Last week, Crane Data hosted its, "Money Fund Symposium Online," which featured a series of presentations and discussions on money market mutual fund topics. The final segment, entitled, "The Future of Money Funds & Cash," included our Peter Crane moderating a panel with Tom Callahan of BlackRock and Debbie Cunningham of Federated Hermes. The three discussed the money fund business overall, prime exits, ESG, portals, technology and potential regulatory changes. We quote from this session below. (Thanks once more to our excellent speakers and sponsors. If you missed it, the recording is available here or via Crane Data's Webinar page. Finally, register for our next two events: European Money Fund Symposium Online, Nov. 19 from 10am-12pmET; and Money Fund Wisdom Demo & Training, Dec. 16, 1-2pmET.)
On future reforms and the pending ICI report, Callahan comments, "Broadly, we think that there needs to be a reform of the commercial paper market and secondary trading, because secondary market liquidity really doesn't exist when you need it in the CP market. Whatever happens to prime funds ... if the CP market isn't fixed in the next crisis, the Fed is going to be right back in bailing the CP market out. We think that's the cornerstone of it. We think there needs to be changing around how banks are able to intermediate and how CP sits on bank balance sheets to make the most logical intermediary more available in these markets when they're needed."
He continues, "We feel like the 2016 reforms were effective in many, many ways. [But] I mean, can you imagine in March if the prime market was $1 trillion dollars bigger? It would have been a much bigger problem to get your arms around. So, we think directionally a lot of things worked. But clearly this issue of 30% weekly liquid assets is one that I think we need to take a good hard look at, because what you saw was something that was meant to be a protection and a buffer to funds actually ended up hurting the funds. It was an accelerant to investors leaving. So those were the points that we made. I think a lot of those will be in the ICI paper."
Cunningham says, "I agree 100% on the assessment on the CP market. Secondary market makers in that aspect of the business, not just for commercial paper, but also for CDs [need to be examined]. Things went wrong in March that were really unprecedented.... I think you've got to basically look at the high quality, short term credit sector as a whole entity and figure out how from an exchange perspective, from a regulatory standpoint, changes can be made."
She explains, "A couple of things on the 30% weekly liquid assets. I do think the benefit to investors leaving early is that the products were very, very well situated to deal with that, and literally were just fighting a regulation as opposed to fighting for liquidity, pricing, credit, any of those types of a crucial aspects. Having said that ... I think ... there are plenty of other products, local government investment pools, other types of private funds, collective funds, that have a similar regulations from a 30% weekly liquid assets requirement, but don't have the 'cliff effect,' the knock-on effect, that is associated with the gates and fees aspect of 2a-7 regulations."
Cunningham adds, "Similarly, also on the offshore side, from a UCITs perspective, there is a gates and fees associated with the weekly liquid assets. But there's a second part of the test that's administered. It's a two-step test, and none of the offshore funds crossed over that or even really got close to it. So, I think there are lots of ways that the market and the funds can be addressed and explored. And certainly, those of us that have worked with the ICI as well as provided input to the SEC, the Fed, Treasury, whoever will listen at this point, the FCA, the Bank of England, you name it, hopefully this is something that we can make those points valid and understood."
Crane then asked, "Is the money fund business still viable?" Callahan responds, "The short answer is, 'Absolutely.' I'm pretty sure 2a-7 funds are up almost $1 trillion dollars year-to-date. Tell me another asset class that has grown a trillion dollars in a year. And you know the premise ... I think it comes from a lot of the negative tones that are in the press around money funds. I actually am very proud of our industry. I think we performed incredibly well under very, very difficult circumstances in March. People talk a lot about the unprecedented outflows that we saw in prime funds. Yes, they were unprecedented, but there were no gates. There were no fees. Certain managers took certain steps to protect their shareholders and protect their clients. And they did so. But there was no money lost. No one was trapped."
He tells us, "Are there changes that need to be made? I mean, this was the inaugural voyage of 2a-7 post-2016 reforms, and we learned a lot.... Did they get it perfect? No. Did they get it mostly right? I think so. So, there are changes that need to be made. But what you don't hear enough about is the service that we provided to our clients. There was, and you know this, a trillion and a quarter that rushed into government funds at the peak. One of the reasons why I love this industry, and most of us that are in it love it, is because there's an intimacy to cash management that you don't get in other parts of investment management. Most other places a client buys a product and you check in with them four times a year and see how they're doing. Cash, we talk to our clients every single day, sometimes multiple times a day, because cash is moving in and out. And when our clients needed us, because in March and April liquidity was life, the cash management industry was there."
Callahan adds, "I'm actually remarkably bullish. We’re going to talk a little bit later on about technology and ESG, some of the accelerants and the propellants, I think, for growth. Debbie, I hope you're right on [length of] zero rates. I hope it's one to three, not three to five [years] or longer…. But when we come out of this, I think that the cash management industry is poised for growth. I'll just stop with the obvious, which is the central bank policy is incredibly accommodative.... We know that the one safe bet about Covid is this is all going to take longer than any of us thought ... which means that corporations are going to continue to hold very high levels of cash. It means they're going to need money funds; they're going to need the cash management industry. So, I have a much more bullish, optimistic view on the industry than maybe some others."
On fee waivers with higher assets, Cunningham tells us, "It's kind of a double-edged sword. There's a lot of factors that go into the determination of waivers. First of all, let me say that waivers are not losses. Sometimes I think when you hear the press talk about waivers, they automatically think those are losses. They are a negative against profit, but that just means less in earnings, not necessarily losses along the line of a true negative. I think that's a misnomer in the press.... I do think that we're going to see some more consolidation. Certainly, when you look at the 2008-2016 timeframe where we were in an extended time period of low interest rates, you saw consolidation. I think you're probably going to see more of the same. We've actually ... started to see it already with some prime products disappearing."
Callahan also comments, "We are sticking with prime, and that comes from a place of having obviously been through the GFC and [now] the Covid crisis. We feel like we know how to manage these products. We also understand the clients that purchase them. Some of the players that pulled out of this market were more sort of retail focused and they were retail sweep vehicles. At BlackRock, we are largely an institutional shop when it comes to money funds. The clients that buy these products are sophisticated institutional clients that understand the risks and understand the benefits. They're very, very important products to our clients, and the longer we stay at zero, that extra 8, 10 basis points really matters to clients. At BlackRock, more than anything, we service our clients and we listen to our clients. The products are important to our clients, so they're important to us."
He states, "Now, that said, we are very eyes wide open. We've been very involved in a lot of the industry dialogues, as has Debbie, and with regulators. I think, there is no question that change is coming to this sector, and I think it's very difficult for anyone to predict where all of this lands. I think there's some election contingency on the magnitude and the speed of those changes. But, you know, to me, it's nearly a locked, dead certainty at this point that there is a prime fund regulation 2.0."
Callahan adds, "There's probably a spectrum of really draconian changes that effectively ban the products to things that I think are more manageable and workable. And I think that's our job in the industry is to try to steer it to a better place. But we're preparing for whatever comes; we're preparing for contingencies. Institutional prime is, in terms of our overall book, a very small percentage of our total cash assets if you strip out some of those internal funds only that you talked about. So it's not that our franchise rides on the future prime, again it's a very small percentage of our assets, but it's important to our clients and our clients are important to us. So, we are remaining committed, but ready for whatever comes."
Finally, Callahan says about ESG MMFs, "I think one of the exciting things that's happened is that it's branched out just beyond sustainability. There are a number of players in the market that have launched social justice-focused funds.... And so, I think that's part of this kind of meta trend that we're seeing with so many of our clients that are looking to express views on sustainability, views on social justice through their largest holding. And right now, as we've talked about on this call, their largest holding is cash. So, I think it's really exciting. I think that it's going to breed a lot of new product, a lot of innovation. It is really, really resonating with our clients, and I think it's only just starting."
