While a couple firms have launched "national" Institutional Tax Exempt Money Market Funds, BlackRock will become the first manager to convert a State Tax Exempt MMF from Retail to Institutional. A statement entitled, "BlackRock California Money Fund and New York Money Fund to be Designated Institutional Money Market Funds," tells us, "In 2016, the BlackRock California Money Fund and the BlackRock New York Money Fund … were each designated a 'Retail Money Market Fund,' under the new definition of Rule 2a-7 under the Investment Company Act of 1940, as amended. In particular, this designation allowed the Funds to maintain a constant net asset value per share ('CNAV') by adopting the amortized cost accounting method, so long as access was permitted to only 'natural persons.'"
BlackRock explains, "It is our view that money market funds benefit from scale, as funds of scale may achieve better buying power and provide benefits of increased diversification for shareholders. Upon further evaluation of these two Funds, at their July 31, 2018 meeting, the Funds' Board of Directors ... has approved the redesignation of these Funds as Institutional Money Market Funds ... to allow for additional distribution opportunities and client types. We anticipate this change will become effective on or around Monday, October 15, 2018."
They state, "An Institutional Fund designation means that the Funds will adopt a floating net asset value per share ('FNAV') through the use of market-based pricing. The Funds will continue to be subject to liquidity fees and redemption gates under certain circumstances, as they are now. Importantly, there are no restrictions on the type of investor who may hold an Institutional Fund, meaning natural persons may continue as shareholders of the Funds."
BlackRock's statement also says, "We understand that this designation could create operational complexity for certain current shareholders; however, it is our view that any additional scale that may be achieved through this change could be beneficial to all shareholders. Further, we are pleased to share that the Funds will continue to offer sameday liquidity, with a 1:00 pm ET cut-off time for orders in advance of a single 3:00 pm ET net asset value strike time."
The brief adds, "In order to understand what this change could mean to you, we recommend you consider not just your individual investment needs, but also the platform through which you invest. We are partnering with each of our distribution platforms to consider this impact." (For more on Tax Exempt MMF Changes, see these Crane Data News articles: "Fidelity Files for Inst Muni MMF (11/7/17)," "Schwab Simplifies MMF Lineup, Lowers Minimums; Federated Muni Exists (10/25/17)," "August MFI: Fleeing State Tax Exempts, American Beacon Profile, AFP (8/7/17)," and "Vanguard Liquidating OH Tax Exempt MMF; JPM: 2017 Outlook Uncertain (11/28/16).")
In other news, Bloomberg writes "Money Fund Giants Brace for $94 Billion Hit From EU Rules," which discusses European Money Market Fund Reforms. They tell us, "The world's biggest asset managers are lobbying for a last-minute reprieve from a European Union policy that could throw about 80 billion euros ($94 billion) of money funds into turmoil. BlackRock Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc. are among giants hoping to persuade EU authorities to preserve a key feature that investors have come to expect: the fixed share price. Public statements by regulators so far suggest that new rules that start on Jan. 21 will eliminate the ability of such funds to maintain the stable value, eroding the main appeal of such products."
The article explains, "Corporate treasurers around the world rely on money funds to park their cash with the assurance they’ll be able to take out every dollar -- or euro -- when they need funds for payroll or investments. The new rules leave investors with even fewer safe places to stash their money as many banks are reluctant to accept large cash balances, while deposit rates in the region are expected to stay below zero for at least another year. Floating-rate funds aren't a great alternative, especially for treasurers, because it would create tax and accounting headaches."
It continues, "If EU authorities don't reverse their stance, fund companies have warned that the policy could mean the death of stable-price euro funds, as managers are forced to offer floating-rate funds or investors turn away from the fund industry altogether and move their money to banks. Peter Crane, founder Massachusetts-based research firm Crane Data LLC, said he expects half of the roughly 80 billion euros in investments to wind up at variable net-asset value funds and the other half at banks."
The piece adds, "The latter option is especially unpalatable to fund companies, who've enjoyed steady growth in assets of constant-value products in the past decade. Euro-denominated funds account for just over 11 percent of a roughly 700 billion-euro industry for constant-value funds, with the remainder based in dollars and pounds, according to data from iMoneyNet. BlackRock, JPMorgan and Goldman Sachs operate the biggest euro-denominated money-market funds that maintain a fixed share price."
Bloomberg tells us, "Money funds traditionally accrue income and distribute it to investors in the form of additional fund shares. Each share retains the fixed price. On days when income is negative, the industry has relied on a newer tool called the reverse distribution mechanism, which works in the opposite direction by reducing the number of shares an investor has in a fund while each remaining share keeps the fixed price."
They comment, "The industry was caught by surprise last year when the European Securities and Markets Authority published technical standards for the implementation of the new rules. Buried in paragraph 186 of the 162-page document, ESMA had a bombshell: its view that the industry's share cancellation practice would be prohibited under the upcoming regulation."
Finally, Bloomberg says, "The industry's biggest lobbying groups swung into action with opposition letters, with groups representing money-market funds and asset managers telling the regulator that the practice is widely used and approved by national regulators including in Luxembourg, a major hub for the fund industry. ESMA was misguided in its approach, according to the groups whose members include the asset-management units of JPMorgan, Goldman Sachs, Morgan Stanley and others."
Note: Let us know if you'd like to see the binder from last week's European Money Fund Symposium in London, and watch for excerpts from some of the sessions in our upcoming Money Fund Intelligence newsletter. Our conference-goers placed the odds of the EU allowing the reverse distribution mechanism, or RDM, at 50-50.
