Money Market Funds: State of Play

8 March 11

In this Q&A, Conor Maher, board of advisors, Institutional Cash Distributors (ICD) Funds, and former head of treasury services, Europe, Middle East and Africa (EMEA) and Latin America at Hewlett-Packard, talks about the post-crisis growth of MMFs, as investors look to achieve a more balanced approach to cash portfolio management.

Q (gtnews): There was a flight to quality at the beginning of the financial crisis and the money market funds (MMF) market experienced considerable growth - it this continuing? Why or why not?

A (Conor Maher, board of advisors, Institutional Cash Distributors (ICD) Funds, and former head of treasury services, Europe, Middle East and Africa (EMEA) and Latin America at Hewlett-Packard): During the financial crisis period, we saw different behaviours among investors in terms of a perceived flight to quality. Some were clearly uncomfortable with MMFs, perhaps because they did not fully understand them, and so exited completely.

Others increased their MMF exposures because they wanted the benefits of broader diversification and same-day liquidity these instruments offer compared to, for example, term deposits with a limited number of bank counterparties. In many cases, investors were attracted to newly-created sovereign asset class MMFs to achieve diversification away from bank and corporate sectors altogether, but without the need for separate trading arrangements in gilts, for example.

In the post-crisis period, MMFs have continued to grow as investors better appreciate their important role in achieving a more balanced approach to cash portfolio management. Also, we have seen a new investor base enter the MMF market as a result of the crisis. This group is staying with it, increasing their cash balances as they develop confidence and understanding in the market and underlying providers.

Q (gtnews): What are the main issues/pain points with using MMFs?

A (Maher): MMFs are no different to other investment instruments. Investors need to have timely line of sight to their exposures, as well as achieving operational efficiency with trade execution, cash settlement and confirmation processing. Most MMF providers provide online access for investors to access their accounts for reporting and, in some instances, trade execution, but this of course does not in itself provide straight-through processing (STP) capabilities between the front- and back-office functions. Increasingly, independent MMF portals are facilitating more end-to-end STP transformation by linking front-office trade execution with back-office settlement, confirmation and reporting activities.

And it isn’t just treasurers who need to be comfortable with MMFs - for new MMF entrants it can take time to get their accountants and internal stakeholders up to speed with the risk and reporting profile of MMFs.

Q (gtnews): How is technology developing to solve these pain points?

A (Maher): As stated earlier, we have seen MMF providers develop online capabilities to deliver varying degrees of front and back office capability.

Beyond that, however, just as we have seen in other treasury markets such as foreign exchange (FX), technology has enabled the development of independent MMF portal providers to offer treasurers a ‘one-stop shop' approach to MMF trading and portfolio management. In particular for larger investors, this is increasingly essential to complement their ongoing focus on STP capabilities and the need for more efficient treasury operations without comprising on key areas such as risk and reporting.

Technology is also responding to a growing risk agenda by facilitating the collation of information from multiple data sources and presenting it in a way that supports timely exposure tracking and informs decision making.

Q (gtnews): How can banks help their corporate clients navigate the MMF environment?

A (Maher): Many banks already have subsidiary businesses providing MMF investment services and dedicated liquidity sales advisors available to help investors with investment ideas and considerations. It is important that investors, in particular, understand the counterparty profile of a bank’s MMF versus, say, a term deposit with the bank itself.

Q (gtnews): What regulatory changes are on the horizon that will affect MMFs?

A (Maher): This is clearly an evolving area. The US President’s Working Group on Financial Markets’ MMF Reform Options Report is a clear indicator that MMFs are not immune from the scrutiny spreading across financial markets. Although we have yet to see any clear legislative changes post-crisis for MMFs, it is nonetheless timely for MMF providers and investors alike to take stock of their objectives, re-affirm their understanding of the risk profile of MMFs and their role as part of an ongoing portfolio approach.

If the MMF industry is to take a steer from the banking sector with regulatory developments such as Basel III, and in the UK the Financial Services Authority’s (FSA) proposed individual liquidity adequacy assessment (ILAA) regime, MMF providers need to thoroughly understand their investors’ behaviour under both normal and stressed market conditions from a liquidity perspective (and of course those of the underlying credits).

Will this lead to new investor protection measures? It remains to be seen but we can already point to a new ratings system for MMFs, increasing demand for segregated mandates, guidelines on liquidity for overnight to one-week maturities, as well as discussions on measures such as primary emergency liquidity facilities, insurance schemes and a two-tier system with enhanced protection for stable net asset value (NAV) funds.

The views expressed in this article are solely those of the interviewee.
First published on www.gtnews.com