The U.S. Department of the Treasury's Treasury Borrowing Advisory Committee briefly discussed potential money market fund reforms, we learned from J.P. Morgan's "Mid-Week US Short Duration Update." The TBAC's Minutes explain, "The Committee reviewed a presentation on regulatory reform options for the money market mutual fund (MMF) industry, given the stress experienced by certain types of funds during March 2020. The presenting member began by noting the vulnerabilities that exist for prime MMFs, highlighting common themes in several recent episodes of heightened outflows. During these events, the outflows from prime MMFs have tended to result in similarly sized and simultaneous inflows into government MMFs."
They continue, "In the face of heightened investor redemptions, prime MMFs tend to show reluctance to sell liquid assets, such as Treasury securities, to guard against breaching regulatory liquidity thresholds that are tied to MMFs' ability to impose fees and gates on redemptions. These episodes increase demand for Treasury bills, as the bill share of government MMF portfolios is much larger than that of prime MMF portfolios. Relatedly, reforms that would result in a smaller prime MMF sector would likely result in higher structural demand for Treasury securities."
The TBAC statement tells us, "The presenting member concluded by arguing that optimal reforms to address the vulnerabilities among prime MMFs should balance allowing these funds to offer attractive yields under normal market conditions while ensuring stability during periods of market stress. In this vein, the presenting member argued that reforms should include removing the ties between MMFs liquidity mandates and redemption fees and gates, mandating that prime MMFs hold a higher degree of liquid assets, and using floating net asset values for all non-government MMFs to set clearer expectations of risks to MMF investors."
A slide deck accompanying the presentation states, "A recent President's Working Group on Financial Markets (PWG) report on money market fund (MMF) reform described 10 potential regulatory options to address existing vulnerabilities in the sector given the events of March 2020. 1. Please discuss the primary drivers of the stress experienced by MMFs in March 2020, as well as any other inherent vulnerabilities that currently exist in the MMF sector. 2. `How would the specific reform proposals presented in the PWG report be expected to impact the MMF industry and broader short-term funding markets, including the front-end of the Treasury market and Treasury repo, both under normal market conditions and during future episodes of market stress?"
It evaluates the PWG proposals, saying, "Listed proposals range from modest to those requiring aggressive changes. Changes to prime MMFs should effectively balance the tradeoffs between attractiveness of yields in normal times and resilience in times of stress. Proposals that strike the best balance, in our opinion, are: Weaken link between regulatory thresholds and gates/fees - Provide greater flexibility to tap liquid assets to meet redemptions; Reform conditions for imposing redemption gates - Reduce incentive for investors to pre-emptively redeem; Changes to liquidity management requirement - Increase liquidity profile through additional categories like biweekly liquid assets; and, Floating NAV for all Prime and Tax-exempt MMFs – Improve transparency and set clearer expectations of fund risks for investors."
The presentation adds, "Other proposals, in our opinion, might face greater challenges in their implementation: Minimum balance at risk and swing pricing requirement - Complex and hard to administer; Likewise, implementation of countercyclical WLA requirements would be challenging, while addressing the pre-emptive redemption incentive problem only partially; Capital buffers, liquidity exchange membership and new requirements for sponsor support are challenging from appropriate sizing and cost perspective and can reduce product viability."
J.P. Morgan's piece comments, "To the degree we see less of an AUM shift out of prime MMFs as a result of floating NAVs, there should be less follow-on impact on credit in the money markets. But that's not to say there will no impact. If the floating NAV reform were combined with the requirement to hold larger liquidity buffers for instance, this could also translate into greater demand for T-bills/discos/repo and lesser demand for CP and CDs, both of which could negatively impact fund yields. To that end, it's possible that reforms could further erode the appeal of prime and tax-exempt MMFs, and assets shift either to short duration credit funds (potentially higher yielding), government MMF (stable NAV, at the cost of little- or no-yield to shareholders) or perhaps evolving alternatives like stablecoin (no-yield). That said, given the current low yield environment, there appears to be still demand for these funds."
In other news, the Economic Times of India writes, "Mirae Asset Mutual Fund launches Money Market Fund NFO." They tell us, "Mirae Asset Investment Managers, India has announced the launch of 'Mirae Asset Money Market Fund', an open ended debt scheme investing in money market instruments. The New Fund Offer (NFO) will close for subscription on August 10. The scheme re-opens for continuous sale and repurchase from August 12. The fund will be benchmarked against Nifty Money Market Index and will be managed by Mahendra Jajoo."
The article says, "The minimum initial investment in the scheme will be Rs 5,000/- and in multiples of Rs 1/- thereafter. According to the fund house, the goal of investment is savings with low to moderate risk. The fund house said that the scheme is ideal for investors with an investment horizon of up to 1 year. Investments in the scheme will primarily be made in money market instruments with up to 1-year maturity. According to the press release, the duration of the portfolio will be between 6 months to 1 year."
They quote Mahendra Jajoo, CIO - Fixed Income, Mirae Asset Investment Managers (India), "At a time when fixed income markets are dealing with possibility of sustained higher inflation across the globe, Money Market Funds may be well suited with exposure in very liquid and high-quality money market instruments, providing attractive yield pick-up due to steep money market curve while still providing reasonable down side protection due to relatively shorter maturity of the portfolio."
India is the 11th largest money market fund marketplace in the world with $58.3 billion in assets, according to ICI's latest Worldwide asset totals. (See our June 18 News, "Worldwide MF Assets Jump in Q1'21 Led by US, China; Europe Sees Drop," and see our previous "Link of the Day briefs: "PGIM India Launches Money Fund" (3/3/20), "New Indian Money Fund Launch" (7/29/19), "Speed Bump for Indian Money Funds" (9/10/18), "New Sundaram Indian Money Fund" (5/9/18) and "Paytm may launch Indian money fund" (1/11/18).
