Strategists Comment on MMF Reforms
The torrent of commentary on the SEC's adoption of money fund reforms continued Thursday. The latest batch includes an update, "SEC Money Fund Reforms Will Reshape US Money Markets," written by Brian Smedley, US Rates Analyst at Bank of America Merrill Lynch. Smedley writes, "Various surveys taken over the past year indicate that a majority of money fund investors will find a floating-NAV fund to be unattractive, especially given the potential for gates and fees to be imposed during a stress period. We suspect that this will be particularly true if the minimal spread between institutional prime and government funds persists as the compliance deadline approaches. As noted above, currently the average institutional prime fund yields just 1.3bp more than the average institutional government fund, according to Crane Data. In our view, the spread between prime and government fund yields will need to widen; the extent of widening will depend on the value that investors assign to the fixed-NAV feature, which is significant. A wider prime-government fund spread will require an increase in prime funds' gross portfolio yields, which will in turn require an increase in yields on credit instruments that prime funds hold, including CDs, CP, bank notes and nontraditional repo. But meaningfully higher credit spreads on these products are unlikely to materialize absent substantial outflows from prime funds. We continue to believe that investors could move a substantial portion of the $964bn currently invested in institutional prime and muni funds into fixed-NAV government funds. Gauging the size and timing of these flows is difficult, but we would not be surprised to see half a trillion dollars shift over the next couple of years, particularly as the compliance deadline approaches in 2016." Also, the Institutional Money Market Fund Association released a statement on the SEC action. "IMMFA welcomes the fact that the SEC has taken note of a number of concerns raised by the MMF industry, evidenced in today's announcement." Said Susan Hindle Barone, IMMFA's Secretary General, "A number of aspects of the new rule, in particular, the fact that government funds have been excluded and that for other funds a two year implementation period has been granted, are very positive for the sector." She went on, "The SEC has engaged in a thorough rulemaking process and has considered the impact of the new rule on investors, for example by addressing tax and accounting issues and by allowing the retention of amortised cost accounting. Without these concessions, the switch to floating NAV products would have been far more challenging." She adds, "However, it is very disappointing that forced conversion to floating NAVs is being imposed on Prime MMFs. We will continue to argue that the principal systemic risk in the MMF sector, namely the threat of runs in MMF at times of market stress, can only be prevented with certainty by the imposition of fees and gates. We consider that the move to floating NAV will have no material impact on the diminution of this risk, and therefore imposes costs on investors for no benefit." Wells Fargo Securities' Garrett Sloan writes, "[T]he published Treasury guidance, and the SEC's two-year implementation window should give many money market investors time to consider their options, and time to determine just how much of an operational burden the floating NAV will be using Treasury's simplified approach. Certainly some will consider it too much of a burden, just as some CEOs may not be able to bear market fluctuations in their cash and cash equivalents holdings. But we are encouraged by the fact that the Treasury has made such concessions specifically for prime institutional money market funds, and hope they are effective." Alex Roever at JP Morgan Securities writes, "The new definition of retail funds would likely prompt some money to shift between institutional money funds and retail money funds. Across the money fund business, there are many cases where investors in institutional share classes of prime funds would actually qualify as "retail" under the natural persons rule. The converse is also true (institutions in retail share classes), although we suspect to a lesser degree. As a result, there's a great client sorting that needs to take place in the prime fund business after which our understanding of what is institutional and what is retail may change substantially. The bigger the actual institutional exposure, the larger the potential exodus from prime institutional funds, and the bigger the potential pullback from banks in the wholesale funding markets. Whatever the shifts may be, we expect prime fund managers will be building their liquidity in anticipation of potential outflows." Dechert and Reich & Tang also issued statements on the rules. Said Reich & Tang, "Our expectation is that none of our Money Market Funds will be subject to a floating net asset value once the revised rules are implemented.... Reich & Tang's internal policy is to manage its funds with a minimum of 35% weekly liquidity at all times." Finally, see ICI's Money Market Fund Assets, which says, "Total money market fund assets decreased by $2.18 billion to $2.56 trillion for the week ended Wednesday, July 23."
