October 14 marks the implementation date for the final phase of the SEC's 2014 Money Fund Reforms, which most notably include a floating (4-digit) NAV for Prime Institutional funds and emergency gates and fees provisions for all Prime and Municipal money market funds. (See our July 24, 2014 News, "SEC Adopts MMF Reforms; Chair White on Rule's Fundamental Changes.) ICI released a "Statement on SEC Money Market Fund Rules," which is subtitled, "Reforms from 2010 and 2014 Have Fundamentally Changed Product to Address Any Pre-Crisis Risks." We excerpt their statement, as well as comments from Fitch Ratings and S&P Global Ratings, below.
The ICI writes, "In 2014 the US Securities and Exchange Commission (SEC) finalized new regulations governing money market funds, which will take effect on October 14, 2016. Investment Company Institute (ICI) President and CEO Paul Schott Stevens issued the following statement on the eve of implementation of the new SEC rules: "This SEC rulemaking required funds to make a number of significant operational changes on a very aggressive timeframe. Thanks to substantial effort, planning, and execution within the industry, funds are prepared to meet the new requirements on time."
He comments, "After all of this work, three things are clear: today's money market funds are very different products than their pre-crisis predecessors; investors value the vital role that money market funds play in helping meet their cash management needs; and money market funds do not need further reform. Indeed, when coupled with SEC reforms from 2010, these new rules add layers of transparency and redundant safeguards that more than adequately address any risks that may have existed in 2008."
Stevens adds, "Funds have worked overtime to prepare for the new regulatory landscape. By entrusting $2.6 trillion in assets to these funds, investors continue to register their confidence in money market funds' ability to meet their needs for years to come."
A statement entitled, "Fitch: Money Funds Not Taking Chances on Liquidity as Reform Looms," tells us, "Uncertainty surrounding investor behavior is pushing prime institutional money funds to err on the side of caution when it comes to liquidity as money fund reform comes into effect on Oct. 14, 2016.... Average weekly liquidity across 33 prime institutional funds Fitch reviewed was 84.0%, and a quarter of the funds maintain at least 99% weekly liquidity. Five funds have 100% of their portfolios invested in weekly liquid assets, eliminating any chance that outflows will trigger the liquidity fees or redemption gates features."
Fitch's Greg Fayvilevich states, "With new liquidity requirements on prime money funds, managers are maintaining liquidity levels well above the 30% threshold on prime funds as over a trillion dollars has flowed out of prime funds ahead of reform. In response, fund managers have been hoarding government securities and other debt that matures within one week to successfully meet the large outflows."
The release continues, "As much as $1.1 trillion has shifted away from prime money funds since October 2015, including $838 billion from institutional prime funds, mainly into government funds. The moves are driven to a large degree by investor discomfort with prime money funds' new features, particularly liquidity fees and redemption gates that may be imposed on these funds if their weekly liquidity falls below certain thresholds."
It adds, "The funds' focus on short maturities is causing dislocations in the short-term markets, with commercial paper (CP) rates spiking in recent months. Rates on CP maturing in 90 days rose from 0.60% at end-April to 0.81% as of Oct. 7, 2016. Not all short-term debt issuers have been willing to pay the higher rates to access the CP market, as evidenced by a decline in CP outstandings of $175 billion between end-April and Oct. 5, 2016. The higher yields on short-term debt are being reflected in money fund portfolios, with the spread between net yields on prime institutional funds and government institutional funds now up to 0.16% as of Oct. 11, 2016, up from 0.12% as of Sept. 21, 2016."
"The yield spreads between government money funds and prime funds, as well as alternative liquidity products such as private liquidity funds and short-term bond funds, will be a significant factor in investors' decisions to move back into prime funds post reform," adds Fayvilevich.
S&P Global Ratings, in an update entitled, "Ratings On Money Market Funds Are Likely To Remain Stable After The SEC's New Amendments Take Effect," writes, "On Oct. 14, the SEC's amendments to rules governing money market funds (MMFs) will take effect. The commission adopted these reforms on July 23, 2014, in part because of the 2007-2008 financial crisis. These updates to rule 2a-7 of the Investment Company Act of 1940 are subsequent additions to the prior amendments the SEC implemented in 2010. The new guidelines represent significant changes to the way MMFs--particularly institutional prime funds--currently operate. S&P Global Ratings' assessment at the time these amendments were adopted in July 2014 was that they were unlikely to affect our principal stability fund ratings (PSFR)."
It explains, "The amendments going into effect on Oct. 14 primarily combine two approaches for restructuring MMF operations, which include floating net asset values (NAV) as well as liquidity fees and redemption gates. The floating NAV per share requirement is targeted to all MMFs, except government and retail MMFs. A floating NAV prime institutional MMF must price and transact in its shares based on the market value of underlying fund holdings at an NAV rounded to the fourth decimal place (e.g., $1.0000).... Retail MMFs were excluded because they are less likely to redeem in time of market stress, as they showed during the 2007-2008 financial crisis."
Authors Guyna Johnson, Michael Masih, and Peter Rizzo comment, "The floating NAV aspect of the regulations has not affected our PSFRs because we rate MMFs based on our opinion of their ability to maintain a principal stability--that is, maintain a marked-to-market NAV per share within a specific range (i.e., up to -0.25% or 0.9975 for a 'AAAm' rating). A floating NAV that remains within this threshold is consistent with one component of our criteria for 'AAAm' rated funds. As the regulations take effect, we believe fund managers will continue to minimize share price fluctuations, as they did after the 2010 SEC amendments to rule 2a-7 that improved credit quality, reduced maturity, and established minimum daily and weekly liquidity requirements."
Finally, they add, "During the two-year MMF reform implementation period ending Oct. 13, investment managers have taken steps to ensure their money funds meet the new regulations while also taking into consideration institutional investors' short-term cash management needs. In addition to dedicating enormous amounts of time and resources to make the necessary operational changes to offer floating NAV MMFs, many investment managers have converted existing prime MMFs to U.S. government MMFs and created new investment alternatives within the stable MMFs and ultra-short bond fund categories. Additionally, we have seen institutional investors move large amounts of money from prime MMFs to U.S. government MMFs. Also, the regulatory changes sparked another wave of industry consolidation as investment managers determined the costs associated with the rules outweighed the benefits of remaining in the business. As a result, we have also seen several players completely exit this market and many others exit the prime MMF business and focus their offerings on government MMFs."
