Reforming Money Market Funds in a challenging environment

?The EU is thinking of reforming Money Market Funds (MMF) again, against a backdrop of still very low and even negative interest rates, the rise of indices management, the advent of the ESG concept and the expansion of private debt funds. In this complicated context, how should treasurers navigate to stay on course and arrive at their destination? That's what we'll try to address in this article.

Problem of excess liquidity management

Managing excess liquidity remains a fundamental issue for any corporate, fund, family office or other public institution treasurer. The days are long gone when rates were much higher, and it was possible not to be picky and not to look for the last carat (or Basis Point / BP). In a context where, on the contrary, the goal is not to make money by receiving interest but to lose as little as possible. This is a radical change that is forgotten and that changes everything in the mind of the person who must invest his funds or give them the best (or more precisely the least penalizing) return. On the other hand, not all treasurers have the same needs, and the offer must be adapted to these varied needs. The essential and primary difference is the time dimension. For how long can I invest the funds? The splitting of the asset layers allows to specialize the tranches and to provide them, according to their objective and nature, with the investment that best suits them, while respecting the internal policy. The second classic constraint is that of accounting with IAS7 (i.e., "cash & cash equivalent"). If one wants such a qualification, it reduces the field of possibilities. The third dimension is (immediate) liquidity. Cash must be available quickly. The funds must be "mobilizable" (i.e., transformed into cash) as quickly as possible or, failing that, within a reasonable period, depending on their nature.

New ESG dimension to consider

Today, while the return is negative and distressing, we are told about "ESG" which the fund should respect. This extra-financial criterion, along with the "green" or "socially responsible", is coming to color the decision-making process. The reforms relating to ESG reporting (i.e., Sustainable Finance Disclosure Regulation) also aim to avoid or limit the often decried "greenwashing" effect. As we can see, it is becoming essential to verify that what one believes to be "green" or "socially responsible" is indeed so, at the risk of being singled out by detractors who are only too happy to align themselves with an investor or manager. Non-financial criteria are therefore becoming increasingly important in the decision-making process. The choice of a sponsor or manager of a money market fund is becoming crucial and requires a good preliminary analysis. The announcement of a reform (the second one) of the MMF's has made people shudder. It is true that the crisis created a moment of temporary panic, but it did not make the markets tense and worried. This last crisis was not financial, let's remember. Withdrawals are explained by an imminent or supposed need for cash, and not by a lack of confidence in funds. Therefore, the blame cannot be put on the funds. The central bank's obsession with liquidity has been the strong and necessary support to keep the whole thing in working order. The European Securities and Markets Authority (i.e., ESMA) has launched a consultation to this effect: to see how to improve the existing system, while not killing it or weakening it. A reform frightens all the actors as it could affect an entire industry, already weakened by a reform and a context of negative rates. French players are less concerned because they have always favored floating value funds, to the detriment of LVNAV or CNAV. We hope that the measures aimed at ensuring liquidity will not be too restrictive, nor will they penalize the return already undermined. Liquidity cushions are certainly needed, but at an acceptable level and in a variety of forms. Funds have been resilient and solid during the crisis, despite some massive withdrawals. But let's face it, there will be consolidation in the market, especially in France, where some small boutiques risk being absorbed by larger ones, reinforcing the idea of oligopolies. There has been an increase in the use of ETFs (i.e., Exchange Trade Funds) and ETPs (i.e., Exchange Traded Products).?These index funds are growing rapidly. In parallel, private debt management funds.?

So, what should treasurers request?

It seems obvious that we need to guarantee the preservation of MMF's in a format or formats acceptable to managers and sponsors, but also by investors, as any penalizing reform affects the already low or negative returns. We can only remain attentive and count on treasurers' associations to defend the products, values, and expectations of corporate treasurers. It is necessary to have Audit Committees and CFOs validate the strategies to be implemented, and possibly to review them to align them with the current regulatory and economic context. It remains demotivating to invest in products where, at the end of the day, the goal is ultimately to limit the damage and reduce interest losses as much as possible. A Cornelian dilemma that many treasurers accept, fatalistic, unmotivated and without solution, that they are. We should follow this reform to make sure that a reform, if it comes, does not kill all MMF's, for lack of possible return for both parties. Unfortunately, I fear that the situation will not improve any time soon, as the economic slump is so strong.

?Fran?ois Masquelier, CEO of Simply Treasury – Luxembourg October 2021

Disclaimer: This article was prepared by Fran?ois Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).