MMF company Federated Investors says new rules won’t have as big an impact as thought.
Federated Advisors wants you to know that everything’s fine in money market fund-land, despite rules put in place by the Securities and Exchange Commission in 2014.
“Regulatory changes to Institutional Prime and Municipal MMFs are far less onerous than we once feared they would be,” wrote Federated in a report, “Money Market Fund Regulatory Changes: The Impact of 2014 Regulations on Investment Policies” in partnership with consultancy Treasury Strategies. “The value proposition of money funds remains intact, and the US Treasury action will mitigate most, if not all, tax and recordkeeping concerns for the corporate investor.”
The report is in contrast to the dozens of letters Federated wrote (or were written on behalf of the company) to the SEC from 2013 up to the days before the SEC’s July 14, 2014 decision. Before the rules, Federated and other MMF companies feared widespread abandonment of the funds, which for years have been a valuable tool for corporate treasurers and other investors.
The rule seemingly most feared was the one that required institutional MMFs to carry a floating net asset value vs. the fixed buck-per-share NAV funds had previously. Those inveighing against the move to a floating NAV cited the possibility of very high one-time and ongoing compliance costs that would accompany such a switch. They also feared companies would leave MMFs in droves as they looked for more certain places to put short-term cash. “Most trust departments will not use floating NAV MMFs as a result of strict investment guidelines and operational challenges,” Treasury Strategies wrote in a report at the time. And “larger broker-dealers and trust departments will incur millions of dollars in system upgrade, process reengineering, and legal costs to accommodate floating NAV MMFs.”
But now a reversal. Federated, which in its report laid out the steps companies should take when thinking about staying in MMFs, said many companies will only need to make minor changes to policies and in some cases none at all. To reach this conclusion, Federated worked with Treasury Strategies, which review more than 20 investment policy statements from its corporate clients “representing a cross section of industries, revenue and portfolio sizes.” Treasury Strategies organized the results into hypothetical companies with various kinds of investment strategies and goals.
“While some of … advantages are now diminished because of the fluctuating net asset value, MMFs are still on par with most other permissible short-term investments and deposits with respect to safety, liquidity, yield and convenience,” Federated said in the new report. “Moreover, MMFs still enjoy an advantage over other instruments in terms of liquidity and transparency.”
Federated isn’t the only fund company changing tack. Fidelity earlier this year announced changes its product mix. Most notably, the fund company will convert its prime funds to government funds in 2015. This decision was the result of many customers wanting to keep the CNAV, Fidelity said. And Reich & Tang announced earlier in March that it will exit the US MMF business altogether. The firm will liquidate $9.5 billion in fund assets by July 31.
As a result of these changes and ongoing uncertainty, treasurers have been seeking out alternatives for their short-term cash. One firm benefiting from the upheaval is StoneCastle Cash Management, which has been actively promoting its Federally Insured Cash Account (FICA). Brandon Semilof, Managing Director for StoneCastle, said his firm is having a record quarter, with over $1 billion of net new funds. Treasurers may find FICA attractive as it provides the safety, via FDIC-Insurance, liquidity and yield.
Pimco has also developed a number of short-term investment products to meet corporates’ varying investment needs, including the company’s Enhanced Short Maturity Exchange-Traded Fund (MINT) and Low Duration Exchange-Traded Fund (LDUR). BlackRock, Barclays and Guggenheim Investments have also entered the market with attractive short-term products. Companies have also been looking separately managed accounts.