Both in the US and Europe, regulators are bearing down on money-market funds.
Following a slow summer and with the onset of the five-year anniversary of the financial crisis, the forces looking to further regulate money-market funds are upping the pressure. But those opposed to the measures are fighting back.
In Europe, the European Commission is contemplating forcing constant net asset value funds to hold a 3 per cent cash buffer. And in the US, the comment period for the Securities & Exchange Commission June proposal requiring institutional prime and tax-exempt money MMFs to change from a stable net asset value (NAV) to a floating NAV is near.
While in Europe the move toward implementing seeming MMF-killer regulations appears inexorable, in the US, the chorus of those against the SEC proposals is getting louder and making the SEC’s path a little less easy to follow. In the past several days, Charles Schwab, Federated and Wells Fargo, along with outspoken MMF-rule critic Melanie Fein, Treasury Strategies’ Tony Carfang and a host of others, have all submitted letters protesting what they feel will be overly onerous rules.
While floating NAV seems inevitable, the letters reveal strong arguments against it. Treasury Strategies’ letter also had accompanying it a report saying users will have to pay “very high one-time and ongoing compliance costs.” Other findings from its report include:
- Most trust departments will not use floating NAV MMFs as a result of strict investment guidelines and operational challenges.
- Small and medium-sized broker-dealers will not offer floating NAV MMFs due to the high cost of system and procedural changes.
- Larger broker-dealers and trust departments will incur millions of dollars in system upgrade, process reengineering, and legal costs to accommodate floating NAV MMFs.
- Broker-dealer and trust systems can not now accommodate floating NAV MMFs; trading, recordkeeping, accounting, and sweep systems will require enhancement before these can be offered.
- Because of the complexity and interdependence of fund service providers, these groups will need more than two years to fully support a floating NAV.
Melanie Fein, who in the past has accused the Fed of misstating the facts about the causes of the Reserve Primary Fund breaking the buck, simply says in her letter that the SEC is “pursue measures under the Investment Company Act that in reality are bank regulatory ambitions masquerading as MMF reforms.” She adds that the Fed’s proposals, embedded in the SEC’s rulemaking, will “have serious implications for market efficiency and the future viability of MMFs, with uncertain long-term structural implications for the financial system as a whole.”
Although these and many other of the letters are vehement in their opposition to the proposals, Josh Siegel, managing principal at advisory firm StoneCastle Partners, says there has been a slight shift in the tone. “I think the discussion is starting to become more substantive,” he said. It has become less about whether MMFs should be abolished or changed, he said, and more about the assets. “People are talking about the assets and the portfolio and not the construct,” Mr. Siegel said. The same assets that are in a money fund are in mutual funds, banks or insurance companies. And all of these different constructs would require some level of amount of capital. So why is it prudent in one vehicle to hold more capital than the other? “They’re the same portfolios but with different rules,” he said. So “how can you justify having a stable NAV when it’s not stable and where there is the potential for loss? How come the bank needs to keep capital and the MMF not?”
In the meantime, Mr. Siegel said, treasurers’ habits are changing anyway and they increasing their use of bank deposits. According to reports, corporate bank deposits are at about 7 percent this year, largely driven by coming international regulatory changes that will force banks to hold higher cash reserves to guard against another financial crisis.
As for StoneCastle, Mr. Siegel said business is booming. The company offers FDIC insurance to companies by slicing up their deposit in $250,000 increments or less and depositing it at hundreds of community banks around the country. “As much as we can make, we can sell,” Mr. Siegal said. What’s changed in the last few months, he said, is that US Treasuries are starting to get attractive, so banks must hedge against the possibility of deposit run-off. Therefore they are looking to shore up their deposit base.