Money Market Funds: A State Street Study February 2018 Limited Access
Methodology State Street commissioned PollRight* to conduct a survey of sophisticated investors on their views on the upcoming changes to Money Market Fund regulation The European Union s (EU) Money Market Fund (MMF) reform applies to all new MMFs from January 2018 and holds all existing MMFs to an 18-month transition period ending in January 2019 when they must be fully compliant Respondents to the survey comprised of institutional and alternative investors operating in sectors such as hedge funds, real estate and private equity**. In total, 82 individuals participated The research was conducted between 8 th and 25 th January 2018 Please note: in some instances, rounding may result in final percentage figures not adding up to 100% * PollRight the in-house research department at Citigate Dewe Rogerson is a market research agency specialising in business-to-business research. It has been at the forefront of research-led PR for over 20 years, encompassing bespoke business omnibus surveying, desk research and analysis and data visualisation. ** Countries/ territories covered include the UK, US, Europe, Central & South America, Middle East and Asia. 2
Summary of Findings Overall, sentiment is split: 27% of respondents believing that the incoming regulation will make MMFs more attractive; 26% who feel MMFs will become less attractive. 38% believe the regulation will have no impact Nearly half (45%) expect European investors to conduct a comprehensive review of how they use MMFs as a result of the greater clarity the new regulation will bring More than half (54%) of respondents expect more European asset owners to change their investment policies to permit investing in MMFs with floating NAVs over the next three years The majority of investors believe that the focus of asset owners will increase on cash segmentation (43%). This is only marginally greater than those who believe it will stay the same (42%). Just 4% expect to see a decrease 3
Summary of Findings Nearly three quarters (73%) of investors agree that investors will increasingly use MMFs as a result of banks continuing to drive non-operating deposits off balance sheets to comply with Basel III regulations. Just 4% disagree More than two-fifths (43%) of investors agree that real term bank deposit rates will fall next year, leading investors to increase their exposure to MMFs. This compares to 35% who disagree 87% of respondents believe that the risk of gating is important when considering an MMF. Of this, nearly a third () believe it is extremely important 88% believe that the risk of liquidity fees are important when considering an MMF. Of this, nearly a quarter (24%) believe it is extremely important Over two thirds (69%) think the issue of gating and liquidity fees around MMFs will become more relevant or important to investors over the next two years Nearly two thirds (64%) of respondents expect the yield differential between prime and government MMFs to increase in the coming two years 4
Q1. Which of the following best describes the kind of investor you are? 25% 24% 23% 20% 18% 15% 13% 13% 7% 5% 0% Individual / retail Pension fund Alternatives asset manager Wealth / High net worth / Family office Asset manager Other 5
Q2. As a result of the incoming regulation, do you think MMFs will become more or less attractive to European asset owners/investors? 9% 3% 27% 26% 24% 20% 26% 0% All more attractive All less attractive 38% Much more attractive No change Much less attractive (0%) Slightly more attractive Slightly less attractive Don t know 6
Q3. Do you expect European investors to conduct a comprehensive review of how they use MMFs, as a result of the greater clarity new regulation brings to this market? 24% 45% 31% Yes No Don t Know 7
Q4. Under new European regulations, investors will have a choice of four short-term money market structures. In the current market environment, which of the following do you think will be most popular with European investors? Government MMF with a variable NAV with no liquidity-based fee or provision for gating Government MMF with a constant NAV, a liquidity based fee and provision for gating 19% Prime variable NAV MMF, with no liquidity based fee or provision for gating 15% Prime low volatility NAV MMF, with a liquidity based fee and provision for gating 15% Don t know 21% 0% 5% 15% 20% 25% 35% 8
Q5. Based on what you expect to happen to markets over the next three years, which of the four MMFs do you expect to be the most popular with European investors? Government MMF with a variable NAV with no liquidity-based fee or provision for gating 28% Prime variable NAV MMF, with no liquidity based fee or provision for gating 22% Prime low volatility NAV MMF, with a liquidity based fee and provision for gating 21% Government MMF with a constant NAV, a liquidity based fee and provision for gating 19% Don t know 15% 0% 5% 15% 20% 25% 9
Q6. With new regulations in place bringing greater clarity, over the next three years do you expect more European asset owners to change their investment policies to permit investing in MMFs with floating NAVs? 21% 25% 54% Yes No Don t Know 10
Q7. Over the next three years, how do you expect the focus of asset owners on cash segmentation to change? 4% 11% 43% 50% 40% 43% 42% 20% 4% I expect a dramatically increased focus on cash segmentation I expect a slightly increased focus on cash segmentation I think the focus will stay about the same I expect a slight decline in focus on cash segmentation I expect a dramatic decline in focus on cash segmentation (0%) Don t know 0% All increase in focus All decline in focus 11
Q8. To what extent do you agree or disagree with the following statement: "Investors will increasingly use MMFs as a result of banks continuing to drive non-operating deposits off balance sheets to comply with Basel III regulations" 4% 7% 13% 15% 61% Strongly agree Slightly agree No opinion Slightly disagree 80% 70% 60% 50% 40% 20% 0% 74% All agree 4% All disagree Strongly disagree (0%) Don t know 12
Q9. To what extent do you agree or disagree with the following statement: "Real term bank deposit rates will fall next year leading to investors increasing their exposure to MMFs" 4% 50% 43% 35% 39% 40% 35% Strongly agree 20% Slightly agree No opinion 0% All agree All disagree 13% Slightly disagree Strongly disagree (0%) Don t know 13
Q10. When considering a MMF, how important is the risk of gating to you? 1% 11% 28% Extremely important Moderately important Slightly important Unimportant 90% 80% 70% 60% 50% 40% 20% 0% 87% All agree 1% All disagree Don't know 14
Q11. When considering a MMF, how important is the risk of liquidity fees to you? 6% 7% 24% 31% 33% Extremely important Moderately important Slightly important Unimportant 90% 80% 70% 60% 50% 40% 20% 0% 88% All agree 6% All disagree Don't know 15
Q12. Over the next two years, do you think the issue of gating and liquidity fees around MMFs will become more relevant or important to investors? 11% 19% 69% Yes No Don t Know 16
Q13. Over the next two years, what do you expect to happen to the yield differential between prime and government MMFs? 7% 11% 18% 54% 70% 60% 50% 40% 20% 0% 64% All agree 7% All disagree It will increase dramatically It will stay the same as today It will decrease dramatically (0%) It will increase slightly It will decrease slightly Don t know 17
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