Northern Trust recently published a Q&A with Peter Yi, Director of Short-Duration Fixed Income, and Scott Warner, Director of Fixed Income Product Management, entitled, "Money Market Reform Arrives in 2016 -- Are You Prepared?." Subtitled, "Ultra-short strategies: A key approach to navigating money market reform," the piece says, "Money market reforms are no longer off in the distant future -- they take effect in 2016. At the same time, many investors expect the Federal Reserve will begin implementing a slow, but potentially steady, rate-hike campaign. With so much at play -- and so much at stake -- investors need innovative cash-management solutions to navigate this changing environment." Also, one of the first "live" pieces of the SEC's MMF Reform package, the "Form N-CR" disclosure mandates, which went into effect in July 2015, has recently seen its first batch of filings, we learned from Stradley Ronan's Joan Ohlbaum Swirsky. We look at the Q&A and at these recent filings below.
Northern's "Point of View" asks, "How do you anticipate cash management strategies will change after money market reform is in effect? Peter Yi answers, "Cash is going to be moving between products and strategies, most likely, into government funds or non-money-market mutual fund products. We're preparing for this shift and think it's going to require some advanced preparation and nimble portfolio positioning. We've been handling volatile liquidity flows since the 1970s and expect this to be very manageable given our experience. Prior to October 14, 2016, the date the industry must implement the structural changes, we believe it is wise to position cash portfolios with greater fund liquidity and monitor any changes in market structure that may affect liquidity."
He continues, "Post-reform, and over time, our forecasts anticipate the market will adjust and credit spreads will be wider for money market instruments. We believe this widening will occur as more investors shift into government strategies, creating more demand for U.S. Treasuries and agencies and less demand for credit instruments. Quite simply: It is our view that a new market equilibrium will emerge; the difference between the yield of a credit fund and a government fund will become much more meaningful. When that happens, we think investors who originally shifted into government funds will move back into credit funds because of the yield differential. It's logical, given supply and demand."
The piece asks, "How does the current lower-for-longer interest rate environment affect your approach to cash?" Scott Warner explains, "Cash has been costing our clients for the last five-plus years; it's been a very expensive insurance policy. But we now have multiple factors coming into play. Interest rates have recently drifted higher in anticipation of [the] Fed move ... as well as money market fund reform creating more uncertainty. So clients are starting to consider solutions such as ultra-short fixed income.... If they decide they have too much cash, what's an alternative? This naturally leads to additional conversations about ultra-short-duration capabilities, taking on marginal interest rate risks, marginal credit risk and albeit some liquidity risk, but very small -- above and beyond what they would get in a money market fund."
Yi adds, "Investors have been gravitating toward these strategies ever since we entered this unprecedented low interest rate environment. However, now the attraction to ultra-short fixed income has been coming from two directions. First are traditional retail and institutional money market investors who are starting to embrace cash segmentation strategies and putting more of their strategic cash allocations into non-money-market products with longer maturities.... Second are core fixed income investors in long-duration strategies that may be fearful of rising interest rates. Developing new innovative strategies in the ultra-short fixed income space has been a flagship capability for Northern Trust. And we've seen incredible success over the last few years accumulating new assets from retail and institutional investors considering new products outside of money market funds."
The Q&A also asks, "Against this backdrop, what is your top priority for your clients? Yi answers, "Now that we have clear guidance on what the final money market fund rules require, we want to be sure we have the right solutions to address clients' needs -- today and in the future. That's why we've spent an incredible amount of time engaging with the regulators and our industry peers to deeply understand the changes -- and why we've engaged with our clients to better understand their view on cash and our liquidity products. We wanted to ensure we considered all of the challenges our clients may face relating to the reforms. We've also done a thorough evaluation of our existing money market offerings, which allowed us to identify the characteristics and features that investors value and would like to retain."
He adds, "In short, `Northern Trust remains committed to the money market business. Our products will continue to evolve with the singular goal of providing a robust suite of liquidity solutions. And as we drive toward the final 2016 implementation deadline, we will continue to thoughtfully evaluate unique options and opportunities to assure investors that they will not have to react in a knee-jerk manner."
In other news, the new "Form N-MFP" requirement mandates that MMF managers disclose "bailouts" and certain specified events. Under the amendment, a money market fund will be required to file Form N-CR if "a portfolio security defaults, an affiliate provides financial support to the fund, the fund experiences a significant decline in its shadow price, or when liquidity fees or redemption gates are imposed and when they are lifted." In most cases, fund sponsors must fill out a brief summary within 1 business day of the event and a more complete follow up description within 4 business days.
Stradley's Joan Swirsky told us recently that a search of the SEC's EDGAR database shows that 5 Form N-CR's have been filed so far in connection with capital contributions, all related to fund liquidations or fund mergers (and none related to real "bailouts", the intent of the rule). Three of them are from the Huntington Funds, which were acquired by Federated (see our Sept. 10 News, "More Consolidation: Federated Buys Huntington"), while the others are from liquidating funds William Blair and Eaton Vance.
The N-CR filing for the Huntington US Treasury MMF says, "As a result of the upcoming merger of the Huntington U. S. Treasury Money Market Fund with another unaffiliated money market fund (scheduled for December 4, 2015), Huntington Asset Advisors is making a capital contribution to the Fund in the amount noted above ($2,431.17). This amount represents historical capital losses incurred on the sale of securities. The goal of the capital contribution is to ensure a $1.00 net asset value upon transfer of assets to the surviving fund."
Two of the filings are for the Huntington Money Market Fund, which is being liquidated. One is from November 2, and the other is from November 23. They say, "As a result of the liquidation of the Huntington Money Market Fund (completed on November 20, 2015), Huntington Asset Advisors is making a capital contribution to the Fund in the amount noted above. This amount represents capital losses incurred on the sale of securities since the last capital contribution as of October 30, 2015. The goal of the capital contribution is to ensure a $1.00 redemption price to shareholders upon liquidation." The capital contribution amounts are $174,689.80 and $7,483.67, respectively.
Yet another filing was made for the liquidation of the William Blair Ready Reserves Fund. (See our Oct. 29 News, "Pioneer, Nationwide Converting Prime to Govt; 2 More Exit MMF Space.") The N-CR filing says, "In anticipation of the Fund's liquidation on or about November 18, 2015, a capital contribution is being made in an amount equal to the difference between the Fund's net assets and the net asset value of shares outstanding." The amount of support was $173,543.69.
Finally, Eaton Vance filed a Form N-CR in connection with the liquidation of its Eaton Vance US Government MMF. (See our Sept. 27 News, "Forward Funds Liquidates US Govt MMF; Eaton Vance Liquidating US Govt MMF.") This filing explains that the "fund is liquidating and a capital contribution is being made in an amount equal to the difference between the Fund's net assets and the net asset value of shares outstanding on liquidation date." The amount of support was $32,315.
