As we mentioned in yesterday's Crane Data News, U.K. Treasury website GTNews.com features a "Focus on Money Market Funds" this week with a number of contributed articles, including: "A New Resilience" by Gail Le Coz of the Institutional Money Market Funds Association, "Money Market Industry Refocuses on Safety and Liquidity" by Karen Dunn Kelley of Invesco AIM, "CNAV: Emerging From the Crisis" by Duncan Thomson of Scottish Widows Investment Partners (SWIP), "Movement in MMFs" by Andrew Widdows of RBS Asset Management, and, as we wrote about Monday, "Improved Communication: A Vital Component of MMF Reform" by Matt Clay of Clearwater Analytics.
First, Le Coz, IMMFA's new CEO, "looks at how the US and the UK have responded to the recent blows to the security and liquidity of money market funds." She says of September 2008, "Given the almost complete absence of liquidity in the money markets and the systemic importance of the industry as buyers of money market instruments, the US government took decisive action to prevent the failing of the US money market.... In Europe, no such support was forthcoming. And whilst the German and Luxembourg governments made statements of support for domestic MMF industries in mid-October, no mechanisms to facilitate the provision of assistance to such funds were announced. However, no European funds broke the buck, and with some exceptions, all funds remained open to receive investment and process redemptions."
She adds, "It is therefore unequivocally clear that all parties are committed to improving the resilience of MMFs. All indications suggest that in the future the product will be subject to additional restrictions -- whether on the instruments which may be purchased or on the risks which the portfolio may include. While there may not be a consensus on how this can be achieved, whatever mechanism is eventually utilised will likely result in a favourable outcome for the end investor. The revised product should be even more adept at providing capital security and liquidity in all markets and at all times.... [T]he benefits of the product, and the reason why investment should be considered, remain as true now as before the credit crunch had even begun to materialise. Indeed, in light of the market turmoil which has been experienced, the objectives of a MMF are arguably the priorities which many investors seek more than anything: capital security and liquidity."
Dunn Kelley writes on the ICI's Money Market Working Group Report in her piece, saying, "Investors have historically treated all money market funds (MMFs) as commodities, viewing everyone as using the same processes and investment philosophies since the industry started in the 1970s. But last year's market panic has shown that all money funds aren't created equal. Investors are refocusing on the reason these funds were created in the first place -- to provide a safe, liquid place to invest short-term cash. The industry is doing the same, and has introduced recommendations intended to boost safety, liquidity and yield, in that order."
Finally, SWIP's Thomson says in his article, "While some trust is returning to the money markets, we are not out of the woods yet. Fundamental changes will have to be made before the industry can fully regain its footing. Now is an opportune moment to look at what originally attracted investors to constant net asset value (CNAV) MMFs, what went wrong and how best to address these problems -- both from an industry and a regulatory standpoint -- so that the industry is better prepared for any future storms. Prior to the credit crunch, we witnessed a revolution in cash management in Europe, with an explosion in the use of CNAV MMFs. Investors from across the spectrum embraced them, and came to see them as an attractive alternative to traditional bank deposits."
He continues, "The benefits of CNAV MMFs are numerous. First, they offer a simple, efficient product that is actively managed within rigid and transparent guidelines. Second, their conservative investment objective of providing an enhanced yield over traditional bank deposits is highly desirable. Third, their structure makes them extremely liquid, thus allowing same-day withdrawal of money. Lastly, they are triple A-rated, meaning they are perceived as being extremely low risk, with security of capital, a priority in their investment strategies."
