The fear of gates and fees to be imposed after new money market fund (MMF) regulations become effective in October was palpable among attendees of a recent NeuGroup Assistant Treasurers’ Group of Thirty meeting. But is that fear justified?
A common refrain is that even a remote threat of money market fund boards imposing gates or fees on funds is untenable. That’s because if the company’s CFO needs funds immediately and they are not available, the treasury executive “might as well walk out the door, because you’re fired,” as one attendee exclaimed.
Under the new regulations, fees of up to 2% may be imposed if weekly liquid assets fall below 30% of total assets, and if daily liquidity falls below 10%, while a gate of up to 10 days may be imposed if weekly liquid assets fall below 30% of total assets. However, MMF boards have discretion for whether to impose those restrictions. Executives at short-term-investment portal ICD among others argue that fund managers are almost certainly going to keep liquid assets safely above those thresholds to avoid having to call a board meeting to deliberate whether to pursue that route.
Nevertheless, even that remote possibility has prompted lots of anxiety. Participants in the AT30 meeting generally agreed the new regulations would prompt a shift away from prime MMFs to the government-only variety and other short-term alternatives. The question was whether that shift would start before or after summer vacations.
Anthony Carfang, managing director at Treasury Strategies, which was recently acquired by Novantas, acknowledged the likelihood of such shift, but he predicted volume would return to prime funds and then some. “We see prime funds coming back and within a year having more volume than ever before,” Mr. Carfang said.
For one, the spread between prime and government-only funds will likely make the former hard to resist. Mr. Carfang said that a lot of treasury executives have been saying the historical 15-basis point spread between the two is insufficient to take the additional risk. However, that difference is nearly certain to widen as the October 14, 2016 effective MMF reform date approaches and corporates and others clamor to move into government-only funds, depressing their rates and widening the spread government-only and prime MMFs.
In addition, more rate hikes will increase the all-in market returns, creating a natural expansion in spreads. “We’ve only had one rate hike and the prime fund spreads are now 21 basis points higher than government-only funds. And that’s just one rate increase, not five or 10, Mr. Carfang said, noting that new derivative collateral requirements will create yet more demand for high-quality securities such as Treasury bonds.
Another reason prime MMFs are likely to return to favor is that they hit the most corporate sweet spots for short-term investments. Treasury Strategies has identified 10 factors corporate treasuries look for in those investments, including relative yield, daily liquidity, ultra-low risk, and TMS connectivity; only prime MMFs hit all 10. Treasury MMFs hit nine out of 10, lacking the relative yield factor; with bank DDAs following at eight and ultra-short bond funds at six.
Mr. Carfang said hyperbolic fears about being unable to meet the CFO’s demand for immediate liquidity arose a year or so ago. He added that the primary function of a treasurer is to maintain the company’s liquidity, structuring the balance sheet so there is sufficient money to pay current bills, but that doesn’t mean the entire portfolio has to be 100% liquid today. “We hear that party line over and over again,” he said. “Most fund companies themselves didn’t fight back aggressively, so everyone started believing it. That’s now changing as the implementation date approaches.”