Last week, Euromoney hosted a webinar entitled, "Managing the 24-hour money market," which featured Calastone's Edward Lopez and SSGA's Will Goldthwait. The session, sponsored by Calastone, covered, "The importance of robust, accountable and informed technology in underpinning the money market," and touched on negative yields, European money fund issues and managing cash in the time of Covid. Lopez comments, "We've seen a lot more need for automation. From the Calastone perspective, our core business is automating the mutual fund flow. But what we've seen recently is more of a focus around the specific vertical for institutional money funds. So, while there had been a little bit of automation in that part of the mutual fund space, what we've seen is there has been a drive to automate the trading, reporting and the settlement side of things.... What's come about with Covid and working from home is now you've got Treasury teams and maybe many of you on the call ... working remotely. And while you might have had a manual process that worked well when you were all sitting on the same floor, or in the same office, now that everyone's working from home ... you could start to see [some] risk.... So we've seen ... a lot more requests to automate some of those processes where we've seen a lot of manual activity in the past."
Goldthwait tells us, "I think that my biggest takeaway from the portfolio management side of things has just been the enormous stress test that essentially, we saw.... We saw a live market dynamic that was putting enormous stress on money market funds, and they came through it. There were certainly some tense periods during the latter half of March. I think the best news for clients that are using money market funds is all of this information is publicly available. Clients now have sort of a data set that they can reference to look at money market funds in an incredibly strained environment, and see how they performed, and what the strains were on yields, on NAVs, on shareholder activity. They can use that to make informed decisions going forward on how they want to incorporate money market funds into their cash management process."
He explains, "Being one shareholder in a money market fund, you know you're with many others, and you know that everyone else is watching. So that's certainly one thing that we hear from clients, the fact that they know if they're in a money market fund there's many people just like them. And they're also curious, what one or other corporate treasurers in my particular sector are doing. So we do speak a lot about that. The other sort of layer of oversight we have is the rating agencies. And they're in with oversight, with daily reports that come in and allow them to monitor those money market funds. So that's another layer."
Goldthwait adds, "The amount of public data now that's available on funds due to reform, you know, European domiciled funds, U.S. domiciled funds, is really remarkable. And I think that was a really helpful piece, and has been a helpful piece, during this first half of the year. A client can get more comfortable with exactly what securities are in these funds? Where are the exposures? And then what are the risk metrics? What are the durations? What's the liquidity look like in these funds? And so that's been another comforting thing for clients."
Lopez says, "I mentioned that in a survey that we've done, APAC was looking for automation around settlements.... But other regions around the world, it was getting the reporting and analytics and looking through insights into funds, etc. Getting all of that wealth of information that's out there that you mentioned Will, and just putting it into a format that could be easily consumed by their analytic systems or their TMS (treasury management system). You can absolutely see that folks are comfortable with the investment from a security perspective, but just ensuring that the proper reporting and analytics is something [else]."
Goldthwait comments, "The other thing that we've seen is the flows have been very, very different from 2008. That's a question that we immediately got, starting literally at the end of February, the beginning of March, is 'Uh oh, do we have a 2008 scenario again?' And I think the flows ... in the U.S. of almost $1.1 trillion coming into money market funds were very, very different than what happened in 2008. In 2008, we saw a fund 'break the buck,' and we saw a significant amount of money flow out. I think the shift out of credit strategies in the U.S. and into government strategies in the U.S. has been dramatic. And now, we've got almost three quarters of the AUM held in government money market funds, which has been very helpful in the U.S. and Europe."
He states, "It's a little bit different in euros and sterling ... the majority is held in credit funds and that worked out well in those markets. Clients were satisfied with that exposure. They were comfortable with the credit risk. We didn't see the outflows that we saw in some Prime funds. But even with the outflows in Prime funds, I think overall it was a liquidity crisis, it wasn't a credit crisis. And our head of research continues to stand by the fact that these banks, given all of the reform that went on [the bank] side, still have plenty of capital and liquidity to withstand even the most harsh of economic downturns. So, we still feel comfortable about that from a credit standpoint."
Lopez also says, "We are seeing some of the, particularly in the offshore, some folks that are closing down there LVNAV and then ... focusing all the effort on the government and the CNAV. I'm wondering if that's similar in the States with the Primes?" Goldthwait responds, "Yeah, we've seen two large fund companies in the states decide they are going to exit the Institutional Prime space." (See Calastone's brief, "Automation in MMFs is Now a Must-Have Say Treasurers.")
Goldthwait then comments, "As much as the conversation sometimes does turn towards yield, this move to make sure that you've got all of that liquidity is very interesting. And we had a poll question recently where we asked our clients what would happen if a money market fund yield went negative like it is in Europe right now. Interestingly enough, a majority of folks answered, 'It is what it is.' You know, it's my cash. And even if it's yielding negative, I can pull it out at any time, and that's just the cost of owning cash. I think that's a really important thing because when we were talking with clients in the early days of the ECB implementing a negative policy rate, there were a lot of folks that were trying to reach for yield."
He continues, "I don't have any concerns [about negative yields] in the U.S. The Fed has been very, very clear that their policy rate will not go negative. And so, I think for that to change, you'd need years of a shift in both governors and policy makers as well as sort of market dynamic. For sterling, I think there might be a little bit more risk there.... But again, I think it comes back to sort of recognizing the cost of cash, and just making sure that you maintain that focus on capital preservation and liquidity, and sort of then put yield over here."
Goldthwait adds, "The other thing that I think is interesting to think about is, when you do go negative, there's a big push pull between what the capital markets will provide you in money market funds and then what bank deposits can provide. And we know that there's banks out there that understand relationship as far as the whole picture, and ultimately can choose to set their deposit rate anywhere they want. Money market funds are a market rate of return, we are only going to be able to provide what the market can provide us. And so, in a way, that's comforting. Owners of money market funds know that it will always be a market rate, versus a deposit. But at the same time, it's hard for me to compete when a bank wants deposits. They can set their rates anywhere to get those deposits."
He comments, "From a U.S. standpoint, my personal view is that there's going to be some discussion around revising the regulations. But ultimately, I don't think there will be any changes. In fact, I think the variable NAV on the institutional side, as well as the liquidity buffers [and] transparency all worked out really well. I think the fact that the clients were able to see exactly what was going on. I think those that wanted to leave Institutional Prime funds … in a way, [NAV] was a penalty for leaving."
Finally, Goldthwait tells us, "In Europe there is a scheduled review in 2022; that was actually planned for five years after the announcement of the set of rules that went into effect in 2018. So, we know that's coming up. Two years will be here, honestly, before we know it. So, you can be sure that there's going to be a lot of discussion around that. I think the real question will be the analytics around the LVNAVs and whether that structure for accounting will survive. I think it's probably a little too soon to make judgment on that. But I do think that that will be the key focus. Is, LVNAV really serving its purpose or was it causing greater angst?"
