Although “when not if” has become a common refrain for money market fund users and the likely changes coming to the sector, that when is becoming critical as it could stretch out a while. Several factors are contributing to this according to Fitch, which presented recently at the Treasury Management Association of New York Conference.
For one, it’s not exactly clear how the Securities and Exchange Commission will land when it comes to the host of rules so far proposed. Will it be a constant net asset value for all funds or will regulators split the market into government and agency funds, which would keep a floating NAV, while prime funds would have to take on the constant NAV? Will there be buffers and holdbacks? In the US, “we’re waiting and waiting and it’s not clear what will happen yet,” said Roger Merritt, fund and asset manager at Fitch.
Further, once these regulations are proposed, it will be months of comment period and then more review and the likely a phased-in approach (see related story here). One big issue is the suggestion that once regulators split MMFs into seemingly “haves” and “have nots,” there will be a rush to the “haves;” that is, all the prime CNAV investors will rush into the government VNAV funds. “Can [government MMFs] handle all the asset inflows,” said Mr. Merritt. Market consensus is no.
Also an issue is differing regulations in the US and Europe will have to be addressed before meaningful rules are implemented. For instance, Fitch says, all MMFs in the US are regulated under one rule 2a-7, and defined the same way. However in Europe, there are two definitions of MMFs – short-term MMFs and MMFs, which mean two separate rules. While there are some regulators in the US, namely Federal Reserve Governor Daniel Tarullo, who lump MMFs in with shadow banking, that feeling is even stronger in Europe, where shadow banking is mostly seen as bad. Regulations there could “make it impossible to run MMFs,” Mr. Merritt said. The good news he added is that historically, Europe “overreaches then negotiates back to more reasonable rules.”
Other areas of concern are how other aspects of regulation are impacting MMFs. For instance, Basel III and its liquidity coverage ratio is forcing banks, big users of MMFs, to hold longer-term funding while at the same time, MMFs have been forced to hold short-term and better quality assets. There is a disconnect in these rules,” said Mr. Merritt.