PIMCO Viewpoint on Reforms
PIMCO wrote last month, "Liquidity Markets Likely to Evolve Under Proposed Money Market Reforms". The June "Viewpoint" says, "The Securities and Exchange Commission on Wednesday [June 5] voted unanimously to propose long-awaited reforms for money market funds (MMF). The first proposal would affect prime institutional money market funds, which are allowed to take on credit risk and account for about $826 billion in assets. They would be required to convert from a fixed, $1 par net asset value (NAV) to a floating net asset value (FNAV) share price. Under the second proposal, MMFs may be required to impose liquidity fees and gates on redemptions during times of severe market stress. (Government MMFs, which invest primarily in government securities, would not be subject to these new regulations.)The SEC is seeking public comment on whether one or both of these proposals should be adopted. In addition, the SEC outlined several other possible enhancements to MMFs, such as increased diversification and disclosure policies. PIMCO views this vote as a pivot point for cash and liquidity management. Approximately 40 years ago, the emergence of regulated 2a-7 money market funds caused a shift in liquidity management; monies intended for short-term savings migrated away from traditional bank-managed accounts into MMFs, which offered a stable NAV and attractive yields. Now, we expect a shift away from the 2a-7 dominated $1 par NAV regime. In our view, actively managed short-term fixed income strategies will become increasingly important for liquidity management. Prime MMF investors will have time to prepare during the 90-day public comment period, which will be followed by a review period and then a final announcement and implementation. These changes won't be finalized for several months -- if not more -- and could take years to be implemented. Nevertheless, a potential change has just begun. We are not saying that the demise of prime 2a-7 funds is imminent or even likely. Rather, we are simply highlighting that other compelling complements for liquidity management are available for investors to consider in response to these regulatory changes."
