State Street Global Advisors (SSGA) recently confirmed that they'll be sticking with their Prime Institutional money fund offering. They published an update titled, "Money Market Reform 2024," which reviews the current round of regulatory changes impacting money market mutual funds. It explains, "During March of 2020 and the onset of the pandemic, there was broader stress in the short-term funding markets and significant redemptions of Prime Fund assets. In response, the SEC proposed additional regulations to further strengthen the Institutional Prime Fund space during periods of volatility with the goal to disincentivize any first mover advantage. In October 2024, the final wave of the SEC's money market fund reform rule changes will take effect, marking the most substantial shift since the 2016 reforms. These changes are set to redefine the landscape of Institutional Prime Money Market funds. This transition signifies a pivotal moment for the industry, reflecting the evolving regulatory environment and the drive for greater stability and transparency in the financial markets." (Note: We're still taking registrations for our European Money Fund Symposium, which will be held Sept. 19-20, 2024 in London, England. See you in 3 weeks in London!)
SSGA writes, "The 2024 reforms are expected to have a profound impact on Institutional Prime Money Market funds, which, as of June, held approximately $650 billion in assets under management (AUM) according to Crane Data. Many fund managers have already announced closures or conversions, accounting for over two-thirds of the AUM. The remaining balance will hinge on how comfortable shareholders are with the new rules and the potential application of fees to their redemptions. It is important to note that for those Institutional Prime Fund Investors who understand their cash flows, have multiple sources of liquidity and view Prime Funds as a strategic cash allocation -- they may be largely unaffected. Effective October 2, 2024, the SEC's new rule will impact Institutional Prime and Institutional Municipal Money Market Funds. Retail Prime and Municipal Money Market funds will remain unaffected. This distinction underscores the focus the SEC has on Institutional investors."
They continue, "The new rule states that a when a fund experiences total daily net redemptions of 5% or more of its net assts in a single day, then it must calculate the cost of selling a vertical slice of the portfolio. If the estimated liquidity costs are less than one basis point (.01%) of the value of the shares redeemed, the fund is not required to apply a fee. If the costs are higher, the mandatory liquidity fee must be applied to all redeeming shareholders. Shareholders who are not redeeming, are not charged the fee. The fee could be zero or more. If, when pricing the vertical slice of the portfolio, it is determined that there is no change to the prices of those securities then the fee would be zero. The SEC mandates that if a fund company cannot establish pricing or determine the fee, the fund company could apply a default fee of 1%."
The piece states, "Historically, it has been [rare] for institutional prime money market funds to lose 5% or more of their AUM in a single day. However, the SEC believes that in most instances, normal market conditions, such redemptions will not materially impact the NAV, and thus, the fee would not be applied. Fees are most likely to be applied during periods of market stress, similar to the liquidity-driven event in March 2020. During such times, NAVs of institutional money market funds can fluctuate by more than $0.0001, highlighting the importance of understanding the market conditions under which fees might be imposed. While most fund closing times are not expected to change, prime funds are expected to convert to a single NAV strike per day. In preparation for these changes, we will convert to a single NAV strike on September 16, 2024. The NAV strike time will be 3 PM ET."
It tells us, "As the reform approaches, it is essential for investors to consider whether Institutional Prime Money Market Funds can still serve their liquidity needs. Given the potential for fees and the uncertainty surrounding redemption costs, these funds may no longer be viable as same-day liquidity vehicles. Instead, they could be viewed as tactical allocations for yield advantage over government or treasury funds. They can continue to offer value as a cash and cash equivalent investment that provides safety and liquidity while generating a yield above a government or treasury money market fund."
Finally, SSGA adds, "The SEC's latest rule changes mark a transformative moment for Institutional Prime Money Market Funds. The reforms aim to enhance market stability but also signal the end of these funds' traditional role. The new regulations, driven by investor behavior during periods of market stress, remove the discretionary power of fund managers to implement fees or gates. Investors must now navigate this new era with a keen understanding of the risks and opportunities presented by these regulatory changes."
An SEC filing for the $15.3 billion State Street Institutional Liquid Reserves Fund, including its Administration Class (SSYXX), Bancroft Capital Class (VTDXX), Institutional Class (SSHXX), Investment Class (SSVXX), Investor Class (SSZXX), Opportunity Class (OPIXX), Premier Class (SSIXX), Service Class (LRSXX) and Trust Class (TILXX), says, "Effective September 16, 2024, the Fund's Summary Prospectuses, Prospectuses, and the SAIs are revised as follows: The second paragraph of the section titled 'Principal Investment Strategies' is hereby deleted and replaced with the following: Although the Fund is a money market fund, the net asset value ('NAV') of the Fund's Shares 'floats,' fluctuating with changes in the values of the Fund's portfolio securities."
It also comments, "The first paragraph of the sub section titled 'Determination of Net Asset Value – For the ILR Fund' in the section titled 'Shareholder Information' is hereby deleted and replaced with the following: The ILR Fund determines its NAV per share once each day on which the New York Stock Exchange (the 'NYSE'), The Federal Reserve banks and State Street are open for business at 3:00 p.m. ET. The price for Fund shares is the NAV next calculated after the purchase order is accepted by a Fund. The Fund calculates its NAV to four decimal places."
SSGA also published a piece named, "Benchmarking Your Cash: Part 1," which states, "Since 2015 the Fed has moved interest rates by almost 1,000 basis points: up, down, back up and most likely back down this year. With the emergence of new liquidity products (deposits, DEI share classes, earnings & tech credits) and the evolving rate environment, institutional cash investors are faced with a difficult question, 'Is my approach to managing our organization's liquidity competitive?'. We at SSGA receive this question continuously and work closely with our clients and prospects to help them benchmark their cash based on liquidity type, whether that be operating, core, or strategic."
They discuss, "Benchmarks for Cash Investments," writing, "The overarching goal of a traditional cash product is to preserve principal and provide liquidity. As such, they do not tend to have benchmarks in the more traditional sense, where a portfolio's aim may be to match or exceed the performance of its benchmark index. The benchmark rate or index chosen for a cash product is more indicative in nature, and can help to measure a portfolio's performance over a risk-free rate of return or against a pool of similar products."
SSGA explains, "Commonly used benchmarks in the cash space include: SOFR (Secured Overnight Financing Rate): The leading replacement for LIBOR, SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. It's considered risk-free, as it's based on actual transactions rather than estimates; T-Bill Rates (U.S. Treasury Bills): The yield on short-term U.S. government debt serves as a benchmark for risk-free returns. Investors often compare their cash yields to the relevant T-Bill maturity to gauge whether they're being adequately compensated for credit risk; [and the] Fed Funds Rate: The target rate set by the Federal Reserve for overnight loans between banks. It influences other short-term rates, including those on bank deposits and money market funds."
They also mention, "Money Market Funds and Money Market Fund Indices: Relevant money market funds or money market fund indices which track average yields can be a reliable way to measure a market rate of return. Indices are categorized by asset type (e.g., government, prime) or share class (e.g., institutional, retail). Providers include: Crane Data, iMoney[Net], S&P, and others. Note that these options may not perfectly align with your specific portfolio strategy."
