policy, and; 5) implement effective investment management. These are core strategies that, if given enough attention by corporate treasury, should ensure that maximum value is taken from all cash management activities, including MMFs.


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Mark Carney Bank of England