At last week's Money Fund Symposium conference in Philadelphia, our opening session was entitled, "Keynote: Adapting to Regulations, Tech & ESG," and featured our Peter Crane moderating a discussion with BlackRock's Tom Callahan and Federated Hermes' Debbie Cunningham. We excerpt from their comments below. (Note: Thanks once again to those who attended and supported our recent Money Fund Symposium! Watch for more coverage in coming days and in the October issue of our Money Fund Intelligence newsletter. The recording and materials are available here for Attendees and Crane Data subscribers.)
Callahan comments, "I think this is the first time as an industry that we've come together post-Covid, which is incredible. And Pete, I know you had an awful lot of sleepless nights and chewed a lot of fingernails over the last couple months, just hoping that we'd all get to be here. So, I personally am thrilled, and can't wait over the next couple of days to reconnect with so many industry colleagues and old friends. And Debbie, it is always such an honor and a privilege to be on the podium with you. You are the unofficial spokesman for our industry and such an incredible leader, and it's just a thrill to be here with you. The home of BlackRock Cash is Philadelphia. We manage just over $1 trillion right up the street at the Cira Center."
He continues, "Given that this is the first time that we are all together, as an industry, I feel like, again, we're kind of in the crosshairs and we're being loudly criticized by certain pundits, all of them outside of our industry. To hear certain pundits tell the story, March 2020 was not a global health crisis that spread to the global capital markets. To hear them tell the story, it was a money fund crisis that became a global pandemic. You know, I don't believe that that is the correct narrative, and I don't believe you do. I certainly know that that our regulators don't believe that to be the narrative."
Callahan explain, "Here is what I believe the correct narrative for the cash management industry through the current crisis is.... Our clients collectively, as everyone knows, are the largest and most sophisticated clients in the world, and they were thrust quite unexpectedly in March of 2020 into the most challenging operating environment that any of them had ever seen. In response, they did the logical thing. They raised liquidity. They raised a biblical amount of liquidity. And much of that, over $1.25 trillion, was invested in money funds in three weeks at the end of March 2020 and at the beginning of April."
He states, "So at their time of maximum vulnerability, they turned to the people in this room to manage their most precious asset, which was which was their liquidity. All this at a time when the operational infrastructure of the money markets was severely compromised. There were fails happening all over the market. Liquidity in every asset class, including, by the way, U.S. Treasuries, was somewhere close to zero. And a lot of us, and a lot of people in this room, because we're human beings at the same time, were disoriented and concerned about our families and trying to figure out how to do simple things like, 'How do you roll a $10 billion open repo from a laptop in your daughter's bedroom when the Wi-Fi just quit?'"
Callahan adds, "So that's what we were all contending with.... We get to the other side of that, and there is not one client that I'm aware of in the global industry that lost access to liquidity for even a minute. Now, that is not to say that as an industry, we don't have work to do. Certain of our products certainly had vulnerabilities exposed. And a lot of us have spent a huge amount of time, especially Debbie, this year, writing letters, writing white papers, working constructively with our regulators."
He says, "And I do believe that this time, once and for all, we're going to get it right. We're not only going to fix Prime funds, we're also going to fix the market infrastructure that surrounds [them]. But you know what I think the correct narrative for the current crisis for cash management industry is that we demonstrated once again that we were a source of stability to the global financial markets, not a source of instability. And for that, I think that all of you and all of us should feel very proud."
On ESG, Cunningham tells the Symposium, "We acquired a firm named Hermes Asset Management out of U.K. in July of 2018.... That [ESG] essentially was their area of expertise.... From the liquidity group's perspective, we were the first to be fully integrated.... We had portfolio teams within our liquidity business that includes portfolio managers, investment analysts and traders. What made the most sense to us was integrating the information that came and that continues to come from the responsible investing office through Hermes into our credit analysis process. So, from a banking perspective, as the agencies were doing banking, the governance issues, that would be the 'G' aspect, take precedence when reviewing that.... So there's been a full integration of proprietary product research that comes from our engagement and our ESG analysts that are used now by the investment team in the liquidity products in addition to all public information that we also subscribe to."
She explains, "So, I feel like we've come a long way. And, you know, clients dictate, though, how it's being managed. The information that we have on a desirability basis of this type of analysis from our Texas clients is vastly different than our London clients. So, we want to take into consideration the differences and the nuances of all our client base and make sure that we're not providing we're not doing something that is problematic to any one of those groups."
Callahan adds, "I would just say I think everyone knows right now ESG has transformed the global asset management industry. It was a little late coming to the cash industry. It's only about two years ago that as an industry, we kind of got serious about this. For me, this is the most exciting, most dynamic, and if you're looking for reasons to be optimistic about the future of the global cash management industry, I think you really do need to look at ESG.... What we're hearing from our clients is, they expect more from a money fund. I mean, money funds have been around for close to 50 years now. Stability, liquidity, yield, in a different environment, those [are the] standard things. But our clients ... have more cash than they've ever had, and there's been a very profound shift in thinking."
During a discussion of pending money fund reforms, Cunningham tells the audience of about 250, "When we look at the timing of the reforms that followed the 2008 financial crisis, the first step, the easy set, was concluded in 2010 and implemented in 2011. So it was a 2-3 year time period. The second set, the more difficult set, was concluded in 2014 and implemented in 2016. There you had a 6-8 year timeframe. Now, I certainly don't think that what we're going to see as a result of the global pandemic, the money market crisis of March 2020, is something that's going to take that same 2-8 year time period. Having said that, it certainly does not seem to be the top priority of the SEC commissioners at this point ... so I would guess we've got at least 2-3 years of debate around this."
She continues, "Now, when you look at the global side of things, from an FSB and IOSCO perspective, they've put forth timeframes that are much sooner than what the SEC, who hasn't really even put forth any timeframe. I mean, what we've been responding to in the US has been the PWG Report, not necessarily anything that came from the SEC themselves. And as such, you know, again, a reminder that in 2009, some of the European regulators were to some degree ready to go with regulation but held off and ended up following the U.S.... So I don't doubt that that could be delayed again from a FSB/IOSCO standpoint, just simply because it doesn't seem to be the top priority of what's happening here in the U.S."
Finally, Callahan weighs in, "Well, for us, if you look at all of those comment letters ... I think all the good ideas are there. A lot of the bad ideas are there, too. But I think we sort of have the universe of potential modifications, changes, adaptations, whatever you want to call it, the ones that will get us to where we want to go. But our most important message is: that's not enough.... I think what the regulators are trying to achieve is a money market structure where every time there's a crisis, they're not having to come in and bail this market out.... There's a lot of good ideas around creating all-to-all platforms, creating better transparency, more standardization is critical."
He adds, "We don't believe that as an industry that we can just get there because these are big structural, difficult changes. I think there's going to need to be a regulatory mandate. So our plea is that, yes, I mean, we are all working constructively and there's a lot of great ideas and a lot of them can work. [But] please focus on that fundamental problem, or ultimately you're not really going to achieve anything. Then our second point is ... there are some [suggestions] that essentially would end up making prime funds obsolete, things like capital or minimum balance at risk or swing pricing.... If there are voices that feel like these products should be banned, then let's have that honest debate. But let's not sort of back-door try to ban prime funds by putting some Rube Goldberg set of requirements on top of the things that are just going to get you to the same place."
