Yesterday, Moody's Investors Service published "Frequently Asked Questions: Impact of Negative Yields on Money Market Funds," which discusses issues with European money funds, and Standard & Poor's published, "Reigniting The U.S. Money Market Fund Reform Debate," which discusses the possibility of future money fund regulatory changes. Moody's writes, "Over the past two years, the persistently low yields offered by high-quality, short-term investments have remained a challenge for money market fund (MMF) managers seeking to generate a positive yield whilst maintaining a stable net asset value and providing daily liquidity for their investors. Faced with historically low yields, many MMF managers have reduced or waived their management fees in order for their MMFs to deliver a positive net yield."
They continue, "The prospect of a prolonged period of low to negative yields on high-quality, short-term investments adds to the challenges already faced by the MMF industry and is creating a number of unprecedented issues for MMF managers. In the immediate term, the greatest impact will be on Euro-denominated government funds, given their limited investment options; however, in due course, zero to negative-yielding securities will exert pressure on prime funds in Europe, as well as government and prime funds in the US."
Moody's adds, "In response to this anticipated negative yield environment, MMF managers have started taking various actions -- beyond fee waivers -- that include suspending subscriptions, or closing down or restructuring funds. In general, we view actions intended to avoid NAV deterioration as credit positive, and will evaluate them on a case-by-case basis. However, if a fund decides to change its structure, objectives or strategy, maintaining a high fund rating would only be achievable if the fund offers investors an option to redeem their shares at par (and based on all the MMF's original terms), before implementation of the proposed changes or transition. We will continue to use the tools in our existing Money Market Rating Methodology to evaluate MMFs, including the effects of any of these changes."
S&P's "Reigniting The U.S. Money Market Fund Reform Debate" comments, "Ever since the Reserve Primary Fund "broke the buck"--its share price fell below $1.00 per share--in the midst of the global credit market crisis of 2007-2008, financial market regulators have stressed the need for additional money market fund regulations. In 2010, the SEC took an important first step by adopting revisions to the regulations to enhance money market funds' resiliency. But the SEC hinted that this was only the first phase and that the industry was in need of a second, more comprehensive overhaul. Regulators said the 2010 amendments did not address what they believe is the industry's susceptibility to runs and a source of financial market instability."
They explain, "When SEC Chairman Mary L. Schapiro announced on Aug. 22, 2012, that a majority of SEC commissioners did not support her phase two reform proposals for money market funds (MMFs) and that she was not proceeding with a vote to solicit public comment on additional reforms, the money fund industry breathed a sigh of relief. However, numerous public comments and a recent letter from Treasury Secretary Timothy Geithner, chairman of the Financial Stability Oversight Council, indicate that additional reform is almost certain--it's just a matter of when."
Finally, S&P's "Overview" says, "As the debate over money market fund (MMF) reform heats up, it seems that additional reform is almost certain--it's just a matter of when. The impact that the reforms could have on our principal stability fund ratings depends largely on the details in the final proposals, as well as whether they impair an MMF's ability to maintain a stable net asset value. Based on what we've heard from market participants, a particular reform's ability to reduce MMFs' perceived susceptibility to runs will likely determine how much consideration the regulators give it."
