Money Market Funds - cash equivalent?
For many years the “humble” money market fund has been the screwdriver in the Treasurer’s toolbox for managing and investing excess cash balances. Favoured for providing the Treasurer with easy access to diverse portfolio options as well as allowing for pinpoint liquidity management by way of easy subscriptions and redemptions. These funds also served to provide Treasurer’s and Finance Directors with sleep filled nights in the knowledge that the cash of the company was invested in a well diversified, well managed and in most cases AAA investment vehicle that could be - and this is the crucial bit – classified as a Cash Equivalent on the balance sheet. One final point to make is that the vast bulk of the money market fund world consisted of CNAV funds – “where a Euro always equals a Euro” and “income accrues steadily in the normal manner”. An exception to this being the French money market fund industry that used VNAV funds – relatively speaking a very small percentage of the global industry.
Well the above description describes the world before the Global Financial Crisis on 2007 which impacted on money market funds in a very significant way in a history that is now well written. This period has resulted in significant regulatory impacts on money market funds in the past number of years on both sides of the Atlantic and sparked an existensial debate surrounding the much loved CNAV funds versus the generally maligned VNAV funds (loved in France of course). The nub of the issue being classification of the investment – ie the whole Cash Equivalent question.
This formed the basis of a very engaged, very passionate and very lively discussion and debate on te 15th March between Severin Leblevennec of Honeywell (representing the Treasurers), Justin Meadows of Nex (representing the industry) and Wayne Ting of PWC (representing the view of the accounting profession). What was well established during this discussion is that Treasurer’s in general are still very much in love with CNAV funds but see that ultimately time is limited for this type of fund and its regulatory evolved form, the LVNAV fund given recent proposals by ESMA to eliminate the reverse distribution mechanism.
A key concern for Treasurers was the lack of clear guidance on the issue from the accounting profession in that the feeling is the standards have not adapted to provide clarity in a much changed environment for investment. This was seen to create difficulty in getting board approval for use of the variable NAV fund types. However, the point was well made by Wayne in that given the standard has not changed means that the assessment in terms of classification of the fund just requires more attention than in the days of CNAV. One issue raised in this regard was that interpretation could vary even between auditors in the same firm but again communication here would be the key.
While straw polling in the room did not reflect much appetite for VNAV fund offerings Justin did point out that this trend was not reflected in the relative volumes being invested where growth of VNAV was quite noteworthy. In that sense as a context to the conversation French Treasurers present made the point that difficulties in getting approval for funds that did not meet the CNAV understanding could be overcome by focussing on what the fund actually does in terms of liquidity management rather than simple accounting classification.
So the outcome….Well, it is clear that this discussion will rumble on even as the regulator marches the industry down the variable NAV route. One course of action is clear- that is for all representative parties : The Treasurers, The Industry and The accounting profession to work together on creating guidelines around how funds should be classified as this is at the very heart of this debate and working together can only be the best way to progress the issues and ensure money market funds remain that screwdriver in the Treasurer’s toolbox.