Seven years have passed since investor panic during the financial crisis set off a run on money market funds. Since that time, the Securities and Exchange has adopted reforms aimed at reducing MMFs’ credit and interest rate risks and boosting their transparency.
The rules have not been warmly greeted by those with a stake in the money market business. “These reforms will cost billions of dollars for funds to comply with,” says Stephen Keen, senior counsel in the investment management group of law firm Perkins Coie in Denver. “MMFs are being made a test case for a push toward increased transparency in financial markets.”
The test case has made life more difficult for corporate finance departments. Typically, companies rely on the high-quality, short-term securities for liquidity. Now it’s taking longer for businesses to get their cash. “Corporate treasurers used to be able to pick from a variety of funds and could get their money essentially whenever they wanted,” says Keen. “These reforms have certainly taken some flexibility away from them and added some incremental costs, though not as large as they could have been.”
The funds still aim to do intraday redemption payments. But that goal has been made more difficult by the SEC’s reform. The commission in 2014 required institutional prime funds—those that invest in corporate securities—to switch to a floating net value for their assets, not a constant $1 dollar value. “Because they are calculating prices rather than maintaining stable value, where it used to be that you put your redemption in at 9AM and got your money back at 11AM, now this might not happen until 2PM or later.”
Treasurers can always park cash in the largely unchanged money market funds that invest in government securities. But those funds have lower yields, with the spread likely to increase when the Federal Reserve begins raising interest rates. “The alternative is institutional prime funds,” says Keen, “but the SEC is making them calculate highly precise net asset value, which ensures there will be tiny price movements no matter how well managed a fund is, and those movements have accounting ramifications.”
While MMFs will still be treated as cash equivalents, it’s a pain to keep track of them. “Yet another alternative is to keep money directly in the bank,” Keen says, “except banks don’t really want deposits, including corporate deposits, because they don’t currently make money on them.”