ICI President Eric Pan posts a comment entitled, "Fact-checking Statements on Money Market Fund Reform" on LinkedIn, which revisits pending SEC Money Fund Reforms and is partially in response to a recent speech by the SEC's William Birdthistle. (See our July 27 News, "SEC's Birdthistle Weighs In on Money Market Funds, Pending Reforms.") Pan writes, "For over 80 years, our part of the financial industry – mutual funds, ETFs, and money market funds – has been one of the most well-regulated and transparent in the world, which is appropriate given our central role in managing money for hundreds of millions of Americans. It is therefore expected that policymakers and academics spend a lot of time thinking about us, and we appreciate the healthy dialogue we have always had with the dedicated and hard-working SEC staff about how to improve our regulatory framework. We also depend on SEC leadership having deep expertise about how funds and the markets work so that we can trust that they are exercising the right judgment to achieve the SEC mission: to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation."
He explains, "One place where we need to make sure the SEC has its facts right is in its open Rulemaking on Money Market Funds (MMFs). Like regulators, funds want financial markets that are resilient to shocks – the question is how best to get there. ICI has written extensively, based on industry-leading data, about the liquidity events of March 2020, including our comment letter to the SEC. We show, through a comprehensive analysis of data, that MMFs were not the cause of market instability as COVID was spreading around the globe. If you missed our roundtable last year on the topic, it's worth taking a look at what we discussed here and here."
Pan's piece continues, "In its proposal, the SEC wants to mandate swing pricing for prime institutional money market funds. What the SEC does not appear to realize (or has not said is its intent) is that swing pricing would cut off prime money market funds at the knees, to the detriment of investors. The products would be stripped of their cash-equivalent features, such as same-day settlement and multiple NAV strikes per day. And investors would be hit with unpredictable costs for redeeming."
He tells us, "Recent statements by SEC leadership suggest that they think their proposal on swing pricing is appropriate because they believe that MMFs in Europe already use swing pricing. That fact is that European MMFs do not use swing pricing. There is neither a regulatory mandate to use swing pricing for MMFs in Europe, nor do any European MMFs voluntarily use swing pricing. In fact, we're unaware of swing-pricing for MMFs being used anywhere in the world. There's simply no parallel in the Europe for what the SEC is proposing, and the SEC is wrong to suggest that as a justification for its rulemaking."
Pan also comments, "We've also seen suggestions by the SEC leadership that any adverse impact on MMFs would not harm investors because they would just shift their money to ultrashort bond funds. Such a conclusion seems flawed given the nature of the markets. Ultrashort bond funds are not a substitute for MMFs. Ultrashort bond funds hold riskier portfolios, can't be considered as cash equivalents by businesses, and don't have intraday liquidity since they settle tomorrow rather than today."
Finally, he adds, "And the SEC leadership knows that MMF investors cannot easily go to MMFs' closer substitute: bank deposits. Only MMFs offer a market rate of return. This becomes even more important as the Fed continues to raise interest rates. And under current banking regulations, banks won't take large amounts of new deposits like these. The fact is that MMFs are vital to our capital markets. They are ingrained in the daily economic life of our country, and that success would be very difficult to replicate. The SEC needs to be extremely careful as it considers changes here. All to say, this is a good time to measure twice, and cut once."
In other news, both S&P Global Ratings and Fitch Ratings recently released updates on the money fund sector. S&P's "U.S. Domestic 'AAAm' Money Market Fund Trends (First-Quarter 2022)" tells us, "Rated U.S. government and prime money market funds (MMFs) experienced modest declines in assets under management during the first quarter of 2022. Asset growth in government funds was mixed, with a majority of government funds seeing net asset flows reverse course and begin to decline at the beginning of the year. Net assets dropped 4% overall during the quarter. Prime fund net assets remained flat compared to the previous quarter, at $365 billion, driven by growth in local government investment pools, offset by a decrease in net assets in registered prime funds. Weakened asset growth in government funds may persist this year as rates continue to rise and a portion of assets moves into higher yielding products."
It continues, "Both government and prime funds will reap the benefits of rate hikes in terms of higher yields. During the first quarter, the seven-day and 30-day net yields for government funds grew to 0.15% and 0.07%, respectively. The seven-day and 30-day net yield for prime funds jumped to 0.26% and 0.16%, respectively. For government and prime strategies, seven-day and 30-day net yields tended to be identical until the end of the quarter, when seven-day yields briefly moved higher than 30-day yields."
S&P continues, "Typically, when rates are rising, we see a greater spread between prime and government funds, followed by investors shifting cash to prime funds from government funds. However, investors have been more conservative due to the proposed changes to Rule 2a-7 of the Investment Company Act of 1940, under which MMFs are registered.... The asset composition of government funds looked similar to the previous quarter, with continued overweight exposure to repo. This was driven by a reduction in Treasury bill supply, offset by the continued supply of the Fed's reverse repurchase program. Exposure to agency and Treasury floaters increased, although floating rate exposure remained historically low."
They add, "Managers shortened the maturity profiles of their portfolios while keeping an eye on the Fed, with the expectation of rate hikes at each of the next six meetings. Weighted average maturities drifted lower by four days for government funds and as much as 10 days for prime funds. Managers will likely have a bias toward shorter maturity profiles until we get closer to the end of the rate hike cycle.... As rates rise, fixed-income prices will fall, which has a modest impact on MMF net asset values. Therefore, the distribution of net asset values (NAV per share) for rated funds has become more dispersed compared to the previous quarter. NAV per share ranged from 0.9990 to 1.0019 for rated funds, whereas the lower bound was previously 0.9995."
Fitch also published its "U.S. Money Market Funds: July 2022," which states, "Total taxable money market fund (MMF) assets decreased by $8.7 billion, from May 31, 2022 to, 2022, according to Crane Data. Government MMFs lost $19.4 billion in assets during this period, and prime MMFs gained $10.7 billion. Total assets have decreased by $95.5 billion since Dec. 31, 2021."
They add, "Treasury holdings decreased by $72 billion while Repo holdings increased by $129 billion, from May 31 to June 30, 2022, according to Crane Data. Repo remains the largest portfolio segment, followed by Treasury.... As of June 30, 2022, institutional government and prime MMFs' net yields were 1.10% and 1.27%, respectively, per Crane Data, both up significantly from the end of May.... This increase is due to the Federal Reserve (Fed) increasing rates 75 bps on June 16, 2022, in line with market expectations. The Fed is expected to raise rates to near 3.5% by the end of 2022." (See also "Fitch Assigns 'AAAf' Rating to Florida FIT Choice Pool and Texas FIT Choice Pool.")
