SEC rule changes have come slowly but steadily for money market funds and the corporates that use them to manage risk. Goldman Sachs Asset Management and other fund providers are taking a nuanced approach to designing technology that fits the bill. By Tim Bourgaize Murray
Money market funds, along with mortgage securitization, have proven one of the last frontiers of post-crisis operational and regulatory reform. This isn't a horrible thing.
As corporates' balance sheets have grown and their treasury teams slimmed down in the years since 2008, changes to the framework governing these funds—SEC Rule 2a-7—have been purposive rather than rapid; the first wave came in 2010, the next is set to be implemented in fall of 2016.
Easing in new requirements, rather than rushing them, has allowed managers to adapt. And many, like Goldman Sachs Asset Management (GSAM), which offers nine such funds, have used their time to develop new technology to help clients cope.
Goldman's head of global liquidity sales and European institutional sales, Kathleen Hughes, says clients need particular help getting used to newly-introduced variable net asset value (NAV) pricing, as they evaluate their choices differently and think about the product in a different construct, both in terms of minimum liquidity amounts as well as other transparency measures.
"Through speaking to policymakers on behalf of our clients, but also speaking with clients directly, we have developed a good body of knowledge about what their worries are, and what features they want preserved to maintain the utility of the product," Hughes tells Buy-Side Technology. "All of this has lead us to building new tools."
Since 2010, every 2a-7 fund has had to comply with certain new requirements. For example, the fund’s weighted average maturity (WAM) calculation moved in from 90 to 60 days; liquidity buckets are now in place as well.
Other developments were voluntary. Goldman, for example, was first to publish the market NAV of its funds, marking to market the underlying securities within the portfolio without using amortized-cost accounting that would be traditionally used for the portfolio's NAV overall.
The way the changes to the rules have been released allows for a couple of different options for money market fund users, according to Hughes.
"If there is a client who absolutely still wants to maintain a product that doesn't have a fluctuation in pricing and a constant NAV, there's the option of 'stable value' government and treasury funds," Hughes says. "There are still certain things to track with that, but from a holdings perspective there's less to do. If stable value pricing is important, there's that option.
"For others that want to invest in our prime funds, it’s unclear what the yield differential will be by 2016, but it's almost sure to be bigger," she continues. "For variable NAV prime funds, it's identifying the differences in pricing as well as from the tax and accounting perspectives. You want to understand it a little bit better. Some may carry on investing in prime funds and not feel that need, sure, but the need to analyze this seems important to many."
Before the SEC codified some of these requirements, standards in the money market were few and far between. The first round of change helped to set parameters, and at this point, GSAM is now in a preparatory and implementation stage as clients start to think about what they need to track with variable NAV, and the technical tools needed to stay ahead. To that end, GSAM's Liquidity Tracker was introduced a few years ago; its Fund Tracker, meanwhile, was launched last October.
"We're not looking at absolute individual snapshots, but at the trendlines, recognizing that we can't just provide clients information without context," Hughes says. "It's about illustrating what's happening and why. Especially in a more normalized interest rate cycle, once rates rise, we'll need to explain how that will impact their portfolios."
The tools make it easier for corporates using GSAM funds to track multiple funds and stardardize for time series, while also allowing them to take holdings information, risk and exposures from third-party funds and run those through GSAM's calculation engine, providing treasury teams the ability to "apply an additional lens," as Hughes puts it.
As part of that process, they'll typically be answering two types of questions. One will come from the CEO's office: What's the exposure to an individual issuer or country? For that, treasury can use the toolset to run a quick report, pushing out relevant factors and variables. Second, Hughes says, comes back to better managing counterparty risk across their books.
"Aggregating all of their money market fund information, as well as direct investments or exposure to a certain name because they're banking with that firm, or that firm is clearing their FX, is crucial," she says. "They may have operational risk to any number of counterparties, within and outside their money market holdings, and to be able to aggregate that treasury operation more holistically becomes very important."
Even though October 2016 seems a long way away, Hughes and her team have been evangelizing about the new "forward looking" tracking tool early on. In part, she says. this is due to money market users coping with competing technology priorities.
"We've seen clients really respond to this; they want these tools but have to put it in the queue. They might be overhauling their treasury workstation, putting new structures in places, or adding a new clearing bank. There are always major projects happening, and we simply have to help them slot this in."
Indeed, many should take stock of their holdings, consider market dynamics, and think 'sooner, the better'.
"The interest rate environment in the US is looking different from where it was in 2014, with the first rate hike priced into the market for second half of 2015," Hughes says. "Another impact upon treasurers is with respect to Basel III and the supply-and-demand technicals that are playing through in the short end of the market, as well. Those changes in banking regulation mean corporates themselves have fewer options now, and that will continue to play out over this time period, too."
The Bottom Line
- Steady adjustments in regulations governing money market funds have led users to closer examination and calculation of variable net asset value, weighted average maturity, and other metrics as they manage larger corporate balance sheets with fewer treasury staff.
- Fund managers such as GSAM have developed new liquidity and fund tracking tools to assist clients in that process, both pulling together these new calculations consistently, and then helping to aggregate and report them for risk management purposes.
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