The National Association of Insurance Commissioners (NAIC), which supports state insurance regulators, will eliminate its Class 1 money fund classification on October 1 due to the pending floating NAV for Prime Institutional money funds. The determination was made by the NAIC's Valuation of Securities (VOS) Task Force meeting on April 4. The NAIC's Class 1 List contains a number of Prime Institutional funds from a variety of the largest money market fund providers, and Crane Data estimates that the move could cause as much as $25 billion to shift away from Prime Inst MMFs. One of the NAIC's requirements for Prime 1 status is a "Stable NAV," and their new interpretation that these Prime funds can no longer be on the Class 1 list will reduce their attractiveness as investments to insurance companies. The NAIC's U.S. Direct Obligations/Full Faith and Credit Exempt List is not affected as this includes Government funds, so these funds will still be available to insurance investors.
The VOS Task Force memorandum, entitled, "Amendment to the Purposes and Procedures Manual to Delete References to the Class 1 (Money Market Fund) List," explains, "Effective October 14, 2016, under regulations recently adopted by the US Securities and Exchange Commission (SEC), institutional prime money market funds are required to report a floating net asset value (NAV) instead of a stable net asset value (NAV). Part Six, Section 2 (b) (ii) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) contains the NAIC's Class 1 List, which identifies money market funds that can be reported as bonds by insurers in part because they are permitted to report stable NAV under SEC regulations."
It continues, "The money market funds on the Class 1 List fit the SEC definition of institutional prime funds, which means such money market funds can no longer report stable NAV and accordingly will no longer be eligible for bond treatment. During the 2015 Fall National Meeting, the SVO was instructed to: (a) renew the Class 1 List for January 2016; (b) but to provide for the expiration of the Class 1 List effective September 30, 2016; and, (c) to prepare an amendment to delete instructions from the Purposes and Procedures Manual related to the Class 1 List for adoption with an effective date of September 30, 2016. The proposed amendment appears below. A referral to the Statutory Accounting Principles (E) Working Group is not necessary because FRS is aware of the planned deletion of the Class 1 List text will prepare a Form A to modify statutory accounting and reporting guidance."
A footnote explains, "A money market fund is eligible for listing on the Class 1 List if the fund meets the following conditions: (A) The fund maintains a rating of Am or better from Standard and Poor's or a rating of A-mf or better from Moody's Investors Service or an equivalent or better rating from another NAIC CRP. (B) The fund maintains a stable net asset value per share of $1.00 at all times. (C) The fund allows a maximum of seven-day redemption of proceeds. (D) The fund invests at least ninety-seven percent (97%) of its total assets in any combination of: the U.S. Government securities listed in Section 2 (e) of this Part below, securities rated in the highest short-term rating category by an NAIC CRP, unrated securities determined by the fund's Board to be of comparable quality, securities of money market funds that are registered investment companies and collateralized repurchase agreements comprised of such obligations at all times. The remaining three percent (3%) may be invested in Second Tier Securities as that phrase is defined by Rule 2a-7 of the Investment Company Act of 1940 (17 CFR 270.2a-7)."
It continues, "A money market fund eligible for the Class 1 List fits the SEC definition of an institutional prime fund: SEC (institutional prime): "... hold a variety of taxable short-term obligations issued by corporations and banks, as well as repurchase agreements and asset-backed commercial paper and require a high minimum investment. NAIC (Class 1): "... invests at least 97% of its total assets in any combination of: ... U.S. Government securities ... securities rated in the highest short - term rating category ..., unrated securities determined ... to be of comparable quality, securities of ... registered investment companies and collateralized repurchase agreements comprised of such obligations at all times and the remaining 3% in Second Tier Securities ..." (Emphasis added). SEC (government fund): "... invests at least 99.5 percent or more of its total assets in cash, government securities and/or repurchase agreements collateralized solely by cash of government securities. The new SEC regulations also affect other characteristics required under the P&P such as redemptions but the more salient one is the P&P requirement for stable NAV because this is more closely related to the bond construct."
The Amendment, as stated in the introduction, deletes all references to the Class 1 list, and those deletions can be seen on the PDF link. The amended version, minus the Class 1 List, states, "The SVO maintains a money market fund and a list of bond mutual funds. Investments in these funds by reporting insurance companies are eligible for more favorable reserve treatment than funds not so listed, as noted above. These lists are published on a quarterly basis. Money market funds that meet certain criteria for exemption from NAIC reserve requirements may be listed on the U.S. Direct Obligations/Full Faith and Credit Exempt List."
Finally, the NAIC writes, "Bond mutual funds that meet certain criteria may be listed on the bond mutual fund list (Bond List) and insurance companies that own these bond mutual funds are permitted to maintain a reserve using the more favorable bond reserve factor." It continues, "Any money market fund wishing to establish that it meets the conditions for listing on the U.S. Direct Obligations/Full Faith and Credit Exempt List and any bond mutual fund wishing to establish that it meets the conditions for listing on the Bond List, must submit a completed submission package to the SVO with the following documentation: (A) The appropriate money market or bond mutual fund application form; (B) Authorization letter requesting review of the fund for approved list purposes; (C) Prospectus of the fund; (D) Statement of Additional Information (SAI); (E) Most recent annual report of the fund, and, if more recent, the latest semi-annual report; and (F) Rating letter from an NAIC CRP dated in the year of the filing."
Crane Data's Money Fund Intelligence XLS tracks whether money funds are NAIC approved or not, so we'll modify these once the NAIC changes go live. A rough count shows that over 400 funds (including share classes) are `NAIC "approved". What is the potential impact of this change? We estimate the impact on Prime assets to be about $25 billion. The Federal Reserve's Z.1, or "Flow of Funds," data shows that Property-Casualty and Life Insurance companies combined hold about $47 billion in money fund assets. We'd guess that about half of this is held in Prime assets and would be impacted. (See our March 14 News, "Fed Z1: Household Assets Retake 1.0 Tril; March Bond Fund Intelligence.") Finally, we asked the NAIC for more details and comment but received no response.
In other news, American Funds, which converted its $15.8 billion American Funds MMF into the American Funds US Govt MMF on April 1, put out a release, entitled, "Money Market Reform Affects Two American Funds." It discusses this major conversion as well as that of the American Funds Insurance Series Cash Management Fund into an Ultra-Short Bond Fund. The statement says, "In July 2014, the SEC adopted amendments that impose new requirements on money market mutual funds. The new rules are designed to address concerns that money market funds may contribute to financial instability during periods of market stress. The most significant changes become effective on October 14, 2016.... The amendments will impact American Funds Money Market Fund and American Funds Insurance Series - Cash Management Fund."
It continues, "The amended rules provide exemption from the floating NAV requirement for U.S. government money market funds. Since American Funds Money Market Fund already invests primarily in U.S. government securities, we have refined the fund's investment guidelines to ensure the fund is deemed a government money market fund under the amended rules. In connection with this change, the fund's name has changed to American Funds U.S. Government Money Market Fund, and the fund is required to invest at least 99.5% of its assets in qualifying government securities. As a result of these adjustments to the fund's name and investment requirements, the fund is exempt from the amended rules and will continue to price and transact at a stable NAV with minimal impact to its investment strategy. These changes are effective as of April 1, 2016."
Regarding the American Funds Insurance Series, it states, "On December 4, 2015, shareholders of the Cash Management Fund formally approved a proposal to convert the fund to an ultra-short bond fund. Given the fund already has a floating net asset value per share, the conversion is intended to streamline administration of the fund, to efficiently manage costs for the fund over the long term and to better position the fund to achieve superior long-term investment results for the benefit of its shareholders. The fund's investment objective will remain substantially unchanged and the fund will continue to provide investors with current income and preservation of capital and liquidity consistent with the maturity and quality standards applicable to the fund. The fund will continue to have an NAV that fluctuates." (See also our April 4 News, "Prudential Core MMF Goes Bond; BlackRock, BofA Approved; Calamos.")
The Capital Group, manager of the American Funds, adds, "In seeking to achieve its objectives, the fund's principal investment strategies will remain largely unchanged. The fund will continue to invest substantially in high-quality money market instruments, such as commercial paper, commercial bank obligations, government securities and short-term debt securities, which may have credit and liquidity support features, including guarantees and letters of credit. Additionally, the fund expects to invest in repurchase agreements backed by U.S. government securities. The fund will continue to maintain a weighted average portfolio maturity of 60 days or less. We will change the name of the fund to American Funds Insurance Series ― Ultra-Short Bond Fund. We anticipate this change to be effected on or about May 1, 2016."
Finally, Transamerica is converting the Transamerica Partners Variable Funds Money Market Subaccount to Government on May 1. The SEC filing explains, "In response to recent amendments to Rule 2a-7 under the Investment Company Act of 1940 passed by the Securities and Exchange Commission, the Board of Trustees of the underlying portfolio of the Transamerica Partners Variable Funds Money Market Subaccount has approved changes to the Portfolio's investment objectives and principal investment strategies that will allow the Portfolio to operate as a "government money market fund." Under amended Rule 2a-7, a government money market fund is a money market fund that invests at least 99.5% of its total assets in U.S. government securities, cash, and/or repurchase agreements that are fully collateralized by U.S. government securities or cash."
It continues, "Effective on or about May 1, 2016, the Transamerica Partners Money Market Portfolio will change its name to Transamerica Partners Government Money Market Portfolio. Transamerica Partners Variable Funds Money Market Subaccount will change its name to Transamerica Partners Variable Funds Government Money Market Subaccount." As we previously reported, the $228 million Transamerica Money Market Fund is converting to the Transamerica Government MMF on May 1, according to a filing.
