This month, MFI interviews Rebecca Milchem, BlackRock's new Head of Cash for EMEA. BlackRock is the 2nd largest manager of money funds worldwide and the largest manager of Euro and Sterling MMFs (according to Crane Data's MFI International as of 8/31/21). We review the latest regulatory discussions, European vs. U.S. issues, and a number of other topics below in our Q&A. (Note: The following is reprinted from the Sept. issue of Money Fund Intelligence, which was published on Sept. 8. Contact us at info@cranedata.com to request the full issue or to subscribe. Note too: Crane Data is hosting its Money Fund Symposium conference live and in person, Sept. 21-23. For those attending, welcome to Philadelphia! Watch for coverage and highlights in coming days.)
MFI: Give us a little bit of history. Milchem: I joined Barclays Global Investors' (BGI) cash business in March 2008 so I had a bit of a baptism of fire. Nothing brings a business together like going through volatile market conditions and you fast track your learning by partnering with clients through those times. Whilst the circumstances of 2020 were very different to the Global Financial Crisis of 2008, at times the market volatility felt like we were repeating history. BlackRock acquired BGI in 2009 and the Money Market Fund (MMF) ranges and client relationships were very complementary in terms of bringing the two business together. BGI naturally had a bigger Sterling book, BlackRock had a larger Dollar footprint and the combined Euro assets brought much greater scale to our business.
MFI: Talk about the your recent changes. Milchem: I am really excited to be given the opportunity to run the EMEA Cash business at BlackRock as Peter Loehnert moves on internally to become the Head of our ETF and Index Investing business in APAC. Jason Horn will continue to head up our APAC Cash business and James Morek will expand his remit by taking responsibility for our cash distribution efforts in EMEA, APAC and LatAm. On the PM side, Matt Clay will continue to head up our European portfolio management group.
MFI: Are more comment letters coming? Milchem: I don't think we're done yet! The European Banking Authority has a consultation out at the moment which is due in October. But obviously key milestones for us are hearing back from the Financial Security Board (FSB) and European Security Markets Authority (ESMA) consultations we have already responded on. From a European regulatory perspective, the 5-year review period of some of the structures that came into effect in the 2017 MMF reforms is up next year. So, we always knew that we were going to have to go over some of the old ground again but now with a more focused lens.
Our main objective is to preserve the utility of money market funds for our investors. We believe MMFs are a vital cash management tool for many investors, providing high credit quality portfolios and crucial diversification that many would struggle to replicate. This utility is especially important while banks have limited appetite for overnight deposits and other alternatives are limited.
It's an advantage having such a fantastic partnership internally with our Global Public Policy Group. We have worked closely with them throughout the previous rounds of MMF reform and Joanna Cound, who heads our EMEA Public Policy team, was previously the Chief Operating Officer for BlackRock's Cash business in Europe. Having that depth of knowledge and expertise in the asset class really helps inform our narratives and consultation responses.
MFI: Tell us more about European regs? Milchem: In terms of formulating actual regulations, there is still work to be done. The ESMA Consultation will advise the European Commission on the upcoming review in 2022. Any legislation will need to be proposed by the Commission and approved by the Council of the European Union and the European Parliament before coming into effect and there will be a timeline for implementation so regulatory changes in Europe are realistically at least a few years from taking effect.
What comes through in many of the consultation responses is the fact that if we don't address the fundamental structural issues with the short term markets, we're not going to enhance market stability. MMF are just one part of the ecosystem and without addressing the root cause, we believe these risks will still exist.
MFI: Is there a consensus forming? Milchem: I think everyone recognizes that the last round of reforms made MMFs more resilient. Whilst I don't want to predict what global regulators might do at this stage, there are some very sensible options being discussed that would address some of the challenges faced by funds last year. In our mind, the key issue is ensuring that MMFs have robust and useable liquidity levels, which is how MMFs meet redemptions. The proposal to decouple fees and gates would be a resiliency-enhancing reform for MMFs because it would reduce the risk of pre-emptive redemptions related to minimum liquidity thresholds and reduce the need to sharply increase the liquidity profile of MMFs during times of heightened redemption pressure.
MFI: What are your biggest challenges? Milchem: Let's face it, effectively managing liquidity can be difficult. With reforms by the banking regulators, it has made it even more complicated for investors. We continue to see growth in MMFs as a tool for investors because they often cannot replicate the scale and the benefits offered by these funds. I see more and more clients coming to us for outsourced credit expertise alongside the ability to manage large flows in a market that is more challenged than it has ever been before. We want to ensure that regulators fully consider the impact to Short Term Funding Markets (STFMs) and broader financial stability if certain MMFs were to be banned (either directly or indirectly through reforms that make them unviable or unattractive to investors). Investors would then be forced to look elsewhere and to potentially riskier, less regulated products or become direct investors in the STFMs themselves. We don't feel any of these options are a substitute for MMFs. We believe it is likely that not only would investors end up with sub-optimal cash/liquidity management tools but the overall STFMs would be less transparent and likely less resilient.
MFI: Talk about your customer base. Milchem: When we went through implementing the 2017 reforms in Europe, we wanted to have a range of products for investors to choose from across the available structures. We've done that and we have created new products so that we have GBP, EUR and USD options that fit in each of the categories in both the short-term and standard money market spectrum. The scale of our fund range means that investors can choose to diversify across different types of products to meet their own investment goals and priorities.
Over the years, as we've seen cash investing become more difficult, we've also seen greater diversification in terms of the types of clients using money market funds. When the ECB introduced negative interest rates in 2014, there were some commentators who suggested that EUR MMF would cease to exist as yields went negative. Whilst there were initial outflows, we believed the value proposition of a MMF would continue to hold in a negative yield environment and the AUM in EUR funds today is a testament to this. Many of the relationships we work with haven't changed their investment policies because they believe MMFs are the best place for them to be to meet their cash objectives.
MFI: Are ultra-shorts still popular? Milchem: The prevailing yield environment encourages clients to think about cash segmentation strategies. When we talk to clients about Ultra Short products, it's really providing education about how these products work, what sort of additional risks they may be taking and making sure it's the right strategy for them. At BlackRock, our Standard MMF range in Europe sits within Cash from a portfolio management and credit perspective. The funds will typically take a little bit longer duration but are still designed with capital preservation in mind.
Our Standard MMFs are designed for investments with a timeline of greater than 3 months. Because of the nature of the way we invest these funds, we are typically doing things that are similar to Short Term MMFs, but we're investing 4 or 5 months longer on average. There will also be a little more flexibility in some of the credit that we can take.
When you go through periods of low or negative yields, there are a lot of clients that will stick to their policy as it has been tested through time. But you do find some other clients that are willing to tear up the rule book a little bit and look at what else is out there. What you normally end up coming back to is the fact that fundamentally, from an investment policy perspective, liquidity and low volatility of capital tends to be paramount to all of these investors. Knowing that these funds are managed by the same asset teams within BlackRock really resonates as well.
Once you move outside the Short Term MMF space, there is a lot more diversity in terms of product offerings and we have definitely seen an increased appetite for these types of products. We always recommend that investors look under the hood and understand the mechanics of what is different in these funds versus the traditional MMFs they use for day-to-day needs.
MFI: What about the future of MMFs? Milchem: Ultimately, clients need cash. They need liquidity. I think one thing that is common across all our client bases these days is that clients' resources are scarce. So being able to outsource to a trusted partner in the liquidity management space is key for them as they go about their working lives. I don't see this trend changing and therefore MMF reform is paramount for me in terms of being there for investors.
Also, in terms of strategy, sustainability is a key focus for many investors in Europe. We've successfully launched some dedicated products in this space but we have also implemented processes on our side that are embedded across the entire cash platform. At the moment, different geographical jurisdictions have different demands. But overall we are seeing a fundamental shift and I am personally excited to play a part in this and help evolve the short term investment landscape with our clients.
