The nation's largest money market fund manager, Fidelity Investments, has begun producing a series of white papers on money fund regulatory reforms. The first in Fidelity's "Money Market Reform Communication Series" is entitled, Understanding Government & U.S. Treasury Money Market Funds. "Fidelity is well prepared for the new rules. Where needed, we will make changes to our product offerings and fund operations to comply with these rules. Fidelity remains fully committed to the money market mutual fund business and to educating investors through a series of publications that discuss how these new regulatory requirements will impact various types of money market mutual funds," writes Fidelity's `Nancy Prior, president fixed income, and Kevin Meagher senior vice president, deputy general counsel.
They explain about "Government and U.S. Treasury money market mutual funds," "Government money market mutual funds invest primarily in U.S. Treasury securities, government agency securities, and repurchase agreements backed by these same securities. There are four common types of money market mutual funds under current SEC regulations. Under the new rules, government money market mutual funds will be defined as money market mutual funds that invest 99.5% of their total assets in cash, government securities, or repurchase agreements collateralized by government securities."
Fidelity writes, "U.S. Treasury money market mutual funds and U.S. Treasury Only money market mutual funds are expected to meet the new definition of a government money market mutual fund. As a result, government and U.S. Treasury money market mutual funds will be eligible to price and transact at a stable $1.00 net asset value (NAV). Additionally, government and U.S. Treasury money market mutual funds will not be subject to liquidity fees and redemption gates. Typically, government and U.S. Treasury money market mutual fund liquidity levels far exceed SEC requirements. Even those fund holdings that do not technically qualify as either daily liquid assets or weekly liquid assets generally exhibit favorable liquidity characteristics compared to non-government securities."
They add, "Government and U.S. Treasury securities generally are perceived to have the lowest credit risk in the U.S. debt markets. During past periods of market stress and uncertainty, the market value of government and U.S. Treasury money market mutual fund holdings typically has increased as investors have sought safety in high-quality securities, which has provided further support to these funds in times of crisis." Note: According to Crane Data's latest Money Fund Intelligence XLS, Treasury Institutional MMFs account for 13.0% of total assets, Government Inst MMFs account for 12.2%, and Treasury and Government Retail MMFs account for 9.9% more. (Prime Inst MMFs account for 32.3% of the $2.5 trillion total and Prime Retail MMFs account for 22.5%.)
The Fidelity series is one example of how money market fund managers are proactively reaching out to clients to communicate about the reforms and the potential impacts. Most of the large money fund complexes have held informational calls with investors or put out papers since last Wednesday's vote to adopt reforms, including Fidelity, Federated, SSgA, Barclays, JP Morgan, UBS, and BlackRock, to name a few. Like Fidelity, BlackRock will be producing a series of materials over the coming months to help its clients navigate the upcoming changes.
Among the other recent comments, an "Investor Update" from UBS" published June 24, explains, "There will be no immediate changes to our funds. These changes will be subject to a lengthy implementation process, and in the interim we expect to continue to manage the funds in the same disciplined, conservative manner. We remind our investors that these changes are subject to a lengthy implementation process (two years for the move to floating NAVs for institutional prime and institutional municipal money market funds). In addition, yesterday the SEC also proposed a separate set of changes to money market fund regulations; as required by the Dodd-Frank Act, the proposed changes would in the future remove references to credit ratings from money fund regulations and would also further refine an issuer diversification requirement applicable to securities with certain types of guarantees. We expect that the regulators may make additional announcements/interpretations in the coming months and expect to provide further updates as more information becomes available. As such, we advise our clients to take the time to understand all the facts and to make a carefully considered evaluation of their investment alternatives. We look forward to working with our clients to help them understand these changes and their implications, and to help determine the optimal solution(s) for them."
Credit Suisse research analysts Ira Jersey and William Marshall also penned a report with their initial thoughts on reform. "The heightened information provided by a floating rather than stable $1.00 per share NAV is supposed to help mitigate the risks of a run on a fund. Although this technically gets rid of the potential for a fund to "break the buck," we are skeptical that it will have the desired effect in a stressed scenario, as a substantial move away from $1.0000 is likely to bring in fund redemptions regardless and increase sell-offs in short end securities. We suggested last year our belief that floating NAV does little to disrupt runs. This might then cause a fund board to invoke gates or fees, likely increasing the severity of any funding stresses. The IRS tax rule changes should mitigate a substantial portion of the technical hurdles of a floating NAV and make it more palatable on the margin, but it does not eliminate the related headaches. With some large institutions having indicated plans to shift out of floating NAV funds, the SEC may have inadvertently reduced the scope for large runs on such funds simply by driving short-end money elsewhere."
They continue, "With respect to the liquidity fees and redemption gates, we see these as less disruptive than the floating NAV, but still extremely detrimental to MMMF's usefulness as liquidity vehicles. The risk that such an investment could effectively become completely illiquid when it is supposed to be a cash equivalent will likely prompt investors to either diversify across funds -- a relatively unappealing option -- or simply look to different investment opportunities (see here for more of our thoughts on the benefits and risks). That said, the discretion is given to the fund boards, so it is possible that the boards could inform their investors that use of the gates or fees would only be in true crisis situations and not when there is a technical move below liquidity thresholds due to temporary factors such as a single large redemption."
The Credit Suisse analysts add, "One option for corporations that wish to continue to use MMMFs as liquidity vehicles with a stable NAV is to move their cash to government funds. According to Crane Data LLC's daily MMMF update, the annualized pick-up of Prime Institutional funds versus Government or Treasury funds over the last 30 days was a mere 2bp -- Prime funds offered 3bp versus Government and Treasury funds' 1bp. These returns underscore the idea that MMMF investors are not using these as opportunities to generate additional income, but view them as liquidity vehicles. The knock-on effects of this rule cannot be overlooked in a world where the available supply of short-end paper is already relatively constrained. Nowhere is this more acute than in the universe of assets in which Government funds can invest."
