Federated Investors became the latest money fund manager to announce "strike" or pricing times for its pending Floating NAV funds. It outlined plans in an April release entitled "Federated Announces Institutional FNAV Money Market Funds and Strike Times." The firm also put out a document, "New Money Market Fund Disclosure Rules Mitigate Concerns on Gates and Fees," which says that disclosure rules should help allay investors concerns about fees and gates. Federated's Deborah Cunningham also commented on disclosure rules in her latest "Month in Cash" commentary. Also, Wells Fargo Securities published a report called, "Money Market Reform Series, Part 3: Observations and Updates," which examines the "money market fund changes that will be relevant to institutional investors."
The latest update on strike times says, "Federated Investors, Inc. has announced additional refinements to the company's line of money market funds by defining the NAV strike times for funds which have been designated as floating net asset value (FNAV) institutional funds.... Federated also has designated Federated Master Trust as an institutional FNAV money market fund, subject to board approval, and outlined strike times for all institutional prime and institutional municipal money market funds."
It continues, "Based upon much client feedback, a variety of strike time models are needed to fulfill the varying needs of our investors and intermediaries. Thus, Federated plans to offer five institutional FNAV money market funds, with single or multi‐strike intraday pricing, as listed in the table below. As of Oct. 14, 2016, each of the funds below will offer the following intraday pricing strike times, subject to board approval: Federated Institutional Money Market Management, Federated Master Trust, and Federated Inst Prime Obligations -- 8am, Noon, and 3pm (Multi-strike and T+0 settlement only); Federated Inst Prime Value Obligations -- 3pm (Single-strike and T+0 or T+1 settlement), and Federated Inst Tax-Free Trust -- 1pm (Single-strike and T+0 or T+1 settlement)."
Federated's update on Disclosure Rules says, "Despite the initial hand-wringing over new redemption fee-and-gate rules unveiled in 2014 and effective later this year, concern continues to decline as investors realize the benefits of new accompanying website disclosure rules that significantly enhance 2010's initial reforms. The improved transparency resulting from the daily and weekly portfolio liquidity and flow disclosures greatly improves the ability of investors to monitor and perform ongoing due diligence and oversight of their funds.... Other than empowering fund shareholders through enhanced access to information, Federated does not expect the 2014 rule changes to be all that noticeable to its money market fund shareholders."
Cunningham writes in her latest Federated column, "Fed stays close to the vest; money funds show their cards," "On April 14, [the SEC] began to require money market funds to disclose more information, such as the amount of liquid assets in their portfolios. Believe it or not, we are happy the SEC did this. It specifically designed these disclosure rules to come out six months ahead of requirements that institutional prime and municipal money funds float their net asset values (NAV) and create fees and gates procedures."
She explains, "The disclosures will be crucial in getting clients comfortable with the reforms. We feel that the more they understand the changes, the less concerned they will be about them. We want investors to see that the floating NAVs -- now reported out to the hundredth of a penny -- are essentially steady and that our portfolios have well above 30% in weekly liquid assets. Cash managers welcome all of this openness because we hope it will convince institutional clients to stay in prime and municipal funds."
Cunningham adds, "Certainly, clients are happy about the additional yield they've been getting lately. The yield of prime over government portfolios was about 20-22 basis points in April, well above the historic average of around 12. That should offer plenty of incentive for clients to take a close look at how they operate, especially as some may need to amend their own investment policies to invest in a floating NAV."
Wells Fargo Securities' "Observations and Updates", written by Garret Sloan and Eric Vos, also discusses strike times. It says, "To facilitate same day (cash) settlement and intraday investor liquidity, funds will be required to set a specific market value at least once a day during market hours and likely multiple times a day.... Actual 'strike times' are slowly being communicated by the fund companies as lineups are announced, but we do not believe that the announced times are set in stone as funds seek the sweet spot for pricing and investor risk appetite. [I]nvestors in Prime and Tax-exempt funds may experience more structured timing related to receiving redemption proceeds and also earlier end-of-day cutoff times, but they will continue to have access to intraday liquidity."
Wells writes, "Weekly liquid asset ratios could become a key criterion on which investors make investment decisions. The theory being that all else equal, higher weekly liquid assets reduce the likelihood of a fee or gate being implemented. Unfortunately, higher weekly liquid assets also correspond to lower yields and less supply, especially amongst issues subject to Basel III capital and liquidity constraints. Money market funds began reporting daily and weekly liquid asset levels on April 14."
On Prime to Govt conversions, it says, "Looking at Prime fund provider activities, Crane Data has reported that providers have announced approximately $287 billion in Prime fund asset conversions, with over $212 billion (or 74%) already converted. Interestingly ... more than three quarters of the assets being converted have been from funds designated as retail, with only $73 billion from 25 fund providers in the Prime institutional space. For those providers choosing to convert Prime funds to Government funds, it may simply be the path of least resistance, as Government funds with a stable NAV will allow both institutional and retail investors to co-exist in the same fund structure, permitting fund advisors a certain ease of compliance with the new 2a-7 rules."
Wells continues, "Sweep services represent another challenge for funds, but the subject has received less attention.... This process is expected to become significantly more complicated for Prime funds that are subject to a floating NAV and gates/fees. As a result, most, if not all intermediaries have decided to discontinue the use of Prime funds for sweep services. Statistics on the proportion of money fund business tied to sweep is very difficult to estimate. On the conservative side, sweep could represent approximately 20% of prime fund assets or approximately $244 billion based on informal conversations with various fund product managers. However, the figure could be much higher than that. Fidelity's decision to amend its Fidelity Cash Reserves retail fund from a Prime to a Government fund was at least partly precipitated by its sweep-related investor base. In other words, if the 20% sweep assumption is correct, the Prime fund space could see outflows of $244 billion in addition to non-sweep Prime money fund outflows."
They add, "Despite peaking at more than $1 trillion, institutional Prime funds have never been the most important cash management tool for treasurers, but they have been an important component, and we believe they will continue in that role. While many investors will likely reject the upcoming changes, we would like to share some observations that will hopefully result in a more complete view of institutional Prime funds under the new regulatory framework.... While we consider the gates and fees to be a heavy handed approach, institutional investors should also consider them as tools with the means to manage the quick and orderly liquidation of funds."
Finally, on the Floating NAV, they comment, "[A] review of shadow NAVs since 2010 indicates that prices of $1.0000 can be maintained for extended periods of time, and price movements to the third decimal place are rare. With that in mind, daily price 'volatility' from the floating NAV may have less of an impact on daily transactions than some currently believe.... We believe that it is only in the full redemption scenarios that most clients will notice the Floating NAV. When all factors are considered, we believe that Prime funds will continue to be an important piece of the cash investment strategy for many institutional investors as the Prime fund outperforms the Government fund on a total return basis in an adverse price scenario, at current market levels."
