In my second interview I was lucky to speak with Paul Przybylski who leads product for JP Morgan, one of the world’s biggest money market fund providers. Paul is perfectly placed to spot emerging trends in this huge market as the global head of product strategy and client service for global liquidity, about how he sees this massive market developing in the aftermath of the Covid-19 crisis.
How did the turbulence in March and April look from where you were standing?
The Covid-19 crisis was unprecedented, and the true global impact is still basically unknown. The speed of the markets’ reaction was very rapid and the lessons we learned in 2008 were simply not applicable. The crisis wasn’t due to a liquidity or credit event specifically tied to money market funds – all assets were impacted as banks and investors alike focused on reducing risk. When that happens, they preserve liquidity, which leads to a drop in trading liquidity.
For funds that meant they struggled to sell assets and raise cash for redemptions. We saw significant gaps between bid and offer prices – if there was one to begin with – and obviously the central banks intervened very quickly and put a floor under markets. For prime funds, the volatility began around March 12th and peaked in the week of March 16th. Once the Fed announced the Money Market Mutual Fund Liquidity Facility (MMLF) towards the end of that week we saw a very different dynamic. By April 1, prime MMFs all had neutral to positive flows, and they increased through April.
What impact did these events have on the Morgan Money platform?
We saw a significant volume spike. During March, every corporate’s workforce started working remotely, so clients looked to our infrastructure because it is a web-based application that gave them the ability to trade securely from their homes. The platform has seen more than 50% growth during 2020 in client adoption and we’ve hit some really high numbers in terms of assets. We were trading about $75bn a month on a notional basis and this year we’ve had peaks where we traded $150bn a month.
Why is fully automated trading and settlement valuable for you and your investors?
It’s important to understand that in a decentralized world where cash managers sit in different places, they’re not necessarily talking to each other. So you want to provide them with efficient tools so they can do their day-to-day jobs with a click of a button and without having to have another conversation or find a colleague to process the settlement.
What are the most important trends you see among the major users of MMFs following the crisis?
When the crisis hit the market, a lot of the corporates tapped their credit lines to shore up their liquidity and those assets were placed in MMFs to earn a return instead of being held on-balance sheet. We’re starting to see those balances being withdrawn from MMFs. Our US government fund, which is the largest in the world from an institutional perspective, hit a peak of $230bn average assets, and now it’s settled around $190bn. Corporates are paying back their credit lines because they see the world normalizing, or looking into paying dividends again or resuming capital expenditure they put on hold.
This is why you’re seeing outflows from MMFs across the spectrum. We expect outflows in the next 12 months across all MMFs, irrespective of product, as clients begin to rebalance their portfolios and look for increased yield in the zero-rate environment.
What are big institutional investors in money market funds looking for in terms of further innovation?
I think after the Covid crisis treasury functions are being looked at even more as a value and revenue generating area. They need technology at their fingertips that gives them the ability to easily identify where all their liquidity resides and how to optimize that liquidity. Clients are looking for tools that give them instant access to their demand deposit accounts (DDAs) and allow them to optimize those DDAs, move money and segment the cash between three months, six months, nine months and 12 months usage. Tools that give them that level of efficiency are going to win out over those that are just traditional trading platforms.
The integrations are also key. These can’t be standalone products any more – they have to be integrated into the ecosystem of the treasurer, whether that’s connected directly to the treasury management system (TMS) or through a deeper integration where they reside within the core TMS. Features like this are going to be standard in the next one to three years – table-stakes, as we like to call them.
With rates near zero for the foreseeable future, clients are going to look for efficiency in moving and trading their investments and that’s going to require digital tools. Remote working is going to make them even more important and over the next five years I think the focus is going to be on building technology that is more mobile and more readily available on smaller devices rather than traditional desktops.
Do you have any institutions yet who are trading on mobile devices?
Not yet. There are still some questions around security protocols and how you authenticate the users. We can already shrink the applications from a technology perspective so they will work on your mobile devices, but there are tough questions over the security aspects. How should you authenticate the person executing a $500m trade on behalf of a major corporation? There’s a lot to consider there – that’s a conversation that’s still taking place.
How do you think MMF regulation might change and what impact could that have?
It’s a question we’re asking ourselves now that we’re working with industry bodies to get a common view on this. To me, what drove client behaviour in the crisis were the rules around 30% weekly liquidity levels because a fee and gate could be imposed at that level. If you have redemptions coming in, the 30% weekly liquidity level isn’t a buffer. It’s a floor where a MMF board must act. So, what happens is that all the fund providers manage to a much higher number than 30%. Right now, the industry average is between 50% and 60%, whereas in a normal environment it’s about 40%-45%. Although there’s a 30% guideline, that’s essentially the floor when what you want is more of a buffer.
We do expect regulation to come to the credit space, specifically. You’re seeing credit fund sponsors begin to phase out their offerings. Two retail players, Vanguard and Fidelity, are doing it possibly because they’re looking at positioning those funds to hold more government-like securities. It’s going to be interesting when it happens. Given we’re about 30% of the market in the credit space, we do think it’s a value-add offering for clients to have access to more than just government MMFs.
