Over half of treasurers polled by the ACT during a recent seminar said they would stop using money market funds (MMFs) if the funds were prohibited from getting a credit rating.
Questioned on the European Commission’s proposal to prohibit MMFs from paying for, or soliciting, a rating, 53.7% of delegates said they would no longer use the funds, while 37.3% were undecided, and just 9% said they would use the funds regardless of whether they were rated or not.
In a second poll, nearly half of treasurers (48.5%) said they would consider not using MMFs if regulators forced the funds to convert to having a variable net asset value (VNAV) from the constant net asset value (CNAV) that they have now. A further 11.8% claimed they would definitely stop using them.
Speaking on the webinar, Chris Dibben, interim assistant treasurer at budget airline easyJet, said that although companies could not just rely on a rating to assess the creditworthiness of an MMF, a rating does give a “clear marker in the sand”. He added: “From our perspective, it’s a comfort. If it were to go, it would have serious implications for us.”
He also said that corporates do not have the “capacity of resource” to assess different MMFs in depth, so a credit rating does provide valuable assurance and it allows comparison of credit risk.
Dibben raised concerns about whether companies could count on getting all their funds back if MMFs switched to a VNAV model. “The value you get back from any individual investment can vary on a day-to-day basis. Treasurers are always quite risk averse. If you had to explain to senior management that you had lost £50,000 on a £100m investment over a few days, that would probably be quite difficult to justify.”
Jonathan Curry, global chief investment officer – liquidity at HSBC, said: “We don’t support the distinction that regulators are making between how prone CNAV funds are to runs compared with VNAV funds. That distinction has been made by the Commission. We believe it’s a red herring and we don’t believe it’s based on facts. The evidence we’ve looked at during the crisis suggests that there’s no differentiation between funds’ sensitivity to runs simply based on their accounting.”
He added that the proposal to oblige MMFs to use VNAV or hold a 3% capital buffer was ill conceived. “The reason why investments are redeemed from funds during periods of stress is because investors have a concern about some or all of the assets that the MMF holds. In that scenario, a 3% capital buffer would be ineffective in reducing a run risk. In addition, it brings into question the economics of running MMFs and the attractiveness of MMFs to investors.”
Nearly 70 delegates participated in the two polls held during the seminar.
Sally Percy is editor of The Treasurer