On Friday, Western Asset Management published a press release entitled, "New Regulations Set To Impact U.S. Money Market Funds According to Western Asset Management" and a white paper entitled, "The New Frontier: Managing Cash Investments," which discuss regulatory changes, cash segmentation and alternatives for investors. But the update does not give any indication on Western's plans for fund lineup changes. The paper, written by Portfolio Manager and Research Analyst Michele Mirabella, says, "For almost 40 years, money market funds have offered a comprehensive solution for cash investors by providing three main benefits -- preservation of capital, liquidity and yield -- all with a simple structure that has provided ease of use. However, in the years since the financial crisis, regulators have focused on ways in which they could avert a future financial crisis. As a result, stricter banking regulations and new money market fund rules were introduced. The new regulatory regime coupled with an environment of unprecedented low interest rates has fundamentally changed the dynamics of the short-term markets. Consequently, investors may find it increasingly challenging to capture all of the traditional benefits of money market funds. We believe these challenges have created opportunities for cash investors to take a more proactive and dynamic approach to their cash management strategies."
Western explains, "Between the regulatory overhaul and the unprecedented market conditions of today's environment, a fundamental shift has occurred in the way investors think of "cash." The historical approach of utilizing money market funds to provide a simple cash alternative by providing preservation of capital, liquidity and yield will be transformed in the near future. And while we still believe that money market funds will continue to provide investors many benefits, we think that cash investors should view this as an opportunity to take a more dynamic approach to their cash management strategies. By adopting a more efficient approach to managing risk and liquidity, cash investors can realign their cash needs to better meet their strategic objectives."
Mirabella adds, "One of the initial steps in this process is to establish or carefully review existing investment policies.... [C]ash investors may consider segmentation or cash bucketing. To clarify, cash can fall into a minimum of three distinct categories: operating cash, core cash and strategic cash. By allocating cash investments over multiple time horizons, investors may be able to achieve optimal returns by separating operational cash needs from longer horizon strategic needs. In the coming months, this simplistic approach may require additional precision as multiple strategies may need to be utilized for the deployment of operating cash."
In other news, at last week's "Conference on Financial Stability and Asset Management," hosted by ICI at Boston University, discussed whether asset management poses a threat to financial stability. Though not a focus, money market funds were mentioned several times throughout. ICI President & CEO Paul Schott Stevens commented, "In our judgment, neither regulated funds nor their managers pose threats to financial stability. The existing regulation and defining characteristics of regulated stock and bond funds, as well as their historical experience, render designation as SIFIs unnecessary and inappropriate."
He adds, "Yes, money market funds were caught up in the crisis, but the experience of long-term stock and bond funds was strikingly different. Unlike money market funds, their net asset value per share fluctuates daily. They are not designed as transactional vehicles. They did not experience redemptions of the kind that threatened prime money market vehicles in 2008. And, of course, the regulation of US money market funds has been comprehensively addressed -- not once, but twice -- since the crisis," added Stevens.
ICI Chief Economist Brian Reid, in his "Overview of the Asset Management," pointed out that the SEC has been accomplished two significant rulemakings since the financial crisis, both aimed at money market funds. The first occurred in 2010 and the second happened in July 2014. "We will see the effects of these rules over the next few months," he said. Already, the new rules are beginning to cause shifts in the market, he added, as some companies are moving from prime to government as a result of the rules.
In another panel discussion there was further discussion of regulations. "One of the narratives that has frustrated many in the industry, is that when asset managers engage in this debate, they are somehow trying to avoid tougher regulations," said Peter Stahl, Senior Vice President, Deputy General Counsel, Fidelity Investments. But the reality is that mutual funds are already "much more tightly regulated" than banks. He added that "to look at this through a SIFI lens is to take a solution and look for a problem."
In one of the last panels money market funds were also discussed. When asked if asset managers that act like banks, i.e. shadow banking, should be regulated differently, panelist Peter Wallison, of the American Enterprise Institute, said no. "If you are acting like a bank, you are engaged in maturity transformation -- that is the essence of banking. I don't understand how an asset manager can be engaged in maturity transformation," he said. But what about money market funds, he was asked. "Money market funds are short term assets. That isn't, as I see it, maturity transformation. Maturity transformation is using short-term liability toward the purpose of making long term investments and that's what is risky about banking." He reiterated, "I can't understand how asset managers could be said to be engaged in maturity transformation."
Finally, David Grim, Acting Director of the SEC's Division of Investment Management, said in a speech earlier this month, "Enhanced reporting facilitates our oversight of funds and assists staff in monitoring efforts. For example, since December 2010, money market funds have filed monthly reports on Form N-MFP with the Commission containing organized data formats relating to portfolio holdings. So far, we have received over 34,000 filings.... Data from these reports have been used extensively by staff to inform policy and rulemaking, and have assisted Commission staff in examination, monitoring and investor protection efforts."
He explained, "During the four years we have been receiving the data, the staff has been able to answer current questions [in real time] about the money market fund industry such as how much exposure did money market funds have to banks in a certain geographic region or country or what percent of money market fund assets were invested in a certain type of security. Just two weeks ago, we began publishing some summary trend data based on the information we get from Form N-MFP that we hope the public will find useful when analyzing money market funds, in addition, fund advisers and possibly their boards will find it useful to compare their funds to broad averages." (See the SEC's latest "Money Market Mutual Fund Statistics" here.)
