Positive development for funds and investors in R230 billion money market fund sector

n anticipation of the implementation of Basel 3, which will commence in 2013, the investment guidelines prescribed for money market funds have been amended by the Registrar of Collective Investment Schemes – effective 1 July 2012.

As a result of this, money market funds are likely to experience higher yields within a more regulated environment. This is according to Sean Segar, Head of Product at Nedgroup Investments, Cash Solutions, who says that ahead of the phased implementation of Basel 3, banks are already positioning themselves by changing the way they fund themselves. Segar believes that it will be to the advantage of the R 230 billion money market industry to follow suit.

This amendment to the investment guidelines for money market funds could not have come at a better time for yield investors following the recent surprise interest-rate cut. With the lowest interest rates in 40 years, investors will look more than ever before to money market funds to compensate for the lower call rates that banks will be offering as money market funds offer higher rates without compromising access to funds.

“It makes sense that money market funds, a large source of funding for banks, adapt to remain compatible with the evolving funding needs of banks,” he says.

The new investment guidelines for Money Market Funds will enable yields on money market funds to increase marginally. Furthermore, the new controls and closer monitoring will regulate the increase in capital risk of money market funds.

“In line with trends in Europe and the USA, a further development is that money market funds are now able to invest in single instruments with a term to final maturity of 13 months versus the previous limit of 12 months. The weighted term to maturity of the fund as a whole has also been increased from 90 days to 120 days,” says Segar.

However, to ensure that these funds retain their identity of being low-risk income funds with a stable capital base and that the inclusion of longer-dated instruments does not lead to funds taking on too much duration – which may lead to volatility in the capital values - a new control measure has been introduced.

“The new limit dictates that the weighted duration of a money market fund cannot exceed 90 days and will ensure that investment managers incorporate a large proportion of floating rate paper in their portfolios,” says Segar.

“The type of instrument that may be invested in by money market funds is also better controlled as a result of these regulations, as are the valuation procedures. Investors in money market funds can take comfort from the fact that their investments are well regulated by the Financial Services Board which is clearly keeping a close watch on money market funds,” he says.

Amongst the changes facing money market funds is the move to focus on the market capitalisation of issuers as a basis for setting limits as opposed to a minimum credit rating. “There is also a further control which stipulates that in order to issue instruments to money market funds the institution issuing or guaranteeing such instruments must have capital and reserves of at least R100m,” he continues.

Segar explains that in the face of evolving capital markets, a number of instruments have now been specifically precluded by the Registrar from being held by money market funds. These include instruments with no fixed maturity, instruments whose initial interest rates are not known at date of inclusion, credit linked notes whose return or redemption is dependent on another instrument, entity or event.

Another control contained in the latest amendments is that the manager of a money market fund must perform a mark-to-market valuation of the money market portfolio and each participatory interest every six months. Segar concludes that this is to determine the variance of the mark-to market value from the constant price and report the calculation to the FSB.