For corporate treasurers in Europe and the United States, money market funds (MMFs) are a commonly used tool prized for their liquidity and capital preservation objectives, alongside competitive market driven returns, and access to specialist investment management and credit expertise
Both regions benefit from robust regulatory frameworks that impose strict standards on credit quality, liquidity, diversification, and transparency. With a high rate of adoption, corporate treasurers in these regions generally have a good understanding of the respective regulations. As businesses continue to grow revenues in SE Asia, exploring the use of domestic MMFs to optimise local liquidity management is becoming increasingly critical for treasury teams seeking to implement best practice within regional treasury centres (RTCs) in Asia, particularly in China, Hong Kong, India, and Singapore.
For US and European treasurers familiar with their respective MMF regulations, evaluating domestic Asian MMFs introduces new complexities. While locally domiciled MMFs in Asia can offer the same operational efficiencies and potential to de-risk treasury cash investment, differences in regulatory frameworks and the extent to which the risk budgets afforded by regulation are used by managers within those jurisdictions must be understood. Partnering with a global asset manager with the necessary experience within those jurisdictions can help highlight key differences. And in doing so will enable treasurers to create investment policies with global principles that allow the right amount of discretion while allowing the board to be satisfied that its risk appetite is being adhered to.
This paper is intended to be a reference guide for treasurers and is organised into five sections. For each topic we explain the differences between regions and highlight what we consider to be the most important considerations.
- Regulatory considerations looks at the key risk characteristics of credit quality, liquidity, duration and diversification.
- Valuation methodology and pricing transparency considers key fund accounting practices and their effect.
- Global vs domestic fund managers explores the different approaches that local and global managers may adopt.
- Trading platforms summarises access solutions available to investors.
- Cash and cash equivalency compares the accounting classification of a money fund holding in different jurisdictions.
With many US and European businesses growing their presence in Asia, the value of local cash holding is growing. Traditionally, funds would have been swept to centres in the US and Europe. But with the increasing maturity of the local markets for cash management products, many treasurers are choosing to retain significant sums locally.
Sustained growth of MMFs in many Asian countries has reflected this pattern of investor behaviour, however it is important to recognise that differences between them exist and need to be understood. Local rules and regulations do vary and, in some cases, will not map to more familiar regulations such as those in the US and Europe. In these cases, it is important that treasurers recognise the differences and that their investment policies reflect corporate risk appetite, but crucially also what the local regulations require. Boards need to understand the additional risks (and also safeguards) that exist in these countries. Market conditions can change quickly and it is therefore important that treasurers and their local teams can rely on fund managers with the necessary market insights and experience to ensure that the security and liquidity of their investments is not compromised.
1. Regulatory considerations across markets
Regulatory frameworks directly shape the risk profiles of MMFs, influencing the credit quality, liquidity, diversification, and transparency of MMFs. Understanding the local regulations in Asia as well as a manager’s individual approach to managing MMFs is crucial to safeguard the company’s assets, ensuring they are available when required to meet the businesses funding requirements.
a. Minimum credit quality requirements
What’s important?
Treasurers considering investing in non-traditional markets must be aware of lower credit quality requirements as defined by regulation. In Europe, where external fund ratings from one or more of the three global credit ratings agencies are common, investment guidelines generally reflect the minimum credit rating requirements of the ratings agencies, A1/P1/F1 at the time of purchase. In Asia, external ratings are less common and/or based on less familiar criteria1. This introduces the possibility that managers have greater flexibility to invest down the credit curve. A manager that adopts a global approach to minimum credit rating requirements via proprietary in-house credit expertise can offer the comfort of a globally consistent risk management process.
EU/US MMFs:
Asian MMFs:
b. Liquidity requirements
What’s important?
For treasurers, an understanding of the liquidity strategy should be one of two key requirements of any MMF investment decision. While there are two distinct components to liquidity, EU and US MMF regulation focuses on fund asset liquidity. In other jurisdictions, such as India and China, regulations also consider the funds’ liabilities to its shareholders. Only a few fund managers (including HSBC) include this assessment as part of their liquidity investment process.
Asset side liquidity management features a robust process governing the proportion of maturing assets due in one day, one week, one month, etc. This should be supplemented by a thoughtful approach to the proportion of transferable assets held and the likelihood of being able to sell securities in stressed market conditions. How these two considerations interact and are managed is at the heart of the asset side of liquidity management.
Liability side liquidity management is an equally important dimension to examine but is perhaps not so well understood. It consists of individual investor and collective client types (sector, geography, typical investment horizon) that form the fund shareholders. Diversification of the client base and how the manager monitors and achieves this is a strong area of differentiation between providers. Managers will adopt different strategies to client concentration, and this is an area of real variation given that, while MMF regulations require a policy in this area, it is left to the individual manager to design and implement their own approach.
Therefore, it is crucial that a manager has policies in place that protect the fund and its shareholders from extreme AUM movements by actively managing client concentrations by client but also client type.
EU/US MMFs:
Asian MMFs:
c. Duration limits
What’s important?
Duration limits as defined by regulation are broadly comparable in US and EU to those in Hong Kong, Singapore, and India. Where differences exist, they are generally more prudent, such as the lower WAL constraints for Indian fund types. China is the only market in which client concentrations drive the weighted average maturity (WAM) and weighted average life (WAL) requirement by regulation and it’s only when very high levels of investor concentration are reached that the maximum WAM and WAL requirements fall in line with those of US and EU domiciled funds, and the other Asian markets. Within regulatory maximums, constraints will vary between asset managers. Particular attention should be paid to WAL policy given its dual sensitivity to credit risk and mark to market price volatility.
EU/US MMFs:
Asian MMFs:
| Top 10 investors hold >50% | Top 10 investors hold >20% | Top 10 investors hold <20% | |
|---|---|---|---|
| Min. Weekly Liquidity (%) | 30 | 20 | 10 |
| Max. Weighted Average Maturity (Days) | 60 | 90 | 120 |
| Max. Weighted Average Life (Days) | 120 | 180 | 240 |
Fig 1 Source: China Securities Regulatory Commission, Fitch
d. Diversification requirements
What’s important?
Issuer diversification in the context of Prime MMFs is a key component of risk management, granting investors efficient access to a breadth of issuers they would not otherwise have access to for a variety of reasons. In jurisdictions where issuer diversification requirements are lower than the US/EU, it’s important to understand a manager’s internal limits to judge concentration risk. HSBC AM’s issuer diversification guidelines are materially lower than regulation in many jurisdictions. Group exposure is limited to 10% overnight and a maximum of 5% beyond. Best practice will go further than this by actively distinguishing between issuers via internal credit ratings that constrain both maximum percentage exposure and maturity.
EU/US MMFs:
Asian MMFs:
1. See for, example, Fitch AAAmmf(chn).
2. The rating scale and methodology used for domestic issuers in Indian and Chinese liquidity funds only relate to issuers domiciled in their respective countries and is therefore only a comparison of credit strength of issuers in the domestic Indian or Chinese markets and not comparable with international ratings.
2. Valuation methodology and pricing transparency
What’s important?
Valuation methodologies directly impact the stability of net asset value (NAV) of the fund. The use of amortised cost accounting where permissible and the extent to which it can be used, can significantly reduce or eliminate NAV volatility, stabilising a funds dealing price.
Understanding the accounting treatment being applied by regulation is an important aspect when considering MMFs. In US and EU regulation, amortised cost accounting may be used in the valuation of certain fund types, while in Asian markets the extent to which it can be used, and conditions associated with its use varies. US and European headquartered companies need to look beyond the name of the valuation i.e., VNAV and understand the methodology used. After all, it is the use of amortised cost accounting to the extent permitted, combined with regulatory constraints on duration and liquidity requirements in each of these regulatory jurisdictions, which mean a stable NAV per share can be achieved. Investment guidelines that limit the use of MMFs to CNAV or LV-NAV will inadvertently and unnecessarily eliminate the use of MMFs in some Asian markets. An alternative may be to characterise the valuation methodology.
For existing users of EU LV-NAV MMFs, it is also noteworthy that within the referenced Asian markets there is no concept of a collar or regulatory threshold at which amortised cost accounting can no longer be used in the fund’s valuation. Managers should however have their own internal risk monitoring processes including maintaining a full marked-to-market (MTM) of the fund to ensure the NAV per share does not become materially dislocated from the MTM NAV.
EU/US MMFs:
Asian MMFs:
3. Global vs domestic fund managers: expertise and risk management
What’s important?
An investment manager’s ability to draw on experience managing through crises will allow them to look at the individual factors objectively and inform the ongoing development of investment guidelines and approach to liquidity portfolio management. Regional teams in a global framework enjoy the benefits of a global process allied to local presence. This is true both for credit research and portfolio management with the following benefits.
Benefits of international managers
Active engagement in money markets around the world also brings experience managing through numerous market crises, each a unique mix of idiosyncratic factors, from the catalyst of the event to numerous other variables including market dynamics around liquidity and credit, prevailing regulatory environment, macroeconomic factors, fiscal and monetary policy. Local managers and those global managers with a strong regional presence may have deeper relationships and connections compared to those in different time zones or continents.
4. Trading platforms bring efficiency and enhance liquidity management
What’s important?
While manual trading options remain available in many instances, the use of investment portals and platforms helps achieve efficiencies that will optimise the liquidity for investors while reducing operational risk. However, third party portal and platform providers used by US and European MNCs may not have established regional operating markets. Bank or asset manager proprietary solutions can offer a compelling alternative to corporates including features such as automated cash sweep solutions and trading portals with automatic cash settlement.
EU/US MMFs:
In the US and Europe, a range of investment solutions enable investors to subscribe and redeem efficiently and, in some cases, do so automatically according to predefined conditions. In recent years, integration with treasury management systems (TMS) has also enhanced liquidity and exposure monitoring, reporting and compliance with internal policies.
Asian MMFs:
5. Cash and cash equivalency
What’s important?
In Asia (ex. China), there are many local accounting standards, although these are typically either aligned to or substantially converged with IFRS. For both US and European headquartered MNCs operating in Asia, the use of local accounting standards given their alignment to global reporting standards, can help with consistent classification of funds as cash equivalent across many jurisdictions. For investors in EU funds, which are distributed extensively around the world, it can be relatively straightforward and therefore not uncommon to have them approved for use by local subsidiaries. However, locally domiciled funds should not be assumed to be cash and cash equivalent given the spectrum of funds operating at different risk profiles. Equally, the technical classification of a fund as VNAV should not be assumed to indicate that the fund is not cash equivalent due to the potential use of amortised cost accounting discussed earlier. The final determination in all events will be the audit opinion.
The accounting treatment of treasury investment solutions and whether or not the solution is ‘cash and cash equivalent’ is an important consideration for any treasurer. There is no blanket classification of certain types of money market funds as cash equivalent. Instead, this categorisation needs to be conducted on a case-by-case basis according to the prevailing accounting rules and in partnership with external auditors.
