In a letter addressed to its money market fund clients, entitled, "New Product Line Up Plans," BlackRock announced Monday changes to its money market fund lineup in response to last summer's sweeping SEC reforms. Among the proposed changes are the introduction of 7-day maximum maturity funds and the possible conversion of prime retail and sweep funds to government funds. BlackRock's letter to clients, says, "The amendments to Rule 2a-7 under the Investment Company Act of 1940 announced by the U.S. Securities and Exchange Commission last year will result in fundamental changes to U.S. money market mutual funds. Although many of these changes are not effective until October 2016, we at BlackRock are working to ensure our products, systems and processes will be fully compliant with the new rules -- and meet the funds' objectives of safety, liquidity and yield." (See also the release, "Western Asset Announces Preliminary Plan For Money Market Fund Offerings," which we'll cover in tomorrow's News and in the pending issue of Money Fund Intelligence.)
It explains, "Through comprehensive dialogue with our clients, we have learned that these new regulations present many of you with substantial challenges and that different clients have particular sensitivity to various elements -- be it redemption gates, liquidity fees, floating net asset value, or "all of the above". A large portion of our institutional client base will be further challenged in the management of their cash by the impact of Basel III regulation on banks' willingness to accept deposits. Based on feedback from both institutional and retail clients, we have designed a spectrum of choices that we reviewed with the funds' Board of Directors. These products are intended to offer the highest value and broadest utility for our clients."
BlackRock explains, "No later than October 2016, BlackRock expects to offer the following investment solutions for cash investors: 1) Constant Net Asset Value ("CNAV") Government Money Market Funds: BlackRock will offer a wide range of CNAV government money market funds -- without redemption gates or liquidity fees (collectively, "gates and fees"). We expect the combination of money fund reform and other market factors such as the impact of Basel III on the banking industry to cause a substantial shift of assets into CNAV government funds. Given the limited supply of short-dated government securities and the substantial contraction of the repurchase agreement markets, we are concerned about the potential for shortages in CNAV government funds. To seek to maximize the liquidity available to our clients in CNAV products, BlackRock plans to offer our clients four institutional CNAV Government and Treasury funds, each of which is an approved counterparty for the Federal Reserve's Reverse Repurchase Agreement Program."
It continues, "2) Floating Net Asset Value ("FNAV") Institutional Prime Money Market Funds: A number of clients have indicated they are interested in continuing to invest in prime funds. We plan to maintain our largest prime fund, the $66.5 billion TempFund as a prime institutional fund. Our historical analysis shows that in normal market conditions, TempFund has demonstrated minimal per share net asset value ("NAV") volatility. Given the anticipated forward environment, we believe that institutional prime funds are likely to offer investors a compelling yield premium relative to CNAV government funds. We expect that TempFund will offer intraday liquidity through at least three NAV calculations a day, with a morning, mid-day and afternoon fund wire. We understand that for some TempFund investors the notion of gates and fees presents challenges, and we will work with those clients to explain how these mechanisms (which were intended by regulators to safeguard client assets in extraordinary market conditions) would work both in ordinary and stressed environments. Suitable alternatives will be identified as needed along with a transition plan for these client assets."
BlackRock's letter also says, "3) FNAV Short Maturity Institutional Prime Money Market Funds: Some clients have indicated interest in a cash investment product that fits between a CNAV government fund and a FNAV institutional prime fund. Subject to the approval of the Funds' Board of Directors, BlackRock will offer an institutional prime fund that limits holdings to those with a maturity of seven days or less. We expect that TempCash, our $2.4 billion fund will be converted to this new strategy. This fund is expected to appeal to clients who require some incremental yield premium to CNAV government funds, but with minimal expected NAV volatility due to both the very short maturity of the portfolio investments and the ability to use amortized cost accounting. In addition, our expectation is that this type of strategy would be unlikely to trigger redemption gates and liquidity fees. In the event that the Federal Reserve is more aggressive than market expectations in their path towards interest rate normalization, this type of fund is expected to perform well compared to other institutional prime funds."
It adds, "4) Retail and Sweep Accounts: Conversations with our retail distribution partners highlighted significant concern regarding funds that are subject to gates and fees for retail clients. Feedback from many of our retail partners currently using various BlackRock money funds for daily cash sweeps indicate it is uncertain that anything other than CNAV government funds will be offered for sweep accounts. The feedback stems from the cost of modifying systems to operate sweeps and the associated operational risk from implementing gates and fees. In response, as needed we will convert certain prime retail funds to CNAV government funds, and clients may transition from prime funds into CNAV government funds. In addition, we will convert a number of our national municipal money market funds to short maturity strategies holding 100% 7-day or shorter Variable Rate Demand Notes (VRDNs). These ultra-short assets typically price at par and should minimize NAV volatility, and significantly reduce the probability of the implementation of gates and fees."
The letter also states, "5) Separate Accounts: Conversations with various clients in the marketplace indicate that for clients of a certain size, separate accounts are an increasingly appealing alternative given the challenges presented by money fund reform, bank regulation and continued low interest rates. BlackRock has already seen substantial growth in its separate account business, with an approximately 25% increase in cash separate account assets in 2014. The flexibility of customized portfolios tailored to an investor's desired levels of risk and liquidity is becoming increasingly attractive. We anticipate continued growth with customized strategies based upon specific client objectives, and are adding to our resources to ensure BlackRock remains the industry leader in bespoke separate account solutions."
BlackRock comments, "There has been discussion in the market regarding the appropriate role of private money market funds in the post-reform world. BlackRock currently operates a number of private funds. Though not part of our core strategy, going forward we expect to offer private funds to meet specific client needs selectively and on a limited basis as private funds are not suitable investment vehicles for the majority of our institutional clients. In addition to the investment solutions outlined above, we expect money fund reform to create client demand for new, innovative products. We are excited to continue our dialogue with you about your investment needs. BlackRock has a continuing focus on evolving our platform to meet our clients' changing needs, including products that may be smaller in scale and appeal to a niche segment of our client base."
They conclude, "These changes to the BlackRock Cash Management business are fundamental and the work is substantial. We are streamlining our product range to ensure we provide the best range of investment alternatives. We will introduce new tools and analytics based on BlackRock's industry leading Aladdin platform that will allow our clients to better manage risk in the new world of cash management. By October 2016 BlackRock will have an industry leading product suite supported by cutting-edge technology, all designed with our clients' needs in mind. We are committed to keeping you apprised as we make progress and will communicate frequently over the coming months as we pass important milestones."
The Wall Street Journal initially reported the news and writes, "BlackRock to Shift Funds to Comply With New Rules." The article says, "BlackRock Inc. said it will close or consolidate some money-market funds and add new features to others -- the latest reflection of how new rules are roiling the $2.7 trillion U.S. money-fund universe. The giant New York money manager in a letter to clients on Monday announced a series of tweaks to its lineup. The changes will reduce BlackRock's money-market funds from about 50 to more than 30, according to the company."
The Journal piece quotes Tom Callahan, co-head of global cash management, "After October 2016, there is really not going to be a one-size-fits-all product anymore.... There is some fund consolidation, funds changing, funds being repurposed and some closing." They also quote our Peter Crane, "[This latest move] reaffirms that fund companies are keeping all their options open."
See also, Bloomberg's "BlackRock Plans Money Fund Changes to Meet New SEC Regulations"," which says, "BlackRock Inc., the world's largest asset manager, said it would change its lineup of money-market mutual funds to make them comply with new federal regulations. BlackRock, in an April 6 letter to investors, said it would offer funds that invest solely in government securities and others with floating net asset values that would invest in corporate debt. The company said it would have funds that limit holdings to securities with maturities of seven days or less. The firm also said it will offer separately managed accounts and private funds on a "limited basis."" Bloomberg quotes our Peter Crane, "The big companies are offering a range of choices, because no one knows exactly what customers will want."
