Last Thursday, Deutsche Bank Group's DB Advisors unit hosted a conference call entitled, "Regulation and austerity: Bitter medicine for a better future?." During the Q&A following, Crane Data asked DB's Joe Benevento, Head of Portfolio Management, Liquidity Management, Americas, about the status of the company's variable NAV money fund filing. Listeners also asked about the municipal market and asset-backed commercial paper.
Crane asked DB, "What is the status of the Variable NAV Fund? When will it go live? Will adhere to the new 2a-7 rules? Benevento responded, "If you look at that Variable NAV fund that Deutsche had registered, it is an important segment of the market for customers who want to know all points in time the transparency of what their securities are worth and don't want the wrapper to get in the way of access to that cash. So we believe this is an important part of the future of the money market industry. If you think about it, that doesn't take away the strength or importance of any $1.00 NAV fund in the market." He added, "[T]here are plenty of changes coming and our thought was to hold off on issuing this new product to the market until the appropriate time.... It's important to get this information. We expect vNAV will compliment the stable NAV products and we want to be sure that our customers know the full landscape the money market fund industry will operate within."
Benevento continued, "We do plan to launch at the end of this year or in the 4th quarter. As of now, we think it's important to have consistency of guidelines, meaning that 'money market fund' means a defined universe of securities and a set of rules for duration. It's important to get customers used to the things they know and the buying community interesting in understanding the volatility of those assets within that acceptable universe. It's also very important to look at supplementing this product in the future and having VNAVs that are slightly longer than the old 2a-7."
He also said, "It's important to see that the regulatory framework, both Basel III and Dodd-Frank, all push funding levels out longer than 30 days. That is directly against what 2a-7 as amended requires for funds. So at some point in time, the market will be issuing longer funding, and I think it's important for market participants start thinking about issuing products that get customers comfortable ... [with] products slightly outside of money market fund range without seeing the mistakes that were made in the enhanced cash market.... I think it is very important that the industry get together and look at products that are just outside of a stable money fund that get customers comfortable on a defined investment universe."
Another question asked about the outlook for municipal money funds. Benevento responded, "This is clearly a market that is undergoing some change. There are fair amount of municipalities that have been responsible throughout this crisis.... There clearly are differences in the credit issued out there in the municipal market.... If you think about an overwhelming majority of the municipal money market, it depends on bank liquidity and bank letters of credit. If those banks liquidities need to be 100% funded dollar for dollar, and funded in very high quality securities to backstop these liquidity facilities, it will be a difficult or expensive venture to offer bank liquidity on these municipal securities. Clearly, we see the VRDO market shrinking, or in certain cases new products emerging from that market, whether it be 30 day puts, or moving to more issuer-generated maturities."
Finally, Benevento was asked, "Will ABCP become irrelevant due to the new Basel III regulations? He responded, "What is interesting about the ABCP market is that it's had its death warrant issued many times over. This market is resilient. I think we will see changes in that market. I think there is a need for funding by ABCP customers and putting it through the banking system will make that funding very expensive. So there is clearly some innovation that needs to go on. One hundred percent liquidity backed deals will be expensive and will need to prove the profitability side of that equation.... [T]his ultimately becomes a higher cost of funding for some of those companies using ABCP.... So we definitely see the size of that market shrinking. The issuers and the issues that remain outstanding are the cleanest of the clean going through the crisis and have [been] whittled down to very solid programs and in many cases programs that are fully backed by those banks.... [But] for the time being we do see a slow decline in issuance and we are definitely starting to see a fair amount of innovation being put to that market."
