Last Friday, we ran the first part of our interview with J.P. Morgan Asset Management's John Donohue, the newly-appointed CEO of Investment Management Americas and Global Head of Liquidity, and Andrew Linton, Global Head of Liquidity Product Development. (If you missed it, read it here.) In Part 2 of the interview, which originally appeared in our January issue of Money Fund Intelligence, the two talk about sweep accounts, the impact on liquidity, and other matters related to gates and fees. We reprint the second half of our article below. (Note: Thanks to those who attended our 5th annual Money Fund University in Stamford Thursday and Friday! The conference binder is available to Crane Data subscribers at the bottom of our "Content" center, and the Powerpoints will be available early next week.)
MFI: Do investors understand the rule? Donohue: I don't think many investors have focused on it at this point due to the fact that the regulations won't take effect until October 2016. What we are going to do in 2015 is work with clients through a very aggressive client outreach campaign to walk them through exactly what all of this means for them and for us.
MFI: Are sweep accounts a big concern? Linton: When you talk to retail intermediaries that have a sweep and ask them about processing a fee and a gate, some respond that they are considering building new sweep processes that can process a fee and a gate, some feel that it's too complicated and will simply use government funds. At the end of the day, it's incredibly complicated and many firms are still evaluating what they will do.
MFI: Will gates be an issue for municipal money funds? Donohue: The interesting thing about muni funds is they tend to have significantly more weekly liquid assets than credit funds. So muni funds have a higher hurdle to actually have a fee or a gate that's triggered by a weekly liquidity number that's below the 30% threshold. It's not uncommon to see muni funds with as much as 85% invested in weekly liquid assets, so gates and fees should be much less of a concern in muni funds.
MFI: How about the logistics of notifying clients? Donohue: There is no getting around it: the logistics will be difficult. And disclosure will be critical. Once one fund throws down a gate, I think it's safe to assume that people will believe that more money funds will follow suit. You are almost introducing contagion at that point. That's why disclosure is going to be really important because on a fund's website, liquidity levels will be posted. Hopefully clients will use that to make sure that the funds they're invested in have ample liquidity.
Our money market funds voluntarily started publicly disseminating their weekly liquidity asset levels and 4-digit shadow NAVs prior to the adoption of the reforms. Again, if that disclosure had been required in 2008, things might have been different. If you looked at the JPMorgan money market funds, we had a ton of liquidity at that time. People would have been able to see that. For other funds, like Reserve -- where perhaps the indications were there that they were facing some issues -- with all the disclosure that's now required, clients may have been able to see that.
MFI: What's the outlook for liquidity? Donohue: It's going to be incredibly challenging because you're going to see more money coming in to the government space. On the same side of the coin you have less repo and front end supply in the market, so there is potentially not enough short-term high-quality issue to meet all of the demand. Also, you have Basel III kicking in. The supply issue is going to be one of the biggest challenges.
At some point, water will find its own level, and the spread between 'Govie' and credit should widen. Then, potentially, credit becomes attractive again and maybe people start to go back into credit funds. At that point investors would be smart to consider segmenting their cash based on amounts that must be liquid and stable. [Some] would benefit from being invested in a government or retail fund, [but some] cash could be more productive invested in a floating NAV MMF, or potentially even further out the curve.
Here's the big question: Will the tax and accounting relief for floating NAV money market funds be sufficient to get clients to accept a gate and a fee in a 2a-7 registered institutional money market fund as opposed to going into a floating NAV fund that does not have the potential for a gate and a fee? I don't know the answer, but that's what we'll be trying to figure out with our clients over the next several months.
MFI: What's the potential impact of higher interest rates? Donohue: All of these issues become easier to manage when rates are higher, that's clear. We'll be facing some major issues, no doubt, but hopefully not in a zero rate or potentially negative rate environment.
