We learned from Financial Advisor magazine about yesterday's "Testimony before the United States Senate Committee on Banking, Housing, and Urban Affairs" from Thomas Deas, Jr., Chairman of the National Association of Corporate Treasurers on "Fostering Economic Growth: The Role of Financial Companies." Deas proposes "to focus on a few areas in which certain regulatory changes could benefit Main Street companies so that we can grow our businesses and increase employment opportunities for our American workers," and he includes a number of comments on money market funds in his testimony.
The NACT Chairman said, "Chairman Crapo, Ranking Member Brown, and the other members of this Committee: Thank you for the opportunity to testify at this important hearing focusing on our country's future economic growth. I am Thomas C. Deas, Jr., recently retired vice president and treasurer of FMC Corporation and current chairman of the National Association of Corporate Treasurers ("NACT"), an organization of treasury professionals from several hundred of the largest public and private companies in the country. At the outset, I would like to thank you, Chairman Crapo, for your efforts to make sure that end‐users are able to engage in prudent risk‐management activities without facing costs that could make such activities prohibitively expensive."
The statement contained a section entitled, "End‐Users and Money Market Mutual Funds," which explained, "There is no question that liquidity is the lifeblood of any business. Without having ample liquidity, production comes to halt, inventories run low, and bills are not paid on time. The cyclical nature of many businesses places significant importance on the availability of committed financing so that they can operate efficiently and without disruption. To illustrate the interconnectivities between end‐users and the financial markets, it is useful to consider their use of money market mutual funds ("MMMFs")."
It continues, "This has been a market of more than US$2.5 trillion not only selling short‐term investments to handle treasurers' temporary excess cash, but on the other side, buying the commercial paper corporate treasurers issue to finance the day‐to‐day funding needs of their companies. However, in September 2008 the Primary Fund of the Reserve Fund group of mutual funds "broke the buck" when it reported a net asset value per share that rounded to less than a dollar. In the period since the financial crisis, regulators have sought new rules for MMMFs to strengthen the market during times of financial stress. MMMFs had always operated with fixed net asset values ("NAV") with a price per share greater than share."
Deas writes, "Congress felt it unnecessary to include additional reforms for MMMFs in the Dodd‐Frank Act as the SEC had already enhanced regulations under its Rule 2a‐7 changes in 2010. However, additional changes went into effect on October 14, 2016 that impose liquidity fees and redemption gates to spring up during periods of market stress. A requirement for a prime fund's NAV to float and be reported to the nearest hundredth of a cent significantly complicates investments in prime funds for corporate treasurers. The floating NAV requirement does not apply to MMMFs investing in government securities, however."
He tells the Senate Banking Committee, "The practical implications of the new rules are daunting for corporate treasurers. Corporate treasury and financial reporting systems up until now have treated fixed NAV MMMFs as cash equivalents. Now MMMF shares in non‐government funds will have a floating NAV per share that must be tracked essentially in real time. For federal and state income tax purposes, a floating NAV requires treasurers to keep track of gains and losses when they inevitably buy MMMF shares at one price and sell them at another in the routine redemption of their investment."
The NACT Chair continues, "Since treasury systems must compete with other departments for internal IT resources, the question of what alternatives are available must be answered. Corporate treasurers can abandon the prime MMMF market and instead invest in government MMMFs that can retain the dollar per share fixed NAV. However, prime funds are important to treasurers not only as a flexible alternative for investments of temporary excess cash balances, but also as providers of short‐term funding by buying corporate CP notes. As the graph below shows, in the year running up to the October 14, 2016 implementation of the new regulations, fund purchases of corporate CP declined significantly."
He adds, "Concerns about investors fleeing prime MMMFs have indeed proven true, declining by US$1 trillion to US$376 billion since the rule became final (see chart below). The cure proved worse than the disease for many fund managers as they closed almost 200 institutional prime funds (see chart below)."
Finally, he comments, "The cumulative effect of the regulatory changes on MMMFs caused US$1 trillion to leave prime funds with much of that moving to government funds unaffected by all the same rules. Corporate treasury investors in these funds were unable to justify or implement quickly enough changes to their treasury and financial reporting systems required by the new rules. End‐user companies were adversely affected not only through fewer choices for the investment of their cash, but for many, an uptick in CP borrowing costs as an important investor base went away."
FA's article, entitled, "Institutional Money Market Funds Drying Up, Treasurers Group Says," says, "Institutional prime money market funds are drying up since SEC rules took effect in October, according to a corporate treasurers trade group. About $1 trillion has fled the funds, leaving $376 billion, since the funds were required to have floating share prices (instead of the traditional $1), liquidity fees and redemption gates, NACT Chair Thomas Deas Jr., chair of the National Association of Corporate Treasurers, says in prepared testimony for the Senate Banking Committee."
It adds, "In the run-up to the SEC rules, the number of institutional prime funds shrank in four years by about one-third, to around 400. Retail investors cannot buy these funds. However, such investors are indirectly exposed to fluctuations in the prices of the institutional funds by their holdings in traditional mutual funds and their pension funds, which can invest in these vehicles. Deas indicated many corporate treasures may be fleeing institutional prime money market mutual funds and going into government funds because they may not be able to get the considerable help they would need from their IT departments to keep track of gains and losses when they buy institutional shares at one price and sell them at another in routine redemptions."
