We've been quoting from last week's European Money Fund Symposium for much of this week, and today we again excerpt from the "Senior Portfolio Manager Perspectives" session. Tuesday, we quoted Deborah Cunningham of Federated Hermes, Joe McConnell of J.P. Morgan Asset Mgmt. and Paul Mueller of Invesco on supply and portfolio strategies in USD, EUR and GBP money funds. But below, we take their comments on potential and pending regulatory changes in both Europe and the U.S. (Note. In case you missed it, our European MFS recording is available here and the Powerpoints and materials are available here.)
Cunningham comments, "From an FSB standpoint, I think we're looking at ... that as basically nothing new. They're continuing to go down rabbit holes that we think will produce no good endings, such as swing pricing and capital buffers. But we also know that what ultimately comes about from an FSB standpoint only represents guidelines for how other jurisdictions then actually regulate the products. So, when we look to our products that are domiciled either in the U.K. or in Ireland, just speaking with the regulators in those countries gets us to a more optimistic and positive approach to what we think will be regulatory reforms that kind of begin to have a clearer ending sometime in 2022 or later."
She tells our webinar, "It doesn't seem to us, for at least the countries that we're operating in, that anyone is putting it at the top of their priority list. It's below ESG measures, below other types of disclosure updates that they're doing. And yet, as such, we can't ignore it and assume it will eventually go away.... We're being very proactive in engaging with the various members of the ECB, the next president, ... with the UK and Her Majesty's Treasury, etc., in order to get in front of anything that could be problematic to all types of funds continuing to exist going forward."
McConnell says, "It's hard to predict how it's all going to play out.... It'd probably be foolish if I tried. But I'm relatively optimistic. I think certainly that one thing that's come out of the discourse over the last year or year-and-a-half is, I think, regulators and central banks probably got a lot closer to the money fund community. I think there's been a lot of engagement, whether it's kind of bilaterally or through organizations, the great work IMMFA is doing.... So I think there is a very good level of dialogue there, and I think that they've got a much better appreciation of what money funds actually do and how we manage money.... [In the FSB report], I think there is an acknowledgment that there's demand for the products that we have. They serve a purpose. They're very popular among the end users. But they also extend a lot of funding to various different segments and parts of the right economy. So, I'd be optimistic that they're not looking to kill and just quash the funds because they do serve that purpose."
He adds, "So hopefully, some sort of balance will come out of this. Also, the point has been made before, but looking at the [broader] ecosystem, as well and recognizing that money funds weren't in isolation the problem. [They were] part of a much, much bigger phenomenon, and the solution has to be more holistic than just pointing at money funds and tweaking some rules.... So certainly, engagement with different parts of the market in an attempt to try and improve the ecosystem of short-term markets is certainly something that is a very worthwhile objective, and something that we should all look to take part in.... I think looking at some of the weaknesses in the short term markets and how we might address things like fragmentation and transparency ... only helps to actually make the market stronger going forwards."
Invesco's Mueller states, "The difference with Europe versus U.S. was really around the treatment of government funds. In Europe, the government funds were still required to do fees and gates whereas in the US, they weren't.... In the U.S., you saw that big shift out of prime funds and into government funds. That wasn't the situation in Europe, which I think was a positive for Europe.... I definitely agree with Debbie and Joe that there is more optimism this time. [But] I'm still a little bit concerned about the LVNAV's and whether there's a threat to those disappearing."
He continues, "We're also aware that money fund regs have a sunset clause after five years -- so that comes up next year. They [regulators] wanted to review the LVNAV. It felt like at the time they weren't happy about having the LVNAV. They very much wanted to remove that. So, I think that's still a risk. It almost might be that we have to give up something to push back on some of the other proposals, which definitely do not think make sense [like] the capital buffers [and] swing pricing.... We may have to have [a little] give and take. Maybe that's one of the areas where we have to give a bit. I would hope not, but that's a risk."
Mueller also says, "I completely agree with the thoughts around the delinking fees and gates and the weekly liquidity.... I think we, like a lot of our peers, weren't able to use that weekly liquidity because we knew that if we did start to use it, clients would get a bit nervous that you could impose a fee or a gate.... So we were having to sell to increase our liquidity when really, we had lots of liquidity.... But yeah, I mean, March was tough.... But we were pleased we got through that and kept our liquidity levels comfortably above 30%. And you know, that was that. But it was a very difficult time."
When asked about the timing of U.S. regulatory changes, Federated's Cunningham responds, "I don't think it's in the near-term. Certainly not this year, and I don't even think it will be the first half of next year, Pete. I think we're targeting the second half of next year at the earliest and more than likely into 2023. If you judge what the response was to 2008, the initial responses to that came out in 2010 and were implemented in 2011. Then the follow up work from 2014 to 2016. So, I [don't think there's] an expectation of a fast track at this point in response to the 2020 issues. But I also don't think it's going away without being addressed. So I think you've got time to prepare your arguments."
She tells us, "From our standpoint, we think obviously there's a couple of things that need to happen. Delinking of gates and fees is at the top of everyone's list. We also believe that gates should only be allowed if a fund is dissolving ... to help a fund wind up its life cycle. But we don't think it should used as a temporary measure. On the fees side, we don't have any problem with fees. But it's the linkage back to the liquidity levels that poses problems. So, you know, delinking and having those fees be more discretionary with board requirements ... and having those board approved procedures also reviewed from a regulatory standpoint to make sure they're solid and not in any way, shape or form, you know, misused [is the way to go]."
Cunningham explains, "We also think better disclosure from ... intermediaries would be a helpful thing. Right now, we have portals that disclose who underlying clients are, and we have portals that don't disclose who the underlying clients are. If it was a requirement for everyone, including all intermediary types, to better disclose who the underlying investors are, I think that's another thing that could be helpful with regards to understanding and knowing who the shareholders are and best positioning products in order to assist with shareholder flows."
She adds, "Then, ultimately, what we've talked about a couple times, the 'all-to-all' ecosystem for high-quality, short-term securities. So not just commercial paper, not just CDs, but municipal securities, government securities, dollar currencies, euro currencies, sterling currencies.... You'd have not just a buyer and a single seller, but rather multiple sellers, multiple issuers, many different types of buyers, guarantors, etc. There [would be] other parties that could enter into this process with a much more open architectural platform so that the market can continue to function even during stressful times that liquidity levels are high.... So, we think all of those things will be things to engage the regulators on, and we're optimistic that the outcome will well be a positive one going forward."
Finally, we asked JPMAM's McConnell about the timing of European regulatory changes. He answers, "I think what we saw through the first round of reforms is that it's not a quick process. There are a lot of countries involved and it can get a little bit politicized at times. They go through this thing called trilogue. Once the European Commission comes out with its recommendations, you've got ... the European Council and the Parliament to weigh in with their views as well. So there are many different iterations along the way ... and that does extend the timeline somewhat. So, I wouldn't expect it to be quick.... `I think we're looking at least a couple of years before we get close to having sort of an end recommendation or policy that's going to be put in place."
