Crane Data recently hosted, "Handicapping Money Fund Reforms," the latest in a series of free webinars. We quoted from the first two-thirds of the webinar, which discussed the future of reforms and the flood of SEC comment letters, yesterday in our CD News piece, "Crane and Dechert's Cohen: Handicapping Money Fund Reform Webinar." Today, we excerpt from the rest of the webinar. On potential reform options, Cohen explains, "I think the big one that you noted was delinking the 30 percent [liquidity level from gates and fees].... It's the number one option on the President's Working Group. I would think ... that's one the industry is perfectly willing to live with, and it seems to be one the regulators are willing to offer. I do think that one will likely happen.... I think the floating NAV for [retail] money market funds is interesting. There are two very large sponsors who supported that, they're not as big in the space, obviously, as others, so they don't have as much of an incentive to preserve that.... It is something that the regulators constantly think about, that stable NAV.... One interesting one, as Pete and I talked about, is requiring prime money market funds to hold a minimum amount of securities in Treasuries. And then, of course, I think a number of commenters talked about improving the commercial paper market structure overall."
Crane adds, "The Dreyfus comment letter was the one that mentioned government securities. I think that was a nice addition, a nice something that even though the weekly liquid assets already presumably includes a chunk of Treasuries, it's mandating that chunk and the counterbalance of NAVs going up while other NAVs are going down. That was a nice little add on." Regarding the likely timeline of reforms, Cohen explains, "I think reform this time around is not a question of if, but when.... In terms of next steps, they’re going to be reading those comment letters, that could take another month or two. One thing to note here is that the new chair of the SEC, Gary Gensler, was just sworn in two weeks ago. Sarah ten Siethoff … is now the interim Director of the Division of Investment Management, but there will be a new director there. And who that is, is going to help guide reform as well. So, we’ve got a new chair, Gary Gensler, and we'll potentially, most likely, have a new Director of the Division of Investment Management."
Cohen tells us, "I want to talk about the rulemaking process in general. They've issued the President's Working Group for comment. I would view that as almost what we refer to as an advance notice of proposed rulemaking. So, putting some ideas out there and letting the industry talk about them. The next step, again, if this is being led by the SEC, would include a formal proposal. I think there's likely going to be a little bit of time until that happens. It possibly could happen before the end of the summer. But they would have to review those comment letters, the director would probably need to be in place, and we'd probably hear a little bit more in terms of speeches from various commissioners, including the Chair ... showing us that it's coming soon. Now, after the SEC issues the proposal, there's a comment period, an opportunity for the industry to comment on the actual proposal. That would be ... most likely a 90-day period after publication.... The publication in the Federal Register usually takes a week or two.... So you're looking at 100-110 days after a proposal is issued for a comment period where the SEC would not be doing anything but collecting comments. Then, after reviewing those comments and addressing them, the SEC could issue a formal rule."
He adds, "The fastest rule makings in the investment management industry take seven to eight months, to give you a little bit of color. The Valuation Rule for mutual funds, that was proposed in April and it was adopted by the SEC in December, so that's eight months, and that was really quick…. The Derivatives Rule in the funds space ... was most recently proposed in November 2019, and then it was adopted in November 2020, so 12 months.... [Y]ou can sort of see that this takes a while. If you look back at the last money market reforms, it was proposed in June of 2013 and adopted in July 2014. So, it can take about a year."
Finally, Cohen says, "I think the other thing to note is even when the SEC adopts a formal rule the compliance period can take quite a while after that depending on the scope of the changes. After the 2010 amendments, it was three months until the compliance period kicked in. But after the larger reforms in 2014, it was 18 months.... So, if you look at the SEC issuing, the earliest timeline possible is something in August or July of this year, the final rule wouldn't be adopted until sometime around this time next year, with the compliance date, if it was just tweaks, end of the fall of 2022." (Note: The Handicapping Reforms webinar recording is available here for those that missed it. Also, mark your calendars for our next free webinar, Asian Money Fund Symposium, which will take place June 17 from 10am-12pm EDT.)
In other news, Will Goldthwait of SSGA hosted the first session of the "Masterclass Series: Disruptors in Cash." He asks, "What can I do to alleviate the negative yields in my portfolio and what can I do to alleviate the zero interest rates in my portfolio? What we'll do is, we'll spend time with these folks talking to them about what their risk tolerances are, what their cash flows look like, what sort of demands there might be on this cash. Sometimes they're able to answer those questions, other times they're not. Regardless, of whether they are or are not, we're able to build out a strategy for them and understand sort of what levers are out in the marketplace."
Goldthwait adds, "So when we think about alternatives to cash, we sort of think about it in three categories. We think about it in the credit category, sort of credit ratings, credit tolerance; we think about it in duration, you know, how far out on the yield curve, what sort of terms are you willing to lock up; and then we think about it in the asset type category."
Finally, the Financial Times published, "Glut of cash in US financial system pressures Fed policy rate." They write, "The Federal Reserve may need to recalibrate its policy toolkit, analysts say, as a glut of cash sloshing through the US financial system has made it more difficult for the central bank to maintain tight control of its policy rate. Short-term interest rates have plummeted to historic lows since the start of this year as financial institutions that are flush with cash compete to lend it out in ultra-low risk vehicles, such as US government securities maturing in the near future or so-called repurchase agreements."
They quote J.P. Morgan Securities Strategist Teresa Ho, "Clearly there is very big, insatiable demand ... and it is like a game of musical chairs in terms of who can find the supply first." She "estimates there is a $751bn supply-demand gap in funding markets as of April." The piece continues, "The surge in liquidity stems in part from the Fed's asset purchase programme in which it buys up $120bn in US government debt every month. Bank deposits shifting into money-market funds as well as the Treasury department's plans to draw down its record stash of cash and pay out funds associated with the recent stimulus package passed by Congress have also increased reserve balances."
The FT piece says, "Large amounts of cash have made their way back to the Fed, with demand for the central bank's reverse repo facility -- which gives financial firms a place to park it temporarily -- surging. Daily usage last week climbed to the highest level since 2017, hitting $369bn on Friday. These factors have pressured the Fed's benchmark interest rate to a level that has begun to attract more scrutiny from analysts and investors. The federal funds rate is hovering at 0.06 per cent, well below the middle of the 0-0.25 per cent rate the central bank is targeting."
It adds, "A sustained tick lower to 0.05 per cent could be sufficient to prompt action from the Fed, said Kelcie Gerson, a strategist at Morgan Stanley. The Fed has already expanded access to the reverse repo programme and lifted limits on the amount of cash financial companies can park at the central bank from $30bn to $80bn in order to drain liquidity from the system and slow down the downward drift in short-term rates. A next step could include increasing the interest the Fed pays banks on reserves they hold at the central bank, analysts say. Another is increasing the rate the Fed pays in its reverse repo programme."
