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Eleanor Hill, Editor, TMI (EH): Could westart with a brief recap of the regulatorychange happening in the MMF space. Whatare the major developments here?

Kerrie Mitchener-Nissen (KMN):Designed to further strengthen the MMFindustry, provide transparency ofinformation to investors, improveregulatory reporting, and ensure consistentpractices around areas such as stress testingand credit analysis, the new EuropeanMMF regulations must be fully

implemented by 21 January 2019. As wehead towards that deadline, asset managersare updating their product offerings in linewith the new rules – and corporatetreasurers must reconsider their short-termcash investments.

By way of a brief summary, the newregulations provide for two types of MMFand three structural options. Under the newrules, MMFs must be classified as either a‘Short-term MMF’ or a ‘Standard MMF’.The former are funds that maintain theexisting conservative investment

A s the implementation date for the new European Money Market Fund(MMF) rules approaches, it is time to cut through the noise around the newregulation, says Kerrie Mitchener-Nissen, Head of Product Development,

International, Global Liquidity, J.P. Morgan Asset Management. In this interview,she dispels some of the common misconceptions about the new rules and explainswhat treasurers really need to consider when it comes to their short-terminvestment options.

By Eleanor Hill, Editor

Short-term InvestmentsMaking Sense of the Shake-up

Under the newrules, MMFs

must beclassified as

either a ‘Short-term MMF’ or a

‘StandardMMF’.

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restrictions currently provided under theESMA Short-Term Money Market Funddefinition, including a maximum WeightedAverage Maturity (WAM) of 60 days andmaximum Weighted Average Liquidity(WAL) of 120 days. Meanwhile, so-called‘Standard MMFs’ reflect the existing ESMAMoney Market Fund definition, including amaximum WAM of six months andmaximum WAL of 12 months.

As for structuring, Short-term MMFs maybe structured as Public Debt Constant NetAsset Value (CNAV) MMFs, Low VolatilityNAV (LVNAV) MMFs or as Variable NAV(VNAV) MMFs, whereas Standards MMFsare all VNAV (see Figure 1).

EH: What do treasurers need to be aware ofaround these changes? What will theimpact be on their short-term investmentoptions?

KMN: While the concept of MMFs is notchanging per se, treasurers may find some ofthe new structures and terminology a littlealien to begin with. When you look underthe hood, however, things become clearer.The Short-term LVNAV MMF, for instance,is broadly similar to the Short-term CNAVMMF that treasurers have long relied on asa home for their short-term cash. Althoughit is worth remembering that, under the newrules, the CNAV label will be reserved forpublic debt MMFs only.

The Short-term VNAV MMF may be lessfamiliar to some treasurers. While theconcept of a floating NAV may seemdaunting, these funds have been around inEurope for a number of years and are usedby many corporates. They are able,however, to invest slightly differently tocurrent CNAV funds, with a lowerpercentage of daily and weekly liquid assets(see Figure 1).

The standard money market fund,meanwhile, sits further up the yield curvethan Short-term MMFs. In theory, thismeans that treasurers could stand toachieve a slightly higher return, butStandard MMFs also take more risk – so thereturn could also be lower.

EH: Could you give some examples of thelevel of risk inherent in a Standard MMF?And, given the additional risk, are theseproducts really suited to the investmentneeds of a corporate treasurer?

KMN: A Standard MMF can invest inlonger-dated instruments – up to a two-year maximum maturity, compared with 13months for Short-term MMFs. StandardMMFs also tend to have higher liquidityrisk. Moreover, funds in this category couldpotentially invest in non-base currenciesand need to hedge back that exposure.Equally, they could invest in other funds tosynthetically create liquidity, or make use ofleverage to enhance their returns.

Together, these factors mean that, in myview, a Standard MMF is not a suitableproduct for working capital. For thatsegment of cash, treasurers need a low-riskproduct that offers instant access to theircash – like a Short-term MMF. That’s not tosay that Standard MMFs do not have a roleto play in the short-term investmentlandscape, but that they are perhaps bettersuited to strategic cash.

In other words, investors need to fullyunderstand the risk they may be takingwith the corporation’s short-term cash if

Fig 1 Comparison of Short-term and Standard MMFs

Permittedinvestments

Max WAM

Max WAL

Maxmaturity

Daily liquidassets

Weeklyliquid assets

Public debtCNAV

Governmentexposure

60 days

120 days

397 days

10%

30%

Source: J.P. Morgan Asset Management, as at August 2018.

SHORT-TERM MMF

STANDARD MMF

LVNAV

Governmentor creditexposure

60 days

120 days

397 days

10%

30%

VNAV

Governmentor creditexposure

60 days

120 days

397 days

7.5%

15%

VNAV

Governmentor creditexposure

6 months

12 months

2 years, with397 daysreset

7.5%

15%

Kerrie Mitchener-Nissen Head of Product Development,International, Global Liquidity,J.P. Morgan Asset Management

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EH: On that last point, what should thosetreasurers seeking a home for theirworking capital look out for in an MMF?

KMN: The most conservative approach toachieving liquidity in a fund is by investingin genuinely liquid instruments such asgovernment paper, short-dated depositsand overnight reverse repurchaseagreements with a diversified set ofcounterparties, as opposed to derivingliquidity through the use of leverage.

In addition to checking theseattributes treasurers should alsoascertain whether or not liquidity in thefund is being achieved through cross-investment into other funds. This canadd a level of risk, particularly duringperiods of economic stress.

Ultimately, when it comes to investingworking capital, ‘plain vanilla’ is still theflavour of the day. And short-term MMFsremain a reliable home for suchinvestments, arguably even more so inlight of the new regulations. �

they simply invest according to basicregulatory classifications. Standard MMFsare not really MMFs as treasurerscurrently know them, and it would be amistake to invest in one based on theassumption that all MMFs are low-risk.

EH: Speaking of understanding risk, whatdo treasurers need to know about labelslike ‘enhanced cash’ and ‘cash plus’ thatare attached to some MMFs today?

KMN: That’s a great question becausethere is currently no consistent definitionof these kinds of terms. They can meandifferent things to different people. Assuch, treasurers would do well to be evenmore cautious than usual whenever suchterms are used – there is a definite need todig below the surface to understand whatis causing the fund to be ‘enhanced’ andwhat that means from a risk and rewardperspective.

Fortunately, I think we may see lessusage of such terms in the future as thenew MMF rules will make it more difficultfor such labels to be applied – which ispositive for investors and the industry.

EH: What will best practice around short-term investment look like in the new MMFlandscape? What steps can treasurerstake to ensure they find the right home fortheir short-term cash?

KMN: The first step on the road to bestpractice is to consider the full cash pot andhow to segment that in an optimal way,taking into account the cash flow forecast.This means understanding what proportionof the organisation’s cash must beimmediately accessible and cannot be putat any risk versus the proportion that can belocated a little further up the yield – andtherefore risk – curve.

Based on the cash segmentation process,it is then important to revisit the investmentpolicy. The goal here should be to build insufficient flexibility to enable theorganisation to respond to marketdynamics whilst meeting its investmentrequirements and objectives.

The final step is then to perform rigorousdue diligence around potential products.For MMFs, this should ideally involvethoroughly reading the prospectus andquestioning the asset manager on topics

including whether they take leverage,whether they take exposure to othercurrencies and how they price the fund.

EH: Once treasurers have segmented theircash and are looking for a home for thatportion that can go further up the yieldcurve, what alternatives do they have toStandard MMFs?

KMN: For those corporates looking to takea step out, it may be interesting to considershort-duration fixed income funds, whichtypically carry a portfolio duration of one tothree years. Another potential option isseparately managed accounts - one of thebenefits being the flexibility to have abespoke investment policy.

Of course, there is no one-size-fits-allsolution as each corporation will have itsown investment priorities. But there iscertainly sufficient choice for treasurers tobe able to find an investment vehicle thatcaters to their security, liquidity and yieldrequirements – both in the strategic cashspace and also in operating cash arena.

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