BofAML Says Reforms Creating Noise
Bank of America Merrill Lynch published an update on Asset Managers and Money Funds entitled, "Money market reforms creating some noise – outlook for flows, firms, & the rate market." The piece, written by Michael Carrier and Mark Cabana, says, "Money market fund (MMF) regulations that are coming into effect on October 14th have and will continue to impact money market flows and short-term interest rates in the market. The regulations target the prime and tax-exempt part of the market ($1.0T in assets) and favor government MMFs. In this note, we discuss the 2014 and 2010 MMF regulations, the timeline, the potential flow & firm impact, and short-term interest rate implications." It explains, "Post the GFC (Global Financial Crisis), the SEC has passed two sets of MMF rules - 2010 and 2014. The 2014 amendments to Rule 2A-7, taking effect this October, aim to increase pricing transparency (and risk awareness), by requiring institutional prime and tax-exempt MMFs to report and trade on intraday fund NAV (vs. the prior fixed $1 NAV). The rule also enables fund boards to impose redemption fees of up to 2% and suspend redemptions for up to 10 days within a given 90-day period, in order to facilitate orderly redemptions of troubled MMFs. In addition to the 2014 amendments, in 2010 the SEC passed other rules targeting MMF liquidity, credit quality, and maturity, among other focus areas.... Since the new rules make prime and tax-exempt funds more complex (floating NAV for institutional and redemption fees/gates for retail and institutional), users have and will likely continue to favor government MMFs in our view. Thus far, about $570B has moved out of prime funds ($90B from tax-exempt) and $745B has moved into government funds, but we still see the potential for another $100-300B in assets to move between now and the Oct 14th deadline. However, post the deadline and depending on normalizing yields, we expect some of the assets to return to prime funds, possibly up to 25% of the recent outflows." Finally, they write, "Among public asset managers, FII and LM [Federated Investors and Legg Mason, which owns Western Asset Mgmt.] have the greatest proportion of their AUM in money market funds, including institutional prime and tax-exempt. We expect a modest negative mix shift in asset manager MMF segments, with less than 1% revenue impact for all firms, though FII could be a bit higher, depending on where the assets end up. That said, the MMF regulations could motivate smaller players to exit the MMF business and lead to share gains for the larger MMF firms."
