Despite plenty of corporate pushback, the SEC’s controversial money market reform will be more headache than hardship for corporate investors.
Money market reform in the US has progressed with the speed of a snail on valium. The idea was first floated in 2008 after the Reserve Primary Money Market Fund’s net asset value fell below $1 per share, unexpectedly saddling investors in the “cash-like” instruments with very real losses. The drop triggered a stampede out of money funds and calls in Congress for tighter regulation of the industry.
Seven years later, the Security and Exchange Commission’s hotly contested reform package is set to go live October 14, 2016. The heart of the reform: regulations requiring prime money market funds—highly liquid vehicles that cater to institutional investors—to ditch the stable $1 net asset value for a floating-rate NAV. The change means shareholders in prime funds could lose money—a possibility that tends to undercut the attraction of an investment vehicle long regarded as safe. Major players in the industry, including Fidelity Investments and Federated Investors, have plans to close or convert some of their larger prime funds.
A number of treasurers contacted by Global Finance indicated it’s too soon to tell what the new rules mean for their cash management strategies. One report sees shareholders yanking up to $500 billion from institutional money market funds over the next two years. Says Brad Airing, managing director in the Global Liquidity Investment Solutions group at Bank of America Merrill Lynch: “We expect a change in allocation but not a total abandonment of prime funds.”
Tony Carfang, former vice president at First National Bank of Chicago and now partner and director of Treasury Strategies, believes some corporations will move a percentage of their cash from prime funds to government funds to avoid a perceived mass exodus in the run-up to October 14.
The floating NAV isn’t the only part of new SEC regulations that could spook corporates. To prevent future runs on the funds, the commission green-lit the addition of a 2% redemption charge if the weekly liquidity of a fund falls below 30% of its portfolio value. In addition, funds will be allowed to deploy a gate—that is, suspend redemptions—for 10 days if liquidity drops below the 30% threshold.
The SEC regulations do not actually require money market funds to impose redemption fees— it’s up to fund boards to take those drastic steps. Industry experts also point out that, while a freeze on redemptions lessens the appeal of institutional money funds, other short-term cash management instruments come with similar snares. The auction-rate security market, for one, simply seized up during the financial crisis.
In a scorecard rating the usefulness of cash management instruments before and after financial regulations, Treasury Strategies still ranked prime funds at the top. That said, a fair amount of corporate cash is going into products like certificates of deposit and time deposits. Tom Hunt, a former finance executive at 3M Global Treasury and current director of treasury services at the Association for Financial Professionals, says treasurers are evaluating putting cash into separately managed accounts. “Some are considering running their own money market fund,” he said.
Ultra-short-term bond funds are also on the radar. Typically, they are touted as being akin to cash. But Fitch Ratings noted that many of the 34 funds it researched invested in debt at the lower end of the investment grade scale with more than a third holding junk bonds.
Finance executives and their staffs will need to do their homework before parking money in unfamiliar short-term investment products. Given the new regulations, the same can be said of investing in prime funds. With fund firms shrinking or converting some prime funds into government funds or others, corporate cash allocations could be thrown out of whack.
One fix: revisiting corporate policies to tweak investment guidelines—a pain, but hardly a monumental task. “Money market fund [managers] see it as a bigger deal [than treasurers do].” says Hunt. “Treasurers are taking a wait-and-see approach.”