state of play in the short term fixed income markets n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
State of play in the short-term fixed income markets PowerPoint Presentation
Download Presentation
State of play in the short-term fixed income markets

Loading in 2 Seconds...

play fullscreen
1 / 24

State of play in the short-term fixed income markets - PowerPoint PPT Presentation


  • 132 Views
  • Uploaded on

State of play in the short-term fixed income markets. Demystifying regulatory reform, interpreting implications and offering solutions. Contents. Reform update Market, issuer and portfolio implications Client implications. Reform update. Current industry climate.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'State of play in the short-term fixed income markets' - knoton


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
state of play in the short term fixed income markets

State of play in the short-term fixed income markets

Demystifying regulatory reform, interpreting implications and offering solutions

contents
Contents
  • Reform update
  • Market, issuer and portfolio implications
  • Client implications
current industry climate
Current industry climate

A debate is on in the money market fund industry concerning the need for additional regulatory reforms.

I believe additional steps should be taken to address the structural features that make money market funds vulnerable to runs.

Mary SchapiroChairman, SEC

Money market funds play a critical role in the U.S. economy.

David HirschmannU.S. Chamber of Commerce

It’s disappointing that the success of the 2010 amendments is ignored in pursuit of changes that will compromise core features of money market funds.

Paul StevensPresident, Investment Company Institute

Europe doesn’t have any (money market funds), and they have a financial system.

Ben BernankeChairman, Federal Reserve

how strong are money market funds today
How strong are money market funds today?

Money market funds have shown great resiliency since significant reforms were enacted in 2010.

Still, the SEC is proposing additional regulations with varying impact on systemic risk.

Prime Money Market Funds accommodated large outflows during U.S. debt ceiling and Eurozone debt crises

Source: Investment Company Institute

the current regulatory environment
The current regulatory environment

Regulators, think-tanks and industry organizations are working on a wide range of potential solutions.

Status quo

Capitalideas

Gatingprovisions

Two-tier regulatory system

Structuralchange

With revisions to current 2a-7 rules

Sponsor capital

Mandatory redemptions in kind

Split retail frominstitutional

Floating NAV

Shareholder funded

Redemption fee

Split credit fromgovernment funds

Subordinated share class

Escrowed shares

Unresolved systemic risk in the market?

Minimal risk of impact to short-term markets while addressing systemic risk concerns?

Implications for theshort-term markets?

potential sec money market fund reform
Potential SEC money market fund reform
  • SEC writing proposal — expected April – May
  • Two commissioners oppose additional reforms — one undecided
    • Commissioner Aguilar on the fence
    • 3 votes of 5 needed to pass proposal
    • Potentially get 90 – 120 days to comment
  • Industry and investors — “Rare Alignment”
capital buffers
Capital buffers

This proposal requires funds to maintain dedicated capital for covering losses in times of trouble.

Capital buffer

Redemption holdback

Resources to address significant falls in a fund’s value

+

=

SEC position:

A capital buffer, in combination with the holdback proposal, would mitigate the incentive for investors to run since there would be capital to address potential losses.

redemption restrictions
Redemption restrictions

This proposal requires funds to hold back a percentage of a shareholder’s redemption proceeds for a set period of time.

Example: (Assumes a 5% holdback)

Investor owns shares worth $100and redeems entire amount

Receives $95today

Receives remaining $5in 30 days…

…UNLESS a crisis happens, in which case the first losses would be funded by the fund’s capital buffer and then by that $5holdback

SEC position:

Discourages a run on the fund as shareholders redeeming the full amount of their investment would bear the first loss in the event that a fund broke the dollar.

floating the nav
Floating the NAV

This proposal requires funds to stop using the amortized cost method of valuation and let their share prices float.

SEC position:

A floating NAV reflects a fund’s true market value, demonstrates that money market funds are not free from risk and helps reduce large redemptions during periods of financial stress.

A historic look at market NAV fluctuations, 2000 – 2010Prime money market funds

market implications
Market Implications
  • Restructuring of intermediation in the short-term fixed income markets
  • AUM shift to offshore MMFs, LGIPs, STIFs and short/ultra-short bond funds
    • Transfer of systemic risk from one market segment to another
  • Yield curve implications unclear
    • shift to Tsy/Govt sector would pressure curves lower
    • demand for shorter, liquid credit product would steepen the credit curve beyond 3 months
  • Dodd-Frank and Basel III – supply challenges
  • Shift to bank deposits. Wholesale deposits neither desirable, nor economical for banks and FDIC insurance on non-interest bearing accounts may not extend past 2012
    • deposit fees?
    • funding shift to the Fed?
market implications1
Market Implications

Is bank deposit growth sustainable?

Source: BofA Merrill Lynch Global Research, Haver, Federal Reserve

market implications2
Market Implications

Banks unlikely to invest excess liquidity at current market levels

Source: BofA Merrill Lynch Global Research

issuer implications
Issuer Implications

MMFs are a vital source of short-term funding to a variety of issuers

Sources: Investment Company Institute, Federal Reserve Board, U.S. Treasury Department, Fannie Mae, Freddie Mac, Federal Housing Finance Agency, Federal Reserve Bank of New York, Municipal Securities Rulemaking Board, Municipal Market Advisors

issuer implications1
Issuer Implications

Systemic risk reduced as short-term funding markets have contracted

*Data for 2010 are through October.

Sources: Investment Company Institute and Federal Reserve Board

portfolio implications
Portfolio Implications

Redemption Restrictions

Floating NAV

  • Unique liquidity considerations: how to account for and
  • Manage the “hold back”. An additional liquidity requirement.
  • Shorter WAM and WALs – first mover liquidity risks
  • NAV “arb” liquidity risks
  • Pricing considerations – premium on most liquid and easily-
  • priced securities. Avoiding pricing “surprises”.
  • Increased levels of Tsy/Gov’t holdings in credit MMFs
  • Credit decisions become more conservative. Credit specific
  • stress => NAV and cash flow implications

Capital Buffer

Common Themes

  • Existing supply challenges exacerbated. Demand for shorter,
  • less volatile assets will not be met with issuer supply.
  • Shorter, more liquid and less credit-sensitive portfolios
  • More opportunity to add value in SMA structures?
  • Sponsors with deeper capital resources attract a greater share
  • of industry AUM. Consolidation drives supply challenges.
  • Greater flexibility in regulatory framework if capital exists?
  • Consolidation impact on market liquidity. More concentrated
  • buyer bases.
corporate reactions
Corporate reactions

Investors and issuers of money market funds express concerns about the potential reforms.

We rely upon the convenience and simplicity that the stable NAV provides for accounting, recordkeeping and tax treatment of cash balances.

New Jersey Association of Counties

Money market mutual funds are a reliable source of direct, short-term financing for millions of businesses, non-profits, and others, including colleges and universities.

American Association of State Colleges and Universities

Holding back a portion of an investor’s money to guard against changes in share value would drive investment away from the funds.

The Pennsylvania League of Cities and Municipalities

capital buffers1
Capital Buffers

A capital reserve is an interesting idea, but there are limits on the amount of capital that could be raised.

redemption restrictions1
Redemption Restrictions

This proposal eliminates the very attribute investors value most in a money market fund – daily liquidity.

floating the nav1
Floating the NAV

This proposal eliminates the very attribute investors value most in a money market fund — a constant NAV.

Investment Policy Impact

important information
Important information

Any forecasts, figures, opinions or investment techniques and strategies set out, unless otherwise stated, are J.P. Morgan Asset Management’s own at date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. They may be subject to change without reference or notification to you. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. You should also note that if you contact J.P. Morgan Asset Management by telephone those lines could be recorded and may be monitored for security and training purposes. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co and its affiliates worldwide.

Issued by JPMorgan Asset Management (Europe) Société à responsabilité limitée, European Bank & Business Centre, 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S.Luxembourg B27900, corporate capital EUR 10.000.000.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited which is regulated by the Financial Services Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l., Issued in Switzerland by J.P. Morgan (Suisse) SA, which is regulated by the Swiss Financial Market Supervisory Authority FINMA; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, all of which are regulated by the Securities and Futures Commission; in Singapore by JPMorgan Asset Management (Singapore) Limited which is regulated by the Monetary Authority of Singapore; in Japan by JPMorgan Securities Japan Limited which is regulated by the Financial Services Agency, in Australia by JPMorgan Asset Management (Australia) Limited which is regulated by the Australian Securities and Investments Commission and in the United States by J.P. Morgan Investment Management Inc. which is regulated by the Securities and Exchange Commission. For U.S. registered mutual funds, J.P. Morgan Institutional Investments Inc., FINRA/SIPC, www.finra.org. Accordingly this document should not be circulated or presented to persons other than to professional, institutional or wholesale investors as defined in the relevant local regulations. The value of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.

J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.