FT Writes on U.S. MMF Reforms
The Financial Times published, "US money market fund reform: an explainer." It says, "What do the rules require and what are regulators trying to do? Since April 14, the websites of a number of money market funds have looked different. Requirements for increased disclosure has led to more data being published for investors. Over the next six months, funds will continue to prepare for October 14, when full implementation of the rules is required. At that point, prime funds will be required to publish [rather, transact on] net asset values based on the current value of the assets they hold. That is a big departure for an industry that historically has touted its ability to preserve the value of its investments at $1 a share, and will mean a fund's price will fluctuate along with market conditions. Also from October, if the fund's assets that can be liquidated within one week fall below 30 per cent the fund can impose a fee of up to 2 per cent on redemptions. If that falls below 10 per cent they can impose a fee of 1 per cent. The fund could also prevent redemptions completely for up to 10 days if the 30 per cent threshold is breached." The FT adds, "How much money has so far left prime funds? As a result of the reform more than $200bn has shifted from prime to government funds. The bulk of this has come through prime funds reclassifying to become government funds.... Why are prime funds reclassifying? Although there is been some suggestion that investors are unwilling to adopt floating NAVs, fund providers say the vast majority of money has shifted for fear of the ability to take money out of prime funds being suspended. This is of particular concern for large institutions, such as broker dealers, that manage retail money. At the end of each business day, money left over from the activities of each individual account is "swept" into money market funds to pick up additional yield. "Fidelity alone is sitting on hundreds of billions of dollars," says Peter Crane at Crane Data, a money mark[et] fund data company. "They can't afford for that to lock up. It would freeze up the economy." It continues, "Will there be further impact and what is the significance of the reform? As the October deadline approaches, focus will sharpen on institutional investors who will have to weigh up whether the extra yield available by sticking in prime funds offsets the drag of the new rules. Prime funds are braced for further outflows and are building up large liquidity buffers to avoid falling beneath the 30 per cent threshold. Some fund managers also say that funds will begin to limit investment in longer dated assets that extend beyond the October 14 deadline.... It could begin to impact the market for commercial paper that many banks use to raise short-term funding.... "Now that we are six months away the market for commercial paper is thinning out," Mr. Crane says. "Everyone is bracing for outflows and preparing to have huge liquidity war chests ahead of the October deadline.""
