Industry insights: See how your cash strategy compares

Money in Motion: tackling changing rates and regulations

In the early months of 2017, J.P. Morgan surveyed respondents at an important juncture, as investors faced unfolding or approaching changes in the regulatory, interest rate, economic and political arenas. As our survey reports, on all fronts investors are reassessing their short-term fixed income investment portfolios, looking for the strategies and solutions that can best help them navigate the changing environment.

In the U.S., new SEC rules governing money market funds (MMFs) took effect in October 2016, following a two-year transition period. After they considered new regulations on floating NAV (FNAV), liquidity fees and gates, many cash investors decided to transition assets from prime to government funds. But as they become more comfortable with the new parameters of prime funds, and ponder their excess yield, many investors are rethinking the relative attractiveness of prime vs. government MMFs. In Europe, where money market fund reform is slated to take effect in late 2018 or early 2019, investors will evaluate a range of new MMF structures. Finally, Basel III regulations, which redefine global standards for bank capital, liquidity and leverage, will continue to drive non-operating deposits off bank balance sheets.

The Federal Reserve’s December 2016 policy rate hike, only its second in the past 10 years, was fresh on the mind of respondents when they answered our survey questions. Liquidity investors looked ahead to policy normalization—likely a gradual pace of U.S. rate increases and, eventually, a reduction in the central bank balance sheet. In Europe, rates remained exceptionally low, but a tapering in the European Central Bank’s bond-buying program could be seen on the horizon.

Around the world, a broadening of stronger growth beyond the U.S. spurred a global reflation trade. In global markets, a “Trump trade” animated investors bullish on the possibility of pro-growth U.S. tax policy and fiscal stimulus. For U.S. multinationals, talk of tax policies to encourage cash repatriation attracted keen interest, but the prospects— and details—of any policy changes are as yet unknown.

Amid all these shifting pressures, investors will be looking for strong investment partners who can help them understand the implications of new regulations and fund structures, offer guidance on cash segmentation and provide insights into the global rate outlook. The most effective partner can align innovative products and solutions that best meet an investor’s liquidity requirements, risk tolerance and investment return objectives.

As investors re-evaluate their cash investment decision-making—an often demanding but always critical process—they will greatly benefit from a peer comparison. It can reveal how their policies and practices resemble, and differ from, those of their peers. In this regard, the J.P. Morgan Global Liquidity Investment PeerView^SM survey can serve as an indispensable industry benchmark. 

Key findings

Investment in money market funds still strong—Based on the market outlook for next year, over 60% of respondents will continue with the same allocation to money market funds, while 22% will increase their allocations to stable NAV funds and 20% to floating NAV funds. Money market funds and bank obligations account for the majority of cash balance allocation. Nearly 40% of respondents cited money market funds as their chosen vehicle for money moved off a bank balance sheet—by far the most popular placement.

Regulatory pressures—In many ways, the regulatory arena has been transformed since our last survey, in 2015. Respondents are grappling with the implementation of money market reform in the U.S. and the approach of reform in Europe, as well as the effects of Basel III around the globe. In Europe, 44% of respondents said they need more time and/or information before they decide on their preferred money market fund structure. Among those considering new structures, 43% ranked risk of gating or a liquidity fee as the most important factor in their decision-making process.

Investment policy changes—More respondents are updating their investment policies to ensure that they provide the flexibility needed in the new rate and regulatory environment. Notably, 48% of respondent policies now permit FNAV funds, up from 32% in 2015. Nearly a third of respondents are looking to add FNAV funds to their list of allowable investments. Changing an investment policy is rarely a simple undertaking. More than three-quarters of respondents said it would take a moderate or significant effort to implement a change—suggesting that planning should begin well in advance.

Shifting rate environment, search for yield—In a still-low rate environment, investors continue to search for yield and reassess their appetite for risk. Nearly two-thirds of respondents said they would select money market funds for their cash investments if bank deposit rates lag. As they evaluate the impact of negative interest rates on euro—and/or sterling—denominated instruments, a large majority of respondents are considering policy changes to allow increased credit risk, more interest rate risk and the use of currency swaps.

Keener need for cash segmentation—Liquidity investors are re-evaluating their investment strategies to meet the demands—and seize the opportunities—of an evolving rate and regulatory environment. Many respondents have determined that they need to consider new investment solutions, including floating NAV funds and more customized portfolios. Cash segmentation—categorizing cash by liquidity needs—is often a key component of the re-evaluation process. More than 70% of respondents can forecast their cash flows out for a month or longer. Just under half can forecast out a quarter or longer.

Moving back into prime funds—Only 37% of U.S.-based respondents are currently invested in a prime money market fund, down from 63% in 2015. A majority transitioned assets to a government money market fund in the wake of new SEC 2a-7 rules. Fifty percent of U.S. investors who transitioned assets from a prime to a government MMF cited comfort level with floating NAV and gates/fees as the primary factor in reconsidering prime. Among respondents who transitioned assets out of prime MMFs, nearly half would consider moving back if prime offered an excess yield of between 15 basis points and 50 basis points

Fuente: J.P. Morgan Global Liquidity