On Monday, the first batch of Prime Institutional money funds will begin trading at 4 decimal places ahead of the October 14 due date for the SEC's latest round of Money Market Fund Reforms. Fidelity and JPMorgan are expected be the first complexes to "float" NAVs for some funds starting today (October 3), though we expect these to remain "stable" at levels over $1.0000 initially. (See our March 3 News, "JPM Details Fund Updates, Cutoffs, Gates in Filing; Linton Comments," and our August 11 News, "Fidelity Reveals Final Lineup Changes: Prime Inst MMFs, Two Strikes.") The continued shift of assets out of Prime Inst funds (those about to "float") -- over $80 billion shifted over the past week and $244 billion shifted out in Sept. -- and into Govt MMFs, along with quarter-end on Friday, caused a surge in Fed RRP usage and repo rates Friday. We review these issues, as well as a recent "Operational Guide" from BlackRock, which features an FAQ on the imminent MMF changes, below.
J.P. Morgan Securities' explains in their latest "Short-Term Fixed Income" weekly, "While the dynamics of quarter-end remained the same, this one was definitely more intense than usual. This time around, we began to feel pressure almost two weeks ahead of time. Additionally, Friday proved to be grim. Overnight Treasury GCF rates averaged 1.27%, 77bp above Tri-party rates, the highest spread YTD.... This severe spread widening was driven by the combination of reduction in dealer balance sheets and poor liquidity in the GCF repo market. As we have mentioned in previous research, we also believe that a fair amount of the additional pressure is due in large part to MMF reform."
They tell readers, "Away from quarter-end, the 2a-7 money market mutual fund industry now has only two weeks left to fully comply with the SEC's MMF reform rules that come into effect on October 14. To get ahead of the regulation, several large prime fund complexes have announced that they plan to adopt a floating NAV for institutional share classes earlier than required. This early move to a floating NAV is intended to allow a brief period of time for fund complexes and their respective shareholders to get operationally comfortable with the new NAV structure."
JPM's piece shows a table listing all the pre-Oct. 14 deadline conversions. These include: Wells Fargo Prime MMFs converting Oct. 5, Morgan Stanley Oct. 7, Dreyfus Oct. 10, BlackRock, Western, Goldman and UBS Oct. 12, and State Street and Invesco Oct. 12." They state, "[O]ur data indicates that [about] $250bn or about 80% of aggregate institutional prime AuM will convert to a floating NAV prior to October 14."
Discussing Friday's quarter-end repo spike, the FT writes, in "Investors stash more cash at Fed as money market reforms loom, "Investors' cash parked at the Federal Reserve in exchange for US Treasuries hit a new 2016 high on Friday, showing heightened demand for short dated assets as typical quarter-end pressures are exacerbated by incoming rules for money market funds.... This typical quarter-end funding pressure has become exacerbated in recent weeks as prime money market funds seek to shorten the duration of their assets ahead of incoming rules in October that are likely to continue to spur outflows from investors."
The Wall Street Journal writes, "Cash Floods Into Fed Repo Facility." It tell us, "The cost of short-term loans in the repurchase agreement or "repo" market surged earlier than usual into quarter's end as money-market funds and others, anticipating new regulations, piled into a Federal Reserve facility that typically drains excess cash from Wall Street. Money-market funds and other eligible investors poured $412.5 billion into the Fed's overnight repo program Friday, its second-highest balance since the record was set Dec. 31 last year with $474.6 billion, Fed data show."
The Journal adds, "Fidelity Investments will convert two prime funds overseeing more than $50 billion combined to floating NAVs on Monday and J.P. Morgan Asset Management will convert an institutional prime fund that oversees $30 billion the same day. Some prime funds are holding only the most liquid, cash-like investments to manage through the transition because they are so close to the deadline for funds to comply with the new rules in mid-October. That is sending them into the Fed's repo program for maximum safety at the same time as government-only ones are going there, traders said."
Last week, BlackRock released an "Operational Guide to Cash Investing." It explains, "For decades, money market funds have been a cornerstone solution for cash investors. In October 2016, several structural changes become effective for certain of these funds and these changes may create questions. This guide is intended to help you navigate the new operational landscape for BlackRock's U.S. money market fund (MMF) solutions, and to understand the potential impacts to your engagement with these important products."
Under "The Fine Print: Frequently Asked Questions," they ask, "What BlackRock MMFs available for purchase are subject to FNAV?" The piece lists: BlackRock Liquidity Funds TempFund and BlackRock Cash Funds: Prime as "Intraday NAV," and BlackRock Liquidity Funds TempCash and BlackRock Liquidity Funds MuniCash as "Single Strike NAV."
BlackRock's FAQ continues, "Which NAV will I receive for my subscription/redemption? The price you receive when you trade a FNAV MMF's shares will be the next NAV determined after the fund's TA has accepted and confirmed your order. If your subscription or redemption order is received prior to the next NAV strike time, you will receive that NAV price for your order.... Will there be any change to my monthly statement if I invest in a FNAV MMF? Monthly statements will continue to be mailed by the fifth business day of each month. `Statements now contain a four decimal place NAV and a period ending asset value."
On Tax and Accounting issues, BlackRock writes, "The NAV Method provides investors the ability to report, for tax purposes, their aggregated net gains and losses over the investor’s tax year, or a shorter period, as determined by the investor.
Finally, they say, "BlackRock offers a variety of MMF solutions, as well as short-term bond funds, separate accounts, and collective trust funds for your cash investment needs. We recommend a flexible approach to the management of your cash, with the use of segmentation where possible. As you adjust to the new operational landscape, we believe it is important to evaluate your providers as well as the construction of their portfolios."
