Last week, Fitch Ratings published a brief paper entitled, "Continued NAV Stability Amidst Money Fund Reform yesterday, which discusses regulatory proposals, "shadow" (or market) NAVs, and transparency. Fitch's press release tells us, "The Securities and Exchange Commission's (SEC) June proposal for money market fund (MMF) reform has placed a heavy emphasis on funds' market (or 'shadow') net asset value (NAV). However, relatively benign market conditions, conservative portfolio management and previous regulatory reforms enabled Fitch-rated U.S. prime MMFs to maintain a stable market NAV since the financial crisis. In addition, earlier this year many of the largest MMF managers began publicly disclosing some funds' daily market NAV. The voluntary disclosures increase transparency for investors, consistent with the SEC's objectives. Thus far, few investors consistently review funds' posted market NAVs, as expected given the stability for most funds. However, the market NAVs will likely receive greater attention during periods of market volatility, for instance when short-term interest rates rise. Increased scrutiny of market NAV by investors may incentivize fund managers to construct portfolios more conservatively." (Note: Watch for our September Money Fund Intelligence and August 31 Performance Data to be published later this morning.)
The report explains, "On June 5, 2013 the SEC issued proposed reforms to MMFs, with a heavy focus on funds' market NAV. Under one of the proposals, institutional prime MMFs will be required to float their NAV, in contrast to the current practice of a stable $1.00 NAV. The SEC argues that this will desensitize investors to NAV movements and help reduce redemptions from institutional prime MMFs in times of stress. In case substantial redemptions do occur, the SEC contends that a floating NAV will invalidate the first-mover advantage that is inherent in stable NAV funds. The SEC has requested market comments on its initial proposal and will finalize the new rule in a couple of months in its current or modified form."
It tells us, "In addition, the SEC has proposed that all MMFs (not just institutional prime) publicly provide daily and historical disclosures of their market NAV. Currently MMFs are required to disclose their market NAV on a monthly basis with a two-month lag. While this aids investors in evaluating funds on a historical basis, this is a stale statistic for short-term money market investments. Aside from the SEC, the Financial Stability Oversight Council (FSOC) in 2012 put forth a number of MMF reform recommendations, including to float the NAV of all MMFs (not just institutional prime). While the FSOC has deferred to the SEC for now, it may revisit the topic of MMF reform if it deems the SEC’s final rule to be inadequate in reducing systemic risk."
Fitch writes, "Starting in early 2013, in anticipation of the SEC's reform proposals, many large MMF sponsors began voluntarily publicly disclosing some funds’ market NAV on a daily basis. This disclosure is a significant improvement in timeliness over the current regulatory requirements. Nevertheless, fund sponsors are being cautious to balance the increased transparency with potential confusion among investors who may not be familiar with the metric. Sponsors are typically displaying market NAV only for select institutional funds that may have more sophisticated shareholders. In addition, fund sponsors have increased their focus on investor education."
The report continues, "Fitch-rated U.S. prime MMFs have maintained stable market NAVs since the financial crisis due to relatively benign market conditions, conservative portfolio management and regulatory reforms (see chart on page 1). For the most part, short-term markets have been relatively stable since 2007–2009, minimizing fluctuations in the value of MMF portfolio securities. At the same time, money fund managers have proactively reallocated portfolio holdings away from, or shortened maturity limits of, riskier issuers in times of increased volatility such as the Eurozone crisis and the U.S. debt ceiling crisis of 2011. The value of securities issued by strong issuers, or at shorter maturities, fluctuates less at times of stress, contributing to a more stable market NAV."
It adds, "Regulatory reforms enacted by the SEC in 2010 have also contributed to the stability of MMF market NAVs. The reforms mandated that MMFs hold higher levels of liquidity and have shorter portfolio maturities, among other things. These changes resulted in MMFs being able to better handle shareholder redemptions without having to sell portfolio securities at a loss, as well as reduce funds' sensitivity to credit and interest rate changes. Fitch-rated funds’ current high levels of liquidity, at 26% daily and 40% weekly liquid assets, as of the end of July, continue to support the stable market NAVs."
Fitch also writes, "Despite the industry's efforts to increase transparency, investors have not shown sustained interest in reviewing funds' market NAV on a daily basis. Anecdotal evidence indicates that few investors check the disclosures consistently. This may be due to the relative difficulty of comparing market NAV across funds run by different sponsors, since disclosures are not standardized on sponsors' websites. Shareholders may become more attuned to funds' NAV if the information is displayed in a standardized form on trading platforms like MMF portals."
Finally, the says, "In addition, as there is little movement in the market NAV of most funds, investors may find the disclosures of little value in the current market environment. However, market NAVs may receive greater attention during periods of market volatility, for instance when short-term interest rates rise. This may be the case particularly as the information is integrated into investors' trading platforms such as MMF portals. Overall, increased transparency is healthy. Heightened scrutiny of market NAV by investors may incentivize fund managers to construct portfolios even more conservatively than before. However, increased attention paid to market NAV may present MMFs with the risk of shareholders preemptively redeeming shares if the market NAV falls below $1.0000 (say, to $0.9999), even for a fund that is not experiencing stress otherwise."
