Yesterday, the Financial Times posted the article, "China regulators target 'systemic risk' from money-market funds," which discusses new regulations on the rapidly-growing Chinese money market fund industry. The article explains, "China will impose tighter regulation on "systemically important" money-market mutual funds, potentially forcing Ant Financial's popular fund to de-risk its portfolio and reduce yields for investors." We quote from this article below, and we also review some filings on fee "recapture," which was featured in a recent ignites.com article. (Note: Our upcoming European Money Fund Symposium, which will be held Sept. 25-26 in Paris, will feature a segment on "MMFs in Asia: China and Japan," and will discuss money funds outside the U.S. in-depth.)
The FT says, "MMFs have exploded in popularity in recent years, as Chinese investors seek high-yielding alternatives to bank deposits. Total assets reached Rmb5.48tn ($848bn) at the end of June, according to data from Wind Information. But analysts warn that even as Chinese investors shift en masse from bank deposits to MMFs, the funds are not subject to the same capital and liquidity regulations as banks."
It explains, "The China Securities Regulatory Commission issued rules late on Friday that required MMFs to limit exposure to any single borrower and to assets with lower credit ratings. The agency also said that it may, in partnership with the People's Bank of China, apply additional regulations to funds "designated as systemically important"."
The Financial Times writes, "Though the agency did not provide a definition of the term, Ant Financial's Yu'E Bao fund is all but certain to earn this designation. With Rmb1.4tn in assets, Yu'E Bao comprised more than a quarter of total Chinese MMF assets at the end of June. Ant Financial is the finance affiliate of e-commerce giant Alibaba Group."
They quote a recent Fitch Ratings report, "The high asset concentration in a few asset managers in China raises risks in the money market, as large or sudden asset reallocations by these large funds could affect market liquidity or pricing dynamics." The FT states, "Liquidity is a particular concern. MMFs hold 57 per cent of their assets in deposits or other cash-like instruments. The rest is held in bonds, which offer higher yields but can be difficult to sell in times of market stress. Most MMF assets are linked to commercial banks."
The piece also comments, "The rules force diversification on MMFs by limiting the amount of exposure these can have to a single institution. MMFs must not hold cash deposits, bonds or other assets from a single bank worth more than 10 per cent of that bank's net assets. Assets from a single institution must not exceed 2 per cent of an MMF's net assets. The rules also forbid MMFs from holding more than 10 per cent of assets in instruments issued by banks or companies with a credit rating below triple A."
It adds, "In recent months, Yu'E Bao has twice reduced the maximum amount that a single investor can hold. The current limit is Rmb100,000, down from Rmb1m in April. Regulators in developed countries have also sought to tighten regulation on money market funds in recent years.... Though they focus on the safety of MMFs, the latest rules are in line with regulators' recent focus on risks from banks' increasing reliance on money-market funding rather than customer deposits. That includes borrowing from MMFs as well as other banks. The CSRC's latest rules take effect in October."
In other news, mutual fund news website ignites.com wrote "Money Funds Steer Clear of Chance to Claw Back Lost Revenue" last month, which discussed the possibility of fund managers "recapturing" waived fees. It says, "After years of waiving portions of their fees to stay competitive, many sponsors of retail taxable money funds have been allowed by recovering interest rates to cut back on using such measures to attract investors. But continued margin and fee pressures are keeping the largest providers from enacting clawbacks that could help recoup the fees they gave up in years of waivers, analysts say."
They write, "Sponsors initially instituted the temporary fee cuts so funds could maintain a $1-per-share net asset value and keep yields attractive to investors. These waivers hit their peak in 2014, with shops forgoing $6.3 billion in revenue.... Seeing provisions for clawbacks spelled out in shareholder disclosures is "not uncommon," says Joan Ohlbaum Swirsky, counsel at Stradley Ronon."
The ignites piece tells us, "And arrangements vary by provider. For example, disclosures for certain Oppenheimer and T. Rowe Price funds state that the firm can recapture fees to make up for waivers dating back three fiscal years, while particular Invesco and RBC funds have the ability to recoup expenses from the past 12 months, their respective prospectuses show. But using those provisions can prove unpopular with shareholders."
It adds, "Larger complexes that choose to recoup fees may find that doing so is more easily said than done, since any attempts to recapture fees may have a noticeable impact on expense ratios, says Peter Crane, president and CEO at Crane Data.... In 2015, Schwab, whose large retail asset base allowed it to offer some of the largest fee waivers in the industry, joined Vanguard in swearing off money fund clawbacks for good, [ignites] reported."
They quote, "The industry is just super fee-sensitive," and most providers are merely grateful to see positive yields, Crane says. "`I think that anyone who is thinking about recapturing is likely so happy to see full fee levels that they're just going to call it a day there," he says." Note: Crane Data is only aware of one fund that is actually recapturing fees. (See the fee table for the JNL/WMC Government Money Market Fund.)
