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Redemptions & Contagion

Apr 16, 2019
1 min

Redemptions & Contagion

The reason why the Money Market Fund Regulation requires funds to know their investors (Know Your Customer extends to Know Your Investor) is the trigger effects of redemptions. This is captured in one neat graphic you can use! #concentrationrisk #stresstest #redemptioncrisis #liquiditycrisis #moneymarkets #contagion #KYC #knowyourinvestor #financialstability #fsb #ESMA #ACT #Treasurers #MMFR #MMFreform #MMFRegulation #compliance #regtech #financialregulation, #Training #regul

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Money Market Funds are special

Mar 18, 2019
1 min

Money Market Funds are special

A drop in asset prices can snowball into a full-fledged financial crisis. This true of any asset and many market. So, what is so special about Money Market Funds? Well, for one, it is not as if similar risks in sectors such as banking have been left unattended. There are regulatory efforts on about pro-cyclicality, concentration risks etc. in various sectors. And yet Money Market Funds have something specific by way of risk. The tightening of money markets is an early sign of

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Be Aware of Concentration

Mar 18, 2019
1 min

Be Aware of Concentration

Being aware of the nature of your investor and how concentrated the holding is among investors, is one of the implicit or explicit asks of the Money Market Fund Regulation. That is because redemption by a few investors of significant heft can cause a fund to sell assets to raise cash and meet the redemptions. But the resultant drop in asset prices can cause a conflagration and contagion which is what regulation seeks to control or limit. Let us to UCITS, commonly known as mut

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Liquidity and Redemption Stress

Mar 18, 2019
2 min

Liquidity and Redemption Stress

Liquidity in normal circumstances and in stressed ones are at the core of the Money Market Fund Regulation. How much of the portfolio can be released to meet redemption requests? That is the central question. When initial apprehension sets in, the first phenomenon is a run on the Fund. That would be quite similar to a run on a bank. These “runs” can become full-fledged routs leading to contagion. Regulation has in many ways, across sectors, moved away from simply preventing f

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Securitisations in the simple world of short-term investments

Mar 18, 2019
2 min

Securitisations in the simple world of short-term investments

The implementation of the Money Market Fund Regulation coincides with the implementation of the Simple, Transparent and Standardised regulation on securitisations or STS. Here is a simple and straightforward way to understand securitization in the first place, in case you need that before getting into STS. What does STS mean? Simplicity: All underlying exposures (loans, assets) that into the securitization engine should be homogenous. Do not mix, for instance, loan types: inf

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Sanctioned Countries, Investment Funds and Know Your Customer

Mar 18, 2019
2 min

Sanctioned Countries, Investment Funds and Know Your Customer

Redemptions from customers can destabilise a fund. In the case of money market funds preventing this is particularly important as investors tend to be large, institutional funds. In the case on Constant and Low Volatility NAV funds, there is also the matter of one investor or set of investors walking away with a redemption at constant NAV when the market value based NAV is, in fact, lower than the constant. To be able to watch out for such situations, and possibly manage them

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ABCPs in the simple world of short-term investments

Mar 18, 2019
2 min

ABCPs in the simple world of short-term investments

The Money Market Fund Regulation allows for securitisations and asset-backed commercial paper (ABCP) in the investment portfolio. There are conditions to be met. But meet those and you are good. One of the conditions which is common to both is the tenor of the investment. Interestingly, in securitisations and ABCPs can have a tenor beyond 397 days (up to 2 years) if there is an interest reset no later than 397 days apart. There is one interesting difference between the condit

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Constants are not the Truth; and Hedge Funds.

Mar 18, 2019
2 min

Constants are not the Truth; and Hedge Funds.

Constant NAVs were fine. Except for what lay beneath. Regulators cannot be happy with a lack of transparency anywhere in the financial sector. So, to have a product out there with a stated NAV which is higher than the actual NAV was not going to last forever. It got tested thoroughly in September 2008 when a money market fund by the name Reserve Primary Fund “broke the buck”: its NAV went below the Constant of one dollar. This happened primarily because of the investment by t

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Negative Interest Rates & Investors

Mar 18, 2019
2 min

Negative Interest Rates & Investors

Some of the delay, discussion and possible confusion in the implementation of the Money Market Fund Regulation comes from the Share destruction mechanism / reverse distribution mechanism. The regulation focuses on sharp decreases in asset values and contagion related to that. Negative interests and comparatively benign: they are a known event; they tick away, like accrual – except that it is in the other direction: the investor’s principal gets eaten away. Negative interest r

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Investor Concentration As A Stress

Mar 14, 2019
3 min

Investor Concentration As A Stress

Imagine having a top-end investor in one of the Funds you run. Winning that account was a dream for the salesperson that aced it. Imagine that investor having a 100 million dollars in that Fund. Imagine that investor needing the money instantly. And if the name of the investor is Enron… You get the picture. A Fund Manager might instinctively realise the risk posed by that large investor. But it really is a Catch-22. Salesperson hunger for and hanker after such large clients.

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The Canary in the Mine

Mar 14, 2019
2 min

The Canary in the Mine

It could be excessively high price earnings multiples. It could be increased credit spreads. It could be asset price inflation. And it usually is a combination of these and other factors – that might indicate trouble on the horizon. Contain contagion has become the mantra for Regulators. No one realistically thinks that the next financial crisis can be averted. But the next crisis should not flare up owing to financial linkages across sectors. That theme is seen across regula

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