ICI's latest "Money Market Fund Assets" report shows that MMFs decreased $13.5 billion in the latest week. Prime funds fell by $17.8 billion, less than a third of the size of the drop the previous week (when they fell $56 billion) and far smaller than the $110 billion 2 weeks ago. Prime assets have declined in 20 out of the past 21 weeks (-$768B), but the outflows appear to be subsiding. (They rose yesterday by $1.4 billion, according to our MFI Daily, their first increase in many weeks.) Since Oct. 29, 2015, when the "Great Prime-to-Govie Migration" started, Prime assets have fallen by a massive $1.064 trillion, or 72.9%. Tax Exempt funds have declined by another $117.0 billion, or 47.8%. Combined these two non-Government sectors (which are now subject to the possibility of emergency gates and fees) have fallen by $1,181 billion (-68%) over the past year. We review the latest ICI update below, and also excerpt from a new Fidelity paper and press release from Capital Advisors.
Government money funds (including Treasury funds) gained $3.9 billion in the past week (after gaining $51 billion last week, $88 billion the week before, and $102 billion the week before that). They've increased by $1,099 billion since last October (more than doubling, up 108.4%) and by $891.6 billion, or 73.0%, YTD. (YTD in 2016, Prime MMFs are down by $889.2 billion, or 69.3%.) Tax Exempt MMFs were up fractionally.
ICI's latest release says, "Total money market fund assets decreased by $13.46 billion to $2.63 trillion for the week ended Wednesday, October 19, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $3.92 billion and prime funds decreased by $17.78 billion. Tax-exempt money market funds increased by $400 million." Prime MMFs now total just $394.6 billion, or just under 15.0% of total assets; Govt MMFs total $2.112 trillion, or 80.0% of all assets.
It continues, "Assets of retail money market funds increased by $9.15 billion to $947.18 billion. Among retail funds, government money market fund assets increased by $4.23 billion to $560.66 billion, prime money market fund assets increased by $1.52 billion to $262.85 billion, and tax-exempt fund assets increased by $3.39 billion to $123.67 billion.... Assets of institutional money market funds decreased by $22.61 billion to $1.69 trillion. Among institutional funds, government money market fund assets decreased by $320 million to $1.55 trillion, prime money market fund assets decreased by $19.30 billion to $131.76 billion, and tax-exempt fund assets decreased by $2.99 billion to $4.27 billion."
In other news, Fidelity released a new update, entitled, "Money Market Mutual Funds: Regulatory Change Review." Written by Money Market CIO Tim Huyck and Senior VP & Deputy General Counsel Kevin Meagher, it says, "The rules establish new definitions for government MMFs and retail MMFs, and require institutional prime MMFs ... and institutional municipal MMFs to price and transact at a "floating" (or variable) net asset value (NAV). Also under the new rules, during periods of extraordinary market stress, retail and institutional prime and municipal MMFs may charge shareholders liquidity fees, payable to the fund upon redemption, and may impose redemption gates that would temporarily halt all withdrawals."
It continues, "Retail MMFs are funds that have policies and procedures reasonably designed to limit all beneficial owners to "natural persons" (i.e., individual investors). These funds may continue to seek to maintain a stable NAV, but are subject to potential liquidity fees and redemption gates. Institutional MMFs are funds that don't qualify as retail funds (i.e., may be held by institutional investors). These funds are subject to potential liquidity fees and redemption gates. They will price and transact at a floating NAV priced out to four decimal places (i.e., $1.0000) and may experience fluctuations from time to time. Government and U.S. Treasury MMFs are not subject to any of the new structural changes."
Fidelity explains, "The daily prices per share of all institutional prime and institutional municipal MMFs are required to "float." This means that instead of fund shares being priced at $1.00, as they were before the new rules, these funds are now required to price and transact at an NAV that uses four decimal-place precision (e.g., $1.0000), a process known as "basis-point rounding." When a fund uses basis-point rounding to calculate its NAV, shareholders may experience a gain or loss if the per share value of the fund changes by 1/100th of a penny. For example, if a shareholder owned 10,000 shares priced at $1.0000, a one basis-point change in a floating-NAV fund would result in a gain or loss of $1.00."
The piece adds, "Shareholders in institutional MMFs may experience gains or losses as the NAV moves up or down. Under ... guidance issued by the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS), floating-NAV shareholders will be able to report a single net total for the gains and/or losses experienced during the course of a year, rather than reporting individual transactions.... With respect to accounting, the SEC stated its position that floating-NAV MMFs will be considered a "cash equivalent.""
The paper tells us, "The SEC rules permit both retail and institutional prime and municipal MMFs to limit redemptions under certain rare circumstances, by imposing liquidity fees or redemption gates. Subject to the discretion of a MMF's board of trustees, these funds can impose a fee of up to 2% on shareholder redemptions if weekly liquid assets were to fall below 30%. Additionally, a MMF's board may impose a temporary suspension of redemptions if weekly liquid assets were to fall below 30%. This redemption gate can only be in effect for up to 10 business days during any 90-day period."
It concludes, "At Fidelity, we remain committed to offering a variety of investment options, and a comprehensive MMF product lineup that includes retail and institutional funds, prime and municipal funds, and government and U.S. Treasury funds. As market conditions and investor preferences evolve, we will continue to review our MMF lineup to ensure that we are meeting investors' needs."
Finally, Goldman Sachs Asset Management unveiled a new "Investing in a Floating NAV World" Calculator" on its website, which allows investors to compare the returns on stable NAV vs. floating NAV investments in a variety of scenarios.
GSAM explains, "Effective October 2016, institutional prime and municipal money market funds in the US will have a floating net asset value (NAV). While this does not impact most retail investors, US institutional investors may need to diversify to achieve stability, liquidity of their investment, or total return. This tool may help institutional investors understand how to invest for their immediate and short-term liquidity needs. It allows the investor to assess if risking stability is worth the reward of a potentially higher yield."
