The SEC and other regulators are zeroing in on money market funds; MMFs and corporations wait it out.
While the Securities and Exchange Commission Chairman Mary Schapiro’s recent testimony to Congress confirmed a commitment to continued reform of money market funds (MMFs), with no timetable set corporations are left in a wait-and-see mode. Despite opposition from the financial world, movement out of MMFs by corporations with excess cash, and conservative MMF managements putting prime funds liquidity at its highest level in two years, the SEC and Federal Reserve press on for more regulation. The Fed recently released a paper introducing the concept of a “minimum balance at risk” (MBR) “that would provide a disincentive to withdraw funds from a troubled money fund,” (see related story here).
Expectations were that the SEC would act on its suggestions in the first half of this year. But as the second half begins, there still has not been a definitive timetable as to when the SEC will proceed with proposing the reform changes vehemently opposed by the finance industry; changes they say threaten the very existence of the money market fund industry.
For corporate treasuries who count on MMFs, it appears MMFs have a very short shelf life.
Bank deposits popular. The latest Association of Finance Professionals (AFP) annual liquidity survey showed that corporate treasuries are putting about half of their excess cash in bank deposits rather than traditionally popular short-term investments such as MMFs, commercial paper, repurchase agreements, T-bills and other short-term government securities (see related story here). A low-interest rate environment certainly is partly the cause, but pending reforms are adding uncertainty and it is clear that treasurers at large corporations are already limiting investments in MMFs and preparing for what may lie ahead.
Peter Crane, president and publisher of mutual fund data company Crane Data LLC, sheds some understanding of the impact that the ominous reform has had on MMFs: “Federal Reserve data shows money funds are down $1.3 trillion over 3 years (down 32 percent), but still at ‘07 levels,” he revealed in a recent presentation, while “MMDAs (money market deposit accounts) are up $1.9 trillion (up 43.9 percent)”.
And credit ratings agency Fitch recently reported that “available daily liquidity of rated prime MMFs stood at 31.1 percent of their assets.” This represents “the highest level since Fitch introduced MMF liquidity criteria in 2010.” Current expectations are that levels should remain constant. This conservative investment approach has created stability in the current MMFs market.
SEC says too much risk.
Regardless of the positive impacts 2010 reform changes have had on MMFs, with $2.5 trillion in assets under management, SEC Chairman Mary Schapiro believes that significant underlying systemic risk remains. She testified in June that she is convinced that the additional reforms are necessary to ensure financial system stability. MMFs, Ms. Shapiro noted in testimony before the Senate Committee on Banking, Housing, and Urban Affairs, “continue, for example, to have considerable exposure to European banks, with, as of May 31, 2012, approximately 30 percent of prime fund assets invested in debt issued by banks based in Europe generally and approximately 14 percent of prime fund assets invested in debt issued by banks located in the Eurozone.”
She went on to note that the Commission, itself divided on proposed reform, is still investigating and analyzing proposals and there will be, as expected, an opportunity for public comment once agreement is reached. As to timing of the proposal and subsequent comment period it is uncertain but we can expect to hear something in the next few months.
Further pressuring Shapiro and the SEC is the threat of the Financial Stability Oversight Council (FSOC) overtaking the process if it continues to drag their feet. Two Federal Reserve members recently reminded the SEC that if more regulation is not forthcoming soon, then they can change jurisdictions and ask the FSOC to decide.
Additional changes?
In addition to the widely noted suggested changes, i.e., a floating net asset value, limits on withdrawals and capital cushions, the SEC is suggesting other changes as well. According to Crane Data, the President’s Working Group reforms being considered by the SEC include:
- Private emergency liquidity facilities for MMFs
- Mandatory redemptions in kind
- Insurance for MMFs
- A two-tier system of MMFs with enhanced protection for stable NAV funds
- A two-tier system: stable NAV MMFs reserved for retail investors
- Regulating stable NAV MMFs as special purpose banks
- Enhanced constraints on unregulated MMF substitutes
These reforms could potentially increase fees and change the nature and structure of MMFs altogether. For instance, mandatory redemptions in kind would restrict the liquidity feature of the funds, as cash is replaced with securities and further liquidation required. With return of principal a key attraction for treasuries, this would result in eliminating use of the funds as cash equivalents.
Despite strong opposition from the finance industry and the recent stability of prime MMFS, the SEC stated that the commission is committed to a reform proposal. While the industry waits for the regulator to make the next move, corporations continue to move cash out of MMFs in anticipation.