Ratings Agencies on MMF Reform
Moody's issued a release last Friday that looks at "Six Things To Watch For in The Wake of New US Money Fund Rules." "1. Will money fund managers alter their investment strategies? Yes. VNAV pricing will help keep sponsors on the straight and narrow. Watch for more conservative and more liquid investments. 2. Who will actually use gates and fees? Probably no one, absent extreme conditions. 3. Will tax treatment change to accommodate VNAV? Very likely. 4. Will money be on the move? Some money will move to alternative products to avoid VNAV pricing or the risk of gates and fees. The changes to product structure are likely to cause MMF investors to shift some balances to alternative liquidity products with differing risk characteristics to meet the multiple needs of liquidity investors. These alternative liquidity products will include bank deposits, separately managed accounts, ultra- and short-duration bond funds, cash plus funds and cash exchange-traded funds (ETFs). That said, we expect that government MMFs will still be a popular re-investment choice for investors redeeming money from non-government MMFs. 5. Will the new rules cause further industry consolidation? Absolutely. Smaller players who have hung on until now may throw in the towel. A combination of changing product structures, low interest rates and higher operational expenses could hinder many of the remaining small-to-medium size sponsors, leading them to exit the industry. 6. Will European regulators take a page out of the SEC's new rule book? Hard to predict. It remains to be seen whether the European Commission will align itself with the changes to be implemented in the US, or whether the two regulatory regimes ultimately will differ substantially." Fitch Ratings also issued a release, "US Money Fund Reform to Transform Cash Management." "Money market fund reform will have its largest impact on institutional prime and municipal money funds while fundamentally changing cash management for corporate treasurers, according to Fitch Ratings. The new rules will reshape the landscape of liquidity products for cash investors.... Although opposition to the proposed rules has focused mostly on the floating NAV, we believe that fees and gates on redemptions may be just as problematic for many corporate treasurers. Corporations rely on money funds to invest cash for routine business expenses like payroll, and the inability to access this cash if a gate is imposed raises operational concerns. Importantly, the new rules will require money fund users to update investment policies, whether to approve investments in floating NAV, or to add alternative investment options. This can be a complicated process that will require a careful, strategic approach. We understand many investors have been waiting for clarity on the new regulations before making investment policy changes. The SEC set the implementation period for the main aspects of reform at two years, giving money managers and shareholders time to adjust to the new regulatory regime." In other news, The Financial Times wrote Monday, "New Money Market Fund Rules Backfire." "What will happen? As market stress rises, it becomes more likely that a fund will erect gates, and the incentive to get out kicks in even earlier. This was a warning made by Federal Reserve governors to the SEC last year, which has been ignored. We may ultimately find that the SEC has increased rather than decreased systemic risk and, more worryingly, opened the intellectual door to further moves in this wrong-headed direction." Also, Marketwatch posted "New Money Market Rules Need to be Tested By Crisis." "It was way too late to fix the problems that surfaced six years ago -- the fact that it took this long and that the rules were adopted by a split vote of commissioners shows how hard real reform is -- but the real question is whether it will stop the financial crisis of 2018, 2024 or whenever the next generational catastrophe hits."
