Speaking at a media briefing on Wednesday, State Street Global Advisor’s head of EMEA cash business Gunjan Chauhan said the reforms revised liquidity and credit quality standards and this would drive further investor use.
She said the MMF reform, which comes into effect for new funds on 21 July 2018 and on 21 January 2019 for existing funds, aimed to bring greater clarity to the money market fund industry, reinforce market stability, and help forestall any future asset runs.
In addition Chauhan said it would strengthen fund requirements for diversification, transparency and liquidity, and ensure all fund sponsors conduct risk analysis as well as diligently analyse the credit quality of their investments.
Investor reaction
Research conducted by State Street on the impact of the new reforms asked investors if they would increase their use of MMFs as a result of the new Basel III requirements on banks to continue to drive non-operating deposits off their balance sheets. Almost three-quarters agreed with this statement and of those 74%, 61% said they slightly agreed, and 13% said they strongly agreed.
The survey also found that 27% of respondents believed the incoming EU and Basel III regulations would make MMFs more attractive, 26% said less attractive, and 38% said the regulation would have no impact.
“Money market funds have long been a core investment product for investors needing a short term liquidity solution,” Chauhan said.
“With reform aiming to enhance stability, and continuing to keep the emphasis on liquidity and principle preservation, we will be ensuring we minimise the impact of reform for our investors, through close engagement and support.”
Short term rates to fall
The research found that 43% of institutional investors believed that term bank deposit rates would fall further this year, making alternative options for holding cash, such as MMFs that had the potential to offer greater yields, increasingly attractive.
The survey noted that 60% of respondents believed that the risk of gating (on redemption’s) was either extremely or moderately important when considering an MMF, 28% said slightly important, 1% unimportant, and 11% did not know.
On the risk of liquidity fees, 57% of respondents said it was either extremely or moderately important, 31% said slightly important, 6% said unimportant, and 7% did not know.
Government debt preferred
Under the new regulations investors will have four short term money market structures and 28% of the survey respondents said the most popular structure over the next three years would be a Government MMF with a variable net asset value (NAV) with no liquidity based fee or provision for gating.
This was followed by prime variable NAV MMF with no liquidity based fee or provision for gating at 22%, prime low volatility NAV MMF with a liquidity based fee and provision for gating at 21%, a Government MMF with a constant NAV, a liquidity based fee, and provision for gating at 19%, and 15% said they did not know.
Another 43% of respondents said over the next three years there would only be a slight increase in focus on cash segmentation, 42% said the focus would stay the same, 4% said a decline in cash segmentation focus, and 11% said they did not know.
