Despite having more than two years to prepare, many treasury departments still have no idea how their investment policies will change come October, when market fund (MMF) reforms finally kick in.
AFP spoke with some of the largest asset managers in the world for a CTC Executive Perspective on what treasury should be doing to prepare for the reforms. Some treasury departments are not planning to look at changing their investment policies until mid-summer, whereas others are addressing the issue now and simply don't know what to do.
A key reason for the inertia among some treasurers is that it has been such a slow crawl to get to this point. "We're closing in on a decade-long process," said Tony Wong, head of global liquidity for Invesco. "You had the first wave of reform, then the second wave that was announced in 2014. When they announced the date of October 2016, it seemed so far away. I think clients are looking at it and saying, 'It's round four; we'll look at it, but there are other things going on in the world.'"
On the other hand, Tom Callahan, head of global cash management for BlackRock, explained that the majority of his corporate clients are focused on MMF reform—they just don't know what they're going to do about it. "We did a survey a couple weeks ago of all the holders in our biggest prime fund. We just asked what clients' intentions are; if they're going to stay, if they're going to move to a government fund, etc. We've been doing this periodically. What jumped out at us was how big the 'I'm not sure yet' camp was. That was striking—but not totally surprising," he said.
There are substantial risks to putting off changes to investment policy. October is still a ways away, but treasury departments that are planning to deal with this in mid-summer might want to reconsider.
John Donohue, CEO, investment management Americas and head of global liquidity for J.P. Morgan Asset Management, warned that it is a very long and difficult process to change internal investment guidelines. "You have to craft the new guidelines, you have to understand what the new rules and regulations are, and you need to make sure the guidelines are flexible enough that you'll be able to make decisions without full clarity on how things are going to work after reform. We may have a general idea of what's going to happen, but we don't know for certain," he said.
David Wines, president and CEO of HighMark Capital Management Inc., an investment advisory subsidiary of MUFG Union Bank, also stressed the importance of addressing your investment policies sooner rather than later. "You don't want to be in a position where you have to make a hasty decision and push ideas through finance committees and audit committees in order to have a change in investment policy," he said. "A long time is required for audit or finance committees to review proposals with regard to investment guidelines. And in some cases, the changes in guidelines need to be ratified by the board of directors."
But the greater danger is the possibility of a liquidity crunch if the majority of corporates move their investments all around the same time ahead of the deadline. "You'll have this tidal wave of money going into government agency funds," said Justo Gonzalez, head of global liquidity credit research for Invesco. "Maybe that doesn't happen, but you don't want to wait and see what the outcome is. You want to be proactive and make those changes ahead of time."
Wines doesn't see a liquidity crunch like this as an overwhelming concern, but does believe it is possible. Assume, for example, that over the course of a two to three month period, half of the investors in a $10 billion institutional fund decide to pull $5 billion out and put it into a government fund. "If this were to happen over a $1.2 trillion dollar money market, then you can see what happens," he said. "If an institutional fund is forced to sell those assets because they have to liquidate—they don't have the gatekeeping ability and the fees to place upon an investor to keep them from pulling funds yet—you can see how an exodus that's dramatic over a short timeframe could cause funds to potentially break the buck."
Therefore, it's best that treasury departments get to work now. If you decide that you need to make big changes to your policy, it may be too late to do so if you wait until mid-summer or later.
Read the new CTC Executive Perspective on addressing your investment policy, which will offer further insights into what treasury departments should consider as money market fund reform draws near.