An Age of Change for Offshore Money Market Funds
Institutional cash investors haven’t had much time to worry about offshore money market funds over the past several years as they’ve been too busy grappling with all the recent changes to US-based institutional funds. But new developments are making offshore funds more difficult to ignore, especially those involving the implementation of MMF reforms in Europe and the new US tax law requiring repatriation of overseas cash. While the European institutional MMF market is less than a third the size of the $2.7-trillion US market, both often share a common set of debt issuers and many US-based treasury organizations have foreign subsidiaries with investments in offshore funds. The new rules impact all these interconnected global investments and will create a new environment which demands attention from cash managers responsible for meeting the liquidity needs of global organizations.
Our May research report, Offshore Money Market Funds in an Age of Change, highlights important new dynamics that cash investors need to be aware of. Like the recent US MMF reforms, new European Union rules in 2018 will limit the ability of institutional money market funds to maintain a fixed net asset value. As we saw in the US, we may soon see an exodus of liquidity investments from offshore prime funds to government funds with fixed values but lower yields. At the same time, US tax reforms requiring repatriation of offshore earnings have cash investors puzzling over their short- and long-term investment strategies. Will the new rules prompt rapid reductions in offshore MMF balances? Or, will “trapped cash” invested in separate portfolios of corporate, Treasury and asset-backed bonds be used to pay down tax and debt obligations instead? Institutional cash investors will need answers to these questions, and more, to make the best choices going forward.
In short, the new rules have created multiple crosscurrents of conflicting incentives. By explaining the new dynamics of offshore institutional money market funds, our full report provides a useful guide for cash managers who need to maintain liquidity with an appropriate balance of domestic and offshore investments.