Today, we quote from several more comment letters written in response to the European Securities and Markets Authority's (ESMA's) "Consultation on EU Money Market Fund Regulation - Legislative Review." The first one states, "J.P. Morgan Asset Management (JPMAM) respectfully submits its response to the Consultation Report of the European Securities and Markets Authority (ESMA) on EU Money Market Fund Regulation (MMFR). JPMAM is one of the world's largest providers of cash solutions, managing in excess of $710 billion in money market fund (MMF) assets. JPMAM's Luxembourg domiciled MMF assets are in excess of $203 billion. JPMAM utilises a variety of fund vehicle structures for its Luxembourg Short Term MMFs, including LVNAV (~$141 billion), CNAV (~$50 billion), and VNAV (~$12 billion), denominated in EUR, USD, GBP, SGD, and AUD."
JPMAM explains, "We agree with ESMA that there was a lack of liquidity in the underlying markets.... Banking sector regulatory reforms implemented after the GFC, while effective in strengthening bank balance sheets, also had significant impacts on MMFs in two ways. Firstly, banks' reductions in non-operating cash deposits drove investors to seek alternatives for short term liquidity. Secondly, banks' reallocation of balance sheet reduced their ability to make markets and facilitate liquidity in the secondary markets. In normal market conditions, this impact is not problematic, since MMFs typically hold high levels of liquidity given the 30% WLA minimum requirement and short average duration limits. [T]he need to sell to meet redemptions from investors is generally very limited in normal times due to the substantial liquidity positions held by funds. During the pandemic when the demand for liquidity rose, MMFs sought to sell non-WLA holdings in order to maintain the required 30% WLA."
They comment, "We do not agree with ESMA's findings regarding the role of Credit Rating Authorities (CRAs) as a vulnerability.... The investor redemptions during the crisis impacted both LVNAV funds and Euro Standard VNAV funds. Unlike LVNAV funds, Euro Standard VNAV funds are predominately not AAA rated, which means they can take incremental risks to offer a higher yield, which their investors seek. By contrast, AAA MMF investors seek to preserve capital and access to liquidity, with yield typically being a secondary consideration. We believe AAA MMF investors view the ratings as an additional element of assurance and guidelines to support their internal decision-making process. CRAs provide value to investors by being independent to the fund sponsor and serve as a secondary check on the fund health and portfolio management."
The letter continues, "JPMAM investors generally view the AAA ratings as a prerequisite, often required as part of their internal investment policy guidelines or investment policy statement. The AAA ratings criteria reinforce and often supplement the already conservative regulatory requirements and also require independent review of MMF portfolios and the portfolio management team by the CRAs, which investors find valuable. The challenge in this crisis was not creditworthiness, but rather market liquidity and we did not experience increased redemption activity due to Fitch revising its sector outlook rating for LVNAV MMFs to 'negative' from 'stable' on 24 March 2020 which was extended on 08 April 2020 to encompass all European non-government MMFs. In fact, some aspects of the AAA ratings criteria such as the 90 day limit on Weighted Average Life (WAL) for credit funds, likely helped to improve fund liquidity."
It says, "JPMAM supports a regulatory review to ensure that regulations are fit for purpose, and supports revisions designed to enhance the resilience of MMFs and short term markets. Few of the proposed policy options outlined would be effective in achieving these goals. MMFR was well designed to enhance transparency and increase resiliency with respect to idiosyncratic risks. However, the events of the COVID-19 crisis were market-wide liquidity events; it would be challenging for any regulation to provide complete protection against a system-wide event such as the COVID-19 crisis. Moreover, it should be noted that despite experiencing unusual stresses, and receiving only very limited benefit from various asset purchase programs (US and EMEA based), LVNAV MMFs neither broke their collars nor imposed liquidity fees or redemption gates."
JPMAM adds, "As a preliminary matter, we observe that from an investor's perspective, fees are a more tolerable intervention than gates. By contrast, gates deny clients access to their cash, which is highly problematic when a client has cash flow demands. Thus, it is worth considering an approach to fees as a remediation tool separate from, and to be used earlier than, gates. Importantly, we believe the existence of such a tool could be useful in educating clients away from viewing the 30% WLA as a bright line."
Finally, they write, "We believe, there is an opportunity to incorporate a framework similar to that used for swing pricing, to make fees more dynamic and reflective of the true cost of liquidity to those demanding it. Such an approach is likely to be more palatable to investors than a static percentage fee, imposed at the Board's discretion. And, while swing pricing as currently used by mutual funds is operationally infeasible and conceptually problematic for MMFs, MMFs have already built an operational framework for the implementation of fees."
The next comment tells us, "HSBC Asset Management is HSBC's core investment business dedicated to managing assets for institutions and individuals worldwide, with USD612.4 billion in total assets under management. As part of the HSBC group, we have local liquidity expertise across both core and emerging markets, with Liquidity assets accounting for USD 133.0 billion (or 21.7% of HSBC Asset Management’s total assets under management). We have more than 25 year's experience in management money market assets, and operate global and local funds across 10 currencies with investment professionals located around the world. This includes funds domiciled and regulated in Europe, the Americas and Asia. We operate LVNAV (in Europe), CNAV and VNAV funds, in both credit and public debt strategies."
They explain, "HSBC Management treats Liquidity management as a separate discipline and has allocated dedicated resources accordingly. There are teams of portfolio managers, credit analysts, risk managers and client service teams focused on our Liquidity business. This focus, and deep experience managing a wider range of fund types, across a number of different markets, means we are well positioned to understand the needs of our investors and the markets in which we operate."
The third letter says, "Invesco Ltd. ... is an independent and diversified investment management firm managing USD 1.50tn in assets on behalf of clients worldwide as at 31 May 20211. We have specialised investment teams managing investments across a comprehensive range of asset classes, investment styles and geographies and our 8,000+ employees globally allow us to focus on client needs locally, with an on-the-ground presence in 25 countries, including a significant presence in the European Union (EU). Invesco manages money market funds (MMFs) and liquidity portfolios on behalf of clients across the globe. In the EU, we manage three Ireland-domiciled MMFs, including EUR, GBP and USD portfolios, with total assets under management (AuM) of USD 9.82bn at 29 June 20212. Our client base for these funds spans Europe (including the UK) and Singapore."
They also tell ESMA, "It is important to note that, while it is the case that MMFs, like other market participants and investors, faced difficulties as a result of the Covid-19-related March/April 2020 liquidity event, it is also true that, despite underlying market liquidity issues, MMFs met investor needs throughout the period. No MMF had to suspend dealings, use redemption gates, apply liquidity fees or utilise any other liquidity management tools affecting investors' ability to redeem. Moreover, we note that no CNAV or LVNAV MMF breached their 20bps collar."
Invesco adds, "We welcome ESMA's consultation on the forthcoming European Commission-led review of the EU MMFR, and appreciate the opportunity to provide comment on the various reform options discussed in the consultation. Of course, while we acknowledge the need to focus on specific provisions in the EU MMFR as part of the review, we welcome ESMA's consideration of 'broader impacts on the stability and functioning of short-term funding markets.' This consideration should be included as part of policymakers' broader work on the market-wide issues experienced during the Covid-19-related March/April 2020 liquidity event. It is important to restate this as, while policymakers may focus attention on the specific provisions of the EU MMFR as part of the review, they should not lose sight of the fact that market-wide issues require market-wide solutions. The review of the EU MMFR should not, therefore, be viewed in silo or as an answer to all of the issues faced in the market last year."
