Capital Advisors Group's Lance Pan asks in his latest commentary, "Will There Be a Renaissance for Prime Money Market Funds? He explains, "As the market's attention was drawn to the war in Ukraine, supply chain disruptions, runaway inflation, and higher interest rates, a significant deadline quietly passed. April 11 marked the end of the comment period for the new round of money market fund (MMF) reforms proposed by the Securities and Exchange Commission (SEC). As the Fed is poised to hike rates aggressively in coming meetings, institutional cash investors are keenly aware that their deposit rates are not likely to keep pace. Might prime MMFs be an alternative? Will the amendments alter the utility and attractiveness of prime funds to institutional cash investors? Should investors plunge in before the new rules take effect? (Note: See the SEC's "Comments on Money Market Fund Reforms" here.)
Pan tells us, "To answer these questions, we need to explore the pending SEC reform proposal. The short verdict is that the approval of the final rules and the associated implementation schedule may not occur until the end of the current interest rate cycle. Institutional prime funds are not likely to return to their previous status as the cash management vehicles of choice due to a reduced amount of yield advantage over government funds. An existential threat comes from the 'swing pricing' mechanism which, if approved, may result in some funds being shuttered or converted to government funds, creating challenges for shareholders who decide to remain in prime."
Capital Advisors also asks, "Will this round of rule revisions reinstate investor confidence in prime funds' cash-like functionality? Will institutional prime funds have a renaissance that rivals their golden age at the turn of the millennium? Unfortunately, we think that if the amendments are ratified as proposed, institutional prime funds will be less distinguishable from government funds and be more cumbersome to manage than ultra-short bond funds, thus making it unlikely that they once again become a popular cash management vehicle. However, if the industry can solve the swing factor puzzle, prime funds may offer some benefit to investors who desire credit exposure in a very low-duration shared-liquidity vehicle."
The piece comments, "If swing factor provisions survive the final rule, it is difficult to fathom how institutional prime funds will be able to thrive. As proposed, the amendments do not make enough economic sense for institutional prime funds to remain attractive to shareholders and funds sponsors alike. As noted earlier, the explicit concentration, liquidity and disclosure requirements offer robust shareholder protection when compared to similarly managed private liquidity and ultra-short bond funds. However, higher liquidity requirements put prime funds at a yield disadvantage compared to the two alternatives. In addition, liquidity investors are notoriously risk averse, especially to cash vehicles with esoteric features. Swing pricing will be a tough sell to this crowd."
Pan writes, "The fund industry and its intermediary partners are faced with a different set of challenges. After undergoing a long and arduous process of converting their systems to handle floating-NAVs and fees and gates, they have fresh decisions to make. Will they commit significant financial and human capital to design and implement a new system to accommodate more rule changes on a product with less cash-like utility while alternatives are available? We suspect that swing pricing may become the straw that breaks the camel's back to force some, if not all, fund sponsors to end prime fund offerings. Funds that decide to stay in the game must then contend with their smaller footprint in the short-term credit markets with less pricing power over commercial paper and Yankee CD issuers."
Finally, he adds, "Many factors will influence how this latest round of MMF reforms will impact liquidity investors. A divided Senate in a mid-term election year makes the fate of the two SEC Commissioner nominees uncertain. If they are confirmed, it is uncertain if either or both will support a final vote on all the amendments in the proposal. Overwhelming objection to swing pricing based on operational difficulty may persuade the SEC to find a different approach. The Commission may try to smooth out the transition by allowing a longer implementation window. All these factors lessen the chance of the new rules being approved and finalized within the next 18 months. While the waiting game is on, prime funds may gain some assets in the interim from opportunistic investors who may plan to move out of prime at the last minute. We continue to advocate for government funds for overnight and near-term cash needs while investing out on the yield curve in high quality government and corporate securities that offer better risk-adjusted return profiles."
In other news, we wrote Tuesday, "Money Fund Yield Break 0.50%; Fidelity Hikes Sweep Rate," which reviews the latest higher yields and rates on money funds and brokerage sweeps. We've since learned that brokerage Robinhood, which may be teetering on the edge of bankruptcy, announced a 1% rate on selected brokerage cash sweeps. A blog piece, titled, "Earn 1% Interest on Uninvested Brokerage Cash at Robinhood," explains the details. It says, "[W]e're introducing our revamped brokerage cash sweep program, which lets all eligible brokerage customers earn 1% interest on uninvested cash and helps them earn extra income. With brokerage cash sweep, customers can currently earn 16x more in interest than the national average and can invest or request to withdraw cash whenever they want."
It explains, "After depositing funds or selling and settling a given stock, customers will currently earn 1% APY on that cash with the interest paid out monthly. This means that if a customer starts the year with $1,000 in uninvested brokerage cash and doesn't deposit or withdraw any funds for the entire year, they'll earn $10 provided the rate doesn't change. Customers can keep track of how much they've earned directly within the app."
Tech Crunch describes the announcement in "Robinhood aims to court users by offering attractive 1% interest rate on cash." It tells us, "Investing app Robinhood is on a roll with announcing new features as it looks to appeal to more customers amid dwindling transaction revenue. Less than a week after unveiling plans to allow users to lend out their stock, the company announced that it has introduced a 'revamped' brokerage cash sweep program that will be rolled out to customers today."
They continue, "What that means is that all 'eligible' Robinhood users will be able to earn 1% interest on cash sitting uninvested in their accounts (though the company did not define which customers are eligible).... Robinhood's brokerage cash sweep program used to offer an interest rate of 0.5% to customers that were enrolled for its Cash Management feature, according to the company. Those previously enrolled for that Cash Management program will be automatically transitioned into the new one and see their interest rate increase to 1%."
For more, see our previous Crane Data News updates: "N-MFP Portfolio Holdings Shows Repo Dominates; Robinhood Returns" (10/9/19), "Money Fund Assets Break $3.25 Trillion; More Arrows Hit Robinhood" (7/12/19), "Robinhood Withdraws Bank Says SFC" (12/3/19), "MarketWatch Has More on Robinhood" (1/3/19), "Robinhood Withdraws 3 Percent Offer; MF Assets Stay Over $3 Trillion" (12/21/18), "SIPC Concerns About Robinhood" (12/17/18) and "Robinhood Stealing Millennial's Cash" (12/14/18).
