Below, we excerpt the second half of our March Money Fund Intelligence "profile" (originally published 3/7), which interviews Federated Investors' Debbie Cunningham.... MFI: Can you comment on the pending SEC reforms? Cunningham: We believe that the ancillary items -- the different types of stress-testing and disclosure enhancements, etc. -- with modest modification make a lot of sense. When you look at the two broad proposals: floating NAV vs. gates and fees, obviously we think the gates and fees is workable, especially [with the] discretion from a fund Board perspective and definitely in the context of our own experience [with Putnam]. On the other hand, we think that for customers, the floating NAV has many negative aspects associated with it and are convinced that imposition of it would be a game changer, [compromising] the efficiency of the product and [changing] how it looks going forward. Now we are confident that cash is a necessary investment class, so it doesn't go away. It doesn't reduce the cash management need; it just potentially changes the vehicle that is most efficient in currently delivering that product.
We're optimistic that we are headed [for] the proposal that's more viable and stands a better change of maintaining the efficiency of the industry, which is the gates and fees option. But we will prepare for the worst, if that's what comes forward, to be able to provide our customers still with the cash management process that they need on a day-to-day basis. Timing-wise, I think there was a placeholder -- the October 2014 date -- that was published as part of the SEC's 2014 calendar.... [There were] some statements made by Chairman White, as well as some of the other commissioners, about making this a priority item.... [But] we've seen some updated statements that no longer cast it in the 'Top 3' from a priority list item. So I guess maybe something that's in-between -- mid-year, end of the second/beginning of the third quarter -- is something that might be reasonable. But, honestly, it's like putting a finger up in the air and trying to figure out which way the wind is blowing on any given day.
MFI: What about modifications to the amortized cost proposal or a dual NAV? Cunningham: I think the modification ideas have good potential. You don't want to close the door on any one [of these options] versus just 4-digit pricing to the 100th of a penny and transacting at that calculation. But there have been discussions from our perspective around transacting at the amortized cost value and verifying with nightly pricing ... publishing of the nightly pricing out to the 4 digits if that's what's deemed the best disclosure. Certainly the industry has been doing that on its own for over a year now at this point anyway. But it's been a pretty benign marketplace, so moving one-100th of a penny every 2 months probably doesn't get too many people riled up or get the attention of any investors. If we were in a rate environment like 1994 you'd actually see changes on a regular daily basis. I believe there are compromises and modifications that can occur.
Part of the problem with associating daily pricing in a money fund is that money funds transact all day long and these are same day transactions. Notwithstanding that practice, there is no intraday pricing for money market securities. So, again, maybe being able to transact at the last calculated price at the end of every day, throughout the next day to allow same day settlement [would work], as long as there are no extraneous events that are taking place. [This is] akin to the way the rule works now, except that funds are allowed to rely on the amortized cost pricing methodology rather than involving mark-to-model pricing from vendors. As a possible modification, you'd be relying on the last mark-to-market pricing from the prior day, but that at least reduces the problem of same day transactions in the portfolio. So we think that there are compromises along those lines, none of which are as good as what exists today in the amortized cost pricing methodology process today, but that potentially could work.
MFI: What about the FSOC? Cunningham: I think it [FSOC stepping in] is a concern to the SEC.... This is probably to a large degree why they're doing as much due diligence and homework as they possibly can prior to coming up with any finalization of these rules.... The SEC needs to be certain every rock is turned over so that, if what they end up with on a rulemaking basis is different from what the FSOC group would want, they have firm conviction as to why they have made the correct but different decision.
MFI: Tell us about Europe. Cunningham: We were ecstatic [on Feb. 17] when the MEPs, the European Parliament, postponed their vote on the September 2013 [money fund reform] proposals. We're hearing only good things about why that postponement occurred.... There's so much consternation about the constant NAV being tied to capital.... So we were pleasantly surprised. We're gaining some comfort that we won't end up with a product that's called a 'money market fund,' but that has drastically different characteristics depending on the part of the world in which you operate. We think consistency is important and we were uncomfortable heading down a path that might have resulted in less consistency. But with the delay of that vote and the potential for a more reasonable compromise, I think we're heading down the right path there too.
MFI: What is your outlook overall? Cunningham: I look forward to finalization of these regulations. Ultimately, we are optimistic that we end up with something that doesn't drastically change the complexion of the product. But in the end if that in fact does occur, we don't think it changes our customer's underlying need for cash management. And so our ability to be flexible and provide as efficient a vehicle as we can within the constraints of whatever regulatory changes are imposed upon us is something that we'll continue to undertake.
Finally, back to what I consider to be the biggest problem in the marketplace at this point, the abysmally low rate environment. I feel that we are making headway towards getting out of that too. I think the Fed facility and the reverse repo side exercise helps. All the treasury issuance as well as the beginning of the tapering process have provided for improvements in supply which have been helpful. I think that although we've hit a little bit of a roadblock with weather related stagnation, we should continue to move forward from an economic standpoint [and] in the second half of the year, start to experience a steeper money market yield curve. Now that doesn't necessarily mean that that's exactly when the Fed starts to raise rates. But at least there is an anticipation of it and a reflection in the yield curve that provides you with a little bit of extra return.
