Money market fund managers continue to be busy, reaching out to clients and stakeholders, keeping them abreast of the pending changes in the industry and to their fund lineups as MMF Reforms approach. In the past week, we came across new "white papers" and updates from Dreyfus/BNY Mellon, Fidelity and BlackRock, which we recap below. Dreyfus published the report, "Money Market Funds: Ready for Today and Tomorrow," which gives an overview of reforms. In addition, Fidelity posted a series of papers on money market funds, most of which focus on the Government fund sector, and BofA Funds issued the update, "Important Information for Dealers about Proposed BofA Funds Reorganizations into BlackRock Liquidity Funds." (Note: Watch for an update on new Money Fund Reform Disclosures, which go live on April 14, and a review and compilation of money fund manager websites next week.)
The Dreyfus MMF paper includes a clear, succinct definition of the new types of funds. It explains, "Retail Prime and Municipal/Tax-Exempt Funds: Limit investors of the fund to "natural persons," which generally means individual investors and certain accounts, such as custodial accounts (ie. IRA's), whose beneficiaries are individuals; Will continue to use a stable $1.00 net asset value (NAV) using amortized cost accounting. The fund's board of directors may impose liquidity fees (up to 2% of redemption proceeds) or redemption gates in times of severe market stress if it is determined to be in the best interest of shareholders in protecting their investment in the fund."
Furthermore, it defines, "Government/Treasury Funds: Eligible investors include both "natural" and "non-natural persons;" Defined as any money market fund that invests 99.5% (formerly 80.0%) or more of its total assets in cash, government securities or repurchase agreements collateralized by such securities. U.S. Government and Treasury funds are included in this definition; Will continue to use a stable $1.00 net asset value (NAV) using amortized cost accounting. The funds have no current intention to impose liquidity fees and/or redemption gates."
Also, Dreyfus writes, "Institutional Prime and Municipal/Tax-Exempt Funds: Eligible investors include "natural" and "non-natural persons." Non-natural persons include financial institutions, corporations, defined benefit plans, endowments and foundations, etc.; Will be required to trade at a variable net asset value versus a stable net asset value using market value prices to the 4th decimal place (for example, $1.0002); The fund's board of directors may impose liquidity fees (up to 2% of redemption proceeds) or redemption gates in times of severe market stress if it is determined to be in the best interest of shareholders in protecting their investment in the fund."
The piece adds, "The institutional prime and municipal/tax exempt money market fund definition limits the type of eligible investor that can invest in the fund and requires such a fund to price its shares using a variable net asset value. The reference of an "institutional share class" is not necessarily synonymous with the meaning of an institutional fund but is simply a naming convention that is used to characterize a share class as having a low total expense ratio that carries a higher minimum investment. In general, prime retail and institutional funds have the potential to provide higher yields than government and treasury funds while municipal funds are designed to generally offer greater tax equivalent yields over government and treasury funds."
Dreyfus explains in a subhead, "Liquidity Fees and Redemption Gates: Checks and balances to protect investor's principal," "Since 2010, the SEC has required money market funds to maintain sufficient portfolio liquidity to meet reasonably foreseeable redemption requests. To ensure portfolio liquidity, the Rule now gives fund boards a set of tools to further protect shareholder principal during periods of exceptional market stress. Liquidity Fee: A fee that could be imposed on investors for selling or redeeming shares in a money market fund. Liquidity fees provide investors continued access to their liquidity at a cost while reducing the incentives for shareholders to redeem shares. Redemption Gate: A restriction that stops redemptions, thus preventing investors from selling or redeeming shares in a money market fund for a certain period of time. A gate can be in place no more than 10 business days during any 90-day consecutive period."
The paper explains, "A fund's board of directors will consider market conditions, a fund's portfolio holdings and the best interest of the shareholders before determining if liquidity fees and/or gates will be imposed. Liquidity fees and redemption gates will be applicable to retail and institutional prime and municipal/tax-exempt money market funds. There is no current intention to impose fees and gates on Government and U.S. Treasury money market funds.... Effective April 2016, shareholders will have access to the fund's levels of daily and weekly liquid asset percentages, net shareholder inflows or outflows, market-based net asset value per share, and whether any liquidity fees or redemption gates have been imposed or removed on the Dreyfus website."
It closes by saying, "Here's a quick summary of how the new rules will affect institutional and retail investors. Effective October 14, 2016: If you are invested in a fund that will be classified as retail stable NAV fund and are not a natural person, you will have to choose another investment option such as a government/treasury money market fund, FDIC insured deposit program or private placement fund to continue to invest in a money market vehicle with a stable NAV. If you are a client and invested in a fund that will be classified as a retail prime/municipal money market fund and are a natural person, you can continue to invest in the funds as you do today. If you own a government or treasury stable NAV money market fund, you can continue to invest in the funds as you do today."
Also, Fidelity compiled a series of white papers on money market fund reform, most of which were refreshes of previously released reports. One is on, "Government Money Market Mutual Funds: An Attractive Option for Investors Seeking Capital Preservation and Liquidity," while another is on "Institutional Liquidity Managers and the New Reality." The latter says of "The new face of institutional liquidity management: customization that optimizes liquidity and returns. Despite having what may seem to be a distant effective date of October 2016, the rule changes have already created a more complicated environment for many institutional liquidity managers. The days of one simple cash management solution have been replaced by the need for a customized suite of products, based on liquidity needs, strategic goals, and risk tolerance."
It explains, "Institutional liquidity managers would now be well served to begin reviewing the details behind the purpose of their assets and the amount needed to meet each function. Shorter term operational cash may require one set of investment solutions, while taking an updated view of longer-term strategic cash may open up a set of investment opportunities that had not been considered. Managers also will need to determine their risk tolerance level and may want to approach liquidity management based on their anticipated total rate of return when deciding between MMFs, judging whether the anticipated yield spread between prime and municipal MMFs versus government MMFs will compensate them for potential trade-offs and risks."
Fidelity adds, "The new environment may be more challenging initially; however, as is often the case, transitions may lead to new opportunity. Customizing cash solutions may provide the chance to better optimize liquidity and returns -- and once liquidity managers identify the operational and strategic utility that best fits their institutions, they will find a wide variety of investment solutions available to help accomplish their goals."
BofA Funds' update states, "Bank of America Corporation has agreed to transfer the investment management responsibilities of BofA Global Capital Management to BlackRock, Inc., including the management of certain of the BofA Funds. The transaction entails, among other things, the reorganization of certain of the BofA Funds into certain corresponding institutional money market funds managed by BlackRock. These reorganizations are expected to occur at the close of business on Friday, April 15, 2016.... When the reorganizations close, the assets in certain of the BofA Funds will transfer to certain of the BlackRock Liquidity Funds." BofA Cash Reserves and BofA MM Reserves will merge into BlackRock TempFund, BofA Govt Plus Res will merge into BlackRock FedFund, BofA Govt Res will merge into BlackRock Federal Trust Fund, and BofA Treasury Res will merge into BlackRock T-Fund. Also, BofA's Muni Funds –- CA Tax-Exempt Res, BoA CT Muni Res, BofA MA Muni Res, BofA Municipal Reserves, BofA NY Tax-Exempt Res, and BofA Tax-Exempt Res -- will be `liquidated on April 8. (See our April 4, News, "Prudential Core MMF Goes Bond; BlackRock, BofA Approved; Calamos," and see our latest MFI and MFI XLS for more on the mergers and liquidations.)
Finally, a news release, "First American Funds Announces Voluntary Waiving of Additional Fees for Treasury Obligations Fund Class Z Shares," says, "In addition to the fund's contractual fee waivers, the advisor may choose to voluntarily waive additional management fees, with the intended effect of lowering the fund's overall expenses. As of April 1, 2016, the advisor has waived an additional two basis points (bps) of management fees for the Class Z shares of the First American Treasury Obligations Fund, resulting in a net expense ratio of 18 bps. The advisor can stop waiving these additional fees and revert to the contractually agreed upon net expense ratio of 20 bps (25 bps gross) -- as stated in the prospectus -- at any time."
