On Tuesday, we wrote about the recently released "2012 AFP Liquidity Survey (see Crane Data's July 10 News "Cash and Bank Deposits Still King In 2012 AFP Liquidity Survey"). Today, we excerpt from the Survey's section on Money Market Fund Reform. AFP says, "Even though no formal proposal had been released at the time of this report, stakeholders and market observers have speculated that the Securities and Exchange Commission (SEC) and the Federal Reserve will soon consider possible money market fund reforms. The Fed has indicated a desire to implement reforms in MMFs through the SEC, principally to mitigate risk from the Fed's role as a backstop or financial guarantor of last resort, as occurred during the 2008 financial crisis. There is wide speculation about what such reform proposals would entail."
AFP explains, "Possible proposals include one of three potential scenarios (or a combination): 1) a floating net asset value (NAV) on money market funds in their investment mix; 2) a holdback provision on redemptions; and 3) capital requirements placed on fund sponsors to provide additional liquidity support. Indications from the SEC in late June of 2012 (when this report was being written) suggest that scenario #1 or #3 above is the most likely reform."
The survey continues, "Perhaps the most controversial of the three potential proposals is the floating NAV. From the perspective of many treasurers, a floating NAV would undermine the safety of principal that has made money market funds an attractive investment vehicle. Should this proposal be enacted, many organizations would need to revamp their investment policies and look for alternative investments that offer comparable safety, liquidity and yield. If the demand for MMFs wanes as a result, a floating NAV would also change market dynamics for debt issuers that supply the securities to the money market fund companies (e.g., commercial paper)."
AFP tells us, "Seventy-seven percent of survey respondents expect their organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings of MMFs currently in their short-term investment portfolio in response to a floating NAV. Large organizations, those that are publicly held and net investors are most likely to make changes in their MMF investments in response to reform."
They comment, "Possible policy decisions organizations may make in the wake of a move to a floating NAV include: Fourteen percent of organizations would not alter their investment strategy with MMFs until the NAV falls below $1. Seven percent would maintain current holdings but would not make additional investments in MMFs. Twenty-three percent would stop making investments and would reduce current holdings. Thirty-three percent would stop investing in MMFs as they eliminate all current holdings. Only 23 percent of respondents indicate the potential reform would have no bearing on their organizations' willingness to invest in MMF."
AFP says, "The goal of the holdback provision (the second scenario above) is to support an orderly liquidation should there be a run on funds. Under the holdback provision, fund companies would subject redemptions by investors to a ten percent holdback that would be paid approximately 30 days later. The holdback proposal, however, could violate the liquidity principle under which treasury departments manage their organizations' short-term investment portfolios."
Finally, they add, "Many financial professionals indicate that if this proposal were enacted, their treasury departments would stop investing in money market funds in one form or another. Forty-three percent of financial professionals report that their organizations would go as far as eliminating money market funds from their short-term investment holdings altogether. In fact, a significant percentage would either reduce them (30 percent) or liquidate them entirely (43 percent). Moreover, just over half of financial professionals at privately held organizations say their organizations would eliminate all their holdings, a response with major implications for financial markets."