Moody's Investors Service put out a press release yesterday afternoon entitled, "ICI and G30 recommendations would add strengths -- and challenges -- to money market funds, which says, "Two private sector groups have made substantive proposals aimed at strengthening the safety attributes of money market funds that would, if adopted by the U.S. Securities and Exchange Commission (SEC), likely make the economics of managing these funds even more challenging, Moody's Investors Service concludes in a new report."
The release was based on a new Moody's report entitled, "Money Market Fund Industry: Weighing Recommendations by Working Groups of ICI and G30," which says, "According to the rating agency, the depth of the changes implied by both proposals -- one from the Money Market Fund Working Group (MMWG) of the Investment Company Institute (ICI) and the other from the Group of Thirty's (G30) Working Group on Financial Stability -- point to a likelihood that money market fund managers will likely soon be facing some combination of a) higher costs, b) investment constraints, and c) greater regulatory oversight and reporting. Moody's believes that these proposals could be a catalyst for further competitive pressures and industry consolidation."
The release continues, "The respective working groups of the ICI and the G30 have outlined two paths with important implications for a host of issues that affect the money market fund business. The proposals are responses to the liquidity crisis in the short-term credit markets that persisted in the weeks following The Reserve Primary Fund 'breaking the buck' in September 2008."
"The SEC also has promised a broad review of money market fund structure, and has informally suggested that the adoption of a floating NAV could ease large investors' and sponsors' sensitivity to the dual promise of constant NAVs and liquidity. Such a shift in attitude could move some money market funds away from amortized cost valuations and a stable $1.00 NAV. Current regulation generally contains provisions related to credit quality, maturity and diversification." VP/Senior Analyst Dagmar Silva adds, "Liquidity, on the other hand, has not been a particular focus of the pre-crisis regulation, but the recent market crisis has highlighted liquidity as a great challenge for money market funds."
She continues, "Both the ICI and G30 proposals lead toward reinforced liquidity for funds, but at a cost to yields. In simple terms, the ICI's proposals affect yields primarily through investment constraints, while the G30's proposals imply both investment restrictions and higher costs. Investors would naturally be affected, and key questions remain regarding their appetite for funds with improved liquidity and credit quality, but with likely lower yields.... Of course, this is still a fairly fluid situation, and the SEC would first have to adopt regulations. Ultimately, it could pick out parts from either or both of the ICI and G30 proposals."
The release adds, "Moody's believes that sponsors of money market funds would need to take on more responsibilities with regard to supervision, compliance and disclosure." "Profitability would likely be further affected," says VP/Senior Credit Officer Matthew Noll, "but large scale, well-capitalized players should best be able to manage the changes if and when they are finally implemented. The "extent of consolidation" and the "expected timeframe of implementation of any such regulations is also unclear," notes Noll, "but we plan to follow developments carefully."
