First American Funds is the latest firm to comment on how it will operate in the post reform world. In a press release entitled, "First American Government Money Market Funds Announce Intention Not To Opt-In To Fees and Gates," First American, the 16th largest US money market fund manager with $41.7 billion in MMF assets, said it won't have fees and gates on its government funds. Also, First American's Jeffrey Plotnik, Director of Money Market Fund Management, released commentary on "The Changing Dynamics of Quarter-End Investing for Money Market Funds," while Lisa Isaacson, Managing Director, posted commentary on "What to Know About Prime Funds." We review their latest communications below, and also cite an S&P "Request for Comment: Principal Stability Fund Rating Methodology."
The press release," says, "The First American Government Obligations Fund, Treasury Obligations Fund and U.S. Treasury Money Market Fund announced today that the Funds currently have no intention to rely on the ability to impose redemption gates and liquidity fees, which beginning October 14, 2016 will be elective provisions for government money market funds under the SEC's money market fund reforms adopted in July 2014. The Funds already have been operating in compliance with the SEC requirement that, effective October 14, 2016, government money market funds hold at least 99.5% of their total assets in cash, U.S. government securities, and/or repurchase agreements collateralized fully by U.S. government securities."
In his commentary, Plotnik writes, "If you are a frequent investor in money market funds, you may have noticed that making large deposits over quarter-end periods can be a challenge. That challenge is a result of decreased supply from broker/dealers and issuers of overnight investment products, combined with increased demand from money market fund managers and short-term investors for those same investments.... Quarter-end continues to be a key financial reporting date for broker/dealers and issuers of overnight investment products. Reported financial statements represent an overview of a company's financial health at quarter-end. Firms reduce their balance sheets to enhance certain capital/leverage ratios or other key financial metrics the regulators and general public analyze to determine their financial strength. Ultimately, the exercise of balance sheet reduction/management limits the short-term investment options that money market fund managers utilize on a day-to-day basis. The quarter-ends that are significant for money market fund investing are the last business days of March, June, September and December, with June and December being the most challenging."
The Fed's Reverse Repo Program has a big impact on quarter-end dynamics, he adds. "The most recent revision to the Fed's Reverse Repo Program added $200 billion in term repo maturing on either April 2nd or April 6th, 2015.... This $200 billion in additional supply will provide welcome relief to the typical quarter-end product shortage. The $200 billion in term Fed repo being offered is in addition to the daily $300 billion auction.... If a fund manager's conditional bid rate is too high, it is possible they could end up with a much lower allocation than expected, or even no allocation. This presents the fund manager with the risk of large amounts of un-invested cash on the last day of the quarter when there are very little in the way of investment options."
He continues, "Quarter-end supply across all asset classes diminishes in the face of stringent and increasing financial industry regulation. In the face of reduced supply we expect that the market's dependency on the Fed Reverse Repo Program will rise, which will then increase the probability that a fund manager could be allocated less than was requested during the Fed Reverse Repo auction."
Plotnik adds, "It is important to remember that un-invested cash in money market funds ultimately means undesirable short-term deposits for custodial banks. Money market fund custodians are now required to comply with more stringent and costly regulatory requirements and are hesitant to house un-invested cash. In some instances, money market funds may be charged penalty fees for un-invested balances ending up on the balance sheets of their custodial banks. At best in the current environment, money market funds will earn a 0.0% yield on the un-invested balances. Ultimately, un-invested cash balances in a money market fund are detrimental to the fund's existing shareholders and this can make money market fund managers apprehensive about accepting large late-day deposits they are not certain can be fully invested."
He concludes, "In summary, even though the Fed has supplied the market with additional supply, traditional quarter-end supply pressures still exist and a more stringent regulatory environment has non-government investment options largely non-existent over key reporting periods. With the Fed auction ending at 9:00 a.m. CT, any unexpected large inflows or an unexpected low allocation at the Fed auction could put fund managers in the difficult position of trying to invest the remaining cash with little or no available supply. With the cooperation of fund investors and early notification, fund managers will do their best to accommodate every purchase request. However, the new market supply dynamics increase the possibility that late and/or large deposits may not get invested. It is still important to understand that each money market fund is impacted differently by large quarter-end deposits based on size, type, prospectus guidelines, rating agency requirements and eligible investments."
Isaacson's commentary updates investors on the changes to, and ramifications for, prime funds. She writes, "Many fund families will have separate prime funds for their retail and institutional shareholders. The retail funds will offer shares at a stable NAV and the institutional funds will have floating NAVs. Both retail and institutional prime funds will be subject to liquidity fees and redemption gates.... Under the new rules that become effective in October 2016, prime funds that are not limited to retail investors will need to price portfolio holdings at a current market price and shareholders will transact at a NAV that is expressed out to four decimal places, or rounded to the nearest basis point."
Isaacson explains, "Several prime funds, including First American Prime Obligations, currently publish a daily market NAV so interested shareholders can already monitor this data point. Beginning in April 2016, all money market funds will need to have available on their websites six months of rolling fund data, including the daily market NAV.... Money market portfolio managers are -- and historically have been -- very focused on limiting NAV variability. The credit research process is built around assessing issuer credit worthiness. Portfolio construction is carefully considered with the goal of maintaining a stable NAV and preserving principal. It is our expectation that shareholders will see very little change in funds' market NAVs." On liquidity fees, she says, "To reduce the likelihood of triggering a fee at the 10% weekly liquid assets threshold, our portfolio management team plans to carry significant front-end liquidity in the portfolios."
In summary, she adds, "The primary features shareholders want in their money market fund investments -- safety of principal, liquidity and yield commensurate with risk -- will remain intact after all of the money market reforms are implemented. Investment managers understand that shareholder access to their fund shares at a known value is paramount. It is because of this that portfolio management teams will work hard to maintain fund NAVs and structure portfolios to avoid emergency fee and gate triggers."
In other news, Standard & Poor's Ratings Services sent out a "Request for Comment: Principal Stability Fund Rating Methodology," which says, "Standard & Poor's Ratings Services is requesting comments on its proposed changes to its regional and global methodologies for assigning principal stability fund ratings (PSFRs) to fixed-income funds that strive to maintain a stable or accumulating net asset value (NAV) per share. We have two main objectives for our proposed changes to the existing criteria: to broaden the scope of our global methodology to include Australian and New Zealand PSFRs and to update the global methodology for PSFRs. Our updates to the global PSFR criteria include new portfolio diversification metrics for investment in banks rated in our highest short-term category ('A-1+'), changes to cure periods for withdrawn and downgraded securities, and further differentiation of the methodology at each PSFR level. If the proposed changes are adopted, in addition to updating and fully superseding our existing global PSFR criteria "Methodology: Principal Stability Fund Ratings" (PSFR criteria), published June 8, 2011, the proposed criteria would fully supersede the regionally specific criteria applied to the ratings on funds in Australia and New Zealand, to which we would apply the global criteria."
