Federated Investors, the 4th largest money fund manager with $210.6 billion, became the second major player to officially announce plans to restructure its money market fund lineup following Fidelity Investments, which announced its plans earlier this month. In a press release issued yesterday, Federated announced phase one of its changes, which includes converting some of its Institutional Prime funds to 60-day maximum maturity funds, which are allowed to continue using amortized cost pricing, decreasing the likelihood that any "floating NAV" fund would actually float. (Recent news of big shifts into government funds may also guarantee enough spread to make these products viable.) Among other changes, it also plans to merge some of its money funds. Federated CEO Christopher Donahue has talked about plans to restructure the firm's money funds for several months since the Securities and Exchange Commission approved MMF reforms last July. Today's "News" outlines the changes.
The release explains, "Federated Investors, Inc., none of the nation's largest investment managers, today announced its preliminary plan to restructure its line of money market funds to meet the needs of its clients and to comply with regulations announced by the U.S. Securities and Exchange Commission (SEC) in July 2014. The regulations will be implemented in phases over the next 20 months and the resulting changes in Federated's money market fund lineup will take place over the same time frame. Federated will work closely with its clients to ensure their liquidity needs are met today and in the future, as the changes outlined below take effect no later than October 2016."
It says, "Federated has spent considerable time discussing product changes with clients and has begun taking steps to adjust its product line to address the needs of a broad array of customers. Federated anticipates that these and other changes will offer investors a full menu of product choices for liquidity management, including money market mutual funds and other options."
The release continues, "Federated will continue to offer Treasury and government money market funds. The company will also designate existing prime and municipal money market funds as either institutional or retail funds. In the retail money market fund category, the company plans to offer the following product types: prime money market funds, national municipal money market funds, state-specific municipal money market funds, variable annuity money market fund."
Further, "In the institutional money market fund category, the company plans to offer the following product types: prime money market funds, national municipal money market funds. Specifically with institutional prime money market funds, Federated anticipates converting certain existing funds to 60-day maximum maturity funds while other existing funds will remain 397-day maximum maturity funds. Decisions on categories for many products will be announced over the next several months with the end result being a continuation of money market fund choices that enables clients to do business with Federated in the manner in which they have grown accustomed."
Chris Donahue comments, "Federated has been a leading provider of liquidity management services for four decades, and we will continue to offer products suitable for all of our clients. Our clients have requested that we begin to share information on our product strategy for October 2016 and beyond, and this announcement will help clients move ahead with their liquidity planning solutions while laying the foundation for Federated to continue providing superior investment management and client service."
The release adds, "Many of the proposed changes will require approval from the funds' board of trustees and, in certain cases, shareholders. Accordingly, Federated will not begin to implement changes to the investment strategies or shareholder qualifications for its money market funds or solicit proxies from fund shareholders until these changes have received the necessary approvals and appropriate disclosures have been included in the funds' registration statements. In addition, further product changes may be required if the SEC issues additional guidance that impacts the funds."
Federated also announced it will not institute liquidity fees or redemption gates on its government and Treasury money market funds. "Government and Treasury money market funds were exempted from new liquidity fees and redemption gates provisions and will continue to seek a $1.00 net asset value (NAV). However, under the forthcoming rules, government and Treasury funds could voluntarily adopt gates and/or fees, as long as a fund's ability to do so is disclosed to investors. Per the new SEC rules, government money market funds will be defined as funds that invest at least 99.5% of total assets in government securities, cash and/or repurchase agreements that are fully collateralized (i.e., collateralized by government securities or cash). These requirements closely follow the manner in which Federated has historically managed and will continue to manage its government and Treasury money market funds," the release states.
The company said the following funds will not have liquidity fees and/or redemption gates -- Federated Automated Government Cash Reserves; Federated Liberty U.S. Government Money Market Fund; Federated Government Cash Series Federated Treasury Cash Series; Federated Government Reserves Fund Federated Treasury Obligations Fund; Federated Government Obligations Fund Federated Trust for Treasury Obligations; and Federated Government Obligations Tax Managed Fund Federated U.S. Treasury Cash Reserves.
The release continues, "Importantly, prime and municipal money market funds must be able to support liquidity fees and redemption gates by Oct. 14, 2016. Federated anticipates complying with these new rules on or about that date. Over the next several months, Federated plans to announce which prime and municipal money market funds will be structured as institutional money market funds and which will be structured as retail money market funds to meet the new rules. Although the SEC compliance date for the separation of institutional and retail investors is not until Oct. 14, 2016, Federated expects to announce its plans for institutional/retail designation prior to that date to give clients the opportunity to plan for their liquidity management needs.... Federated's retail money market funds will continue to seek $1.00 NAVs as they have for the past four decades."
Deborah A. Cunningham, CIO for Global Money Markets, tells us, "Federated has a strong reputation for the depth and experience of our cash management investment personnel. We are keenly focused on the many details required to meet the SEC guidelines while continuing to manage our portfolios with the highest standards possible and interacting with our clients to help them meet their liquidity management needs."
On the new 60-day maximum maturity funds, Federated says, "Subject to any required approvals, certain institutional prime and municipal money market funds will limit their investments to securities maturing in 60 days or less. Other institutional prime and municipal money market funds will continue to invest in securities with maturities of up to 397 days, the maturity limit under Rule 2a-7. Currently it is anticipated that institutional prime and municipal funds selected to be 60-day maximum funds will begin to gradually limit their investments in late 2015 to securities maturing on or before Dec. 14, 2016, which is 60 days post implementation, so that the funds can be restructured appropriately by Oct. 14, 2016."
The release explains, "As permitted under current rules and guidance, each time a 60-day maximum fund calculates its NAV per share, it will use amortized cost to value its portfolio securities as long as no market quotations are available and each such security's amortized cost approximates the security's fair value. Beginning on or about Oct. 14, 2016, the 60-day maximum funds will attempt to maintain an NAV of $1.0000 per share, and, under ordinary circumstances, the funds' per share price would be expected to experience little or no fluctuations. However, the funds' NAV may fluctuate if the amortized cost value of its securities no longer approximates the market value or if a fund is required to dispose of securities for something other than amortized cost. Federated believes that the short maturity of the securities held by the funds should help to limit the instances when these events may cause a fund's $1.0000 NAV per share to change."
Further, "Subject to notification and disclosure, Federated anticipates that on or about the compliance date for floating net asset value (Oct. 14, 2016), Federated will convert at least one of its products to a floating net asset value money market fund for clients seeking an institutional prime money market fund with potentially higher yields than the 60-day maximum money market funds. More details will be announced during the second quarter of 2015."
Finally, some MMFs will be merged. They write, "Subject to board approval, and in some cases shareholder approval, Federated plans to merge several of its money market funds into other money market funds with similar investment objectives and add new share classes to the surviving funds. These moves will enable the firm to continue offering clients a straightforward, robust and well-diversified choice of products and the ability for investors to do business with Federated in the manner and form in which they are accustomed. Funds that are expected to be merged will be announced in the next several months. Although Federated's plan announced today may be adjusted before the compliance dates for the money market fund reform rule, Federated believes the information presented will help clients move ahead with their liquidity planning solutions."
