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. We also know that institutional clients (51%) and large corporates (33%) do form a large chunk of the assets in Money Market Funds in Europe. And where bonuses depend on it, size really, really matters.
The Money Market Fund Regulation requires that Fund Managers get to know who their investors are. The prescription really takes ‘Know Your Customer’ to new levels.
Article 27 of the MMFR requires that a Fund Manager know:
1. If a group of investors could potentially redeem investments at the same timeIf one investor has a large investment in a fund
2. If such numbers exceed the daily liquidity requirement
3. Identify patterns of investor need for funds
4. The risk aversion of an investor
5. Correlation or links between different investors
That is a tall ask. Let’s say a salesperson strikes gold and gets a large investment from a German exporter of dog leashes to China. She conversationally discovers that there is seasonality in this particular business and that all dog-leash exporters run surpluses for one half of the year.
She is very likely, as salespersons are inclined, to call on all the companies in that sector and raise money from them.
She would be counted as a phenomenally successful salesperson. However, the customer group she has picked have identical usage patterns. Seasonally, they will all behave similarly. Further, if there is any crisis in that sector everyone will draw upon the liquidity to tide over the crisis.
This is the kind of vulnerability that MMFR wants Fund Managers to be aware of. And yet, this kind of vulnerability is a certain outcome of the sales function.
Situations envisaged in the stress tests that are detailed by ESMA in the technical advice and standards that accompany MMFR include:
1. Investors responding in tandem to a credit default in the market
2. Modeling investor behavior in stress situations
3. Combine investor redemption stress with other stresses, such as market events
4. How the top 3 investors in a Fund might respond to different kinds of stress
And this is not exhaustive.
Looking through to the reporting template, A.7.1 and 2 require:
1. Percentage held by the top 5 investors. It asks for this to be done by Ultimate Beneficial Owner – a concept from money laundering regulation.
2. It asks for a breakdown between Retail and Professional clients. This may have been required under MiFID anyway from a Customer Classification point of view. But now there is a need to quantify assets held by each category.
A.7.3 is demanding from a different perspective. It requires categorization by investor groups as follows:
1. Non Financial corporations
3. Insurance corporations
4. Other financial institutions Pension plans / funds
5. General government
6. Other collective investment undertakings
While “unknown” is an option provided, no regulator will look kindly at a large proportion of Assets Under Management being reported there. The look-through to UBO specification is mentioned here, too.
The range of issues that a Fund Manager is expected to consider are indeed, complex. Some of these perspectives are very routinely part of the credit assessment in making an investment. Similar diligence seems to be needed in accepting investments, too!
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