By Ted Howard
Treasurers ultimately will feel the most pain of having to comply with new money market fund rules.
The Securities and Exchange Committee late July voted to approve new laws aimed at regulating the money market fund industry. In the process, they ostensibly chose who wins and who loses in the sector. Among the losers are corporate treasurers and issuers of short-term debt (see related story).
The SEC in a 3-2 vote approved rules requiring certain MMFs to abandon the dollar peg for net asset values and move to a floating NAV, which would more accurately reflect a fund’s market value. The rules will also apply gates and fees to anyone looking to redeem their funds in the midst of a run. The toughest part of the new rules were reserved for prime money funds, which are used by institutional investors and buy riskier securities like commercial paper. This could mean trickier cash management for treasurers going forward.
The rules “eliminate the attractiveness of what makes prime funds so appealing” to treasurers, said Brandon Semiloff, managing director at StoneCastle Cash Management. Gone will be the no-brainer use of the funds for treasurers, which for more than four decades meant a dollar in was a dollar out.
The rules mean that money could start moving to other assets, Mr. Semiloff said, including separate accounts and other ultra-short-term funds. StoneCastle offers a product called FICA or Federally Insured Cash Account, which offers through a large collection of community banks, weekly liquidity, a competitive yield and a high level of FDIC insurance. Still there are no funds like MMFs to satisfy any immediate, daily cash needs of treasurers and their companies. “There’s nothing out there that offers the flexibility or liquidity of a money market fund,” Mr. Semiloff said. Currently, he added, “if a treasurer calls a fund and needs $500mn, he can get it right away.” But with the new rules, this won’t be the case.
It’ll be then incumbent upon treasurers to manage cash more carefully and anticipate the company’s cash needs. In particular, they should revisit their investment policies to ensure it enables them to have as much flexibility as possible in the management of short-term cash balances.
Although the new rules could mean that companies might pull out billions of dollars out of certain funds over the two-year phase in period, the rules “weren’t a big surprise,” said Pete Crane, president & CEO of Crane Data. Nor were they as bad as some thought. “The emergency gates and fees are a little kinder than they were proposed,” Mr. Crane said. “They give the board flexibility” in determining when to impose the gates and fees. “So that does make the combination more palatable for prime institutional investors.”
The big winners in the SEC’s decision were retail funds, which aren’t required to use the floating NAV. It was determined that retail customers were creating runs when the Primary Reserve Fund broke the buck back in 2008. Also on the winner’s side, according to Mr. Crane, are lawyers. “The lawyers who write the money fund prospectuses [will be winners] because you’re going to see this massive reorganization of all these fund lineups.”