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Investment Management

Prime Money Fund Future Not So Bleak

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July 11, 2016

There remain concerns regarding regs, but the death of prime money market funds has been greatly exaggerated.

Annuit CoeptisThe Securities and Exchange Commission’s new money market fund (MMF) rules impacting institutional prime and municipal MMFs become effective October 14, 2016 requiring funds to use floating net asset values (NAVs) instead of fixed. The rules also enable the board of such a fund to apply fees of up to 2% if weekly assets fall below 30% of its total assets, and if daily liquid assets fall below 10%, and a gate of up to 10 days if the level of weekly liquid assets falls below 30% of total assets—if it’s in the best interest of the fund.

The rules have clearly spooked NeuGroup members, with 43% of survey respondents switching to government‐only funds that are not impacted; 3% are moving to separate accounts, and 27% are doing something else. A quarter of respondents reported being unconcerned about the rules or staying invested in prime funds. Nevertheless, 43% do not anticipate changing their investment policies, while 19% anticipate making changes; 16% have already done so and 22% aren’t sure. Nearly half plan to do so in the second quarter and the same portion by year end; and 6% already made changes to their policy in Q1 of this year.

One of several key takeaways from a recent Assistant Treasurers' Group of Thirty meeting was that VNAV was seen as “no big deal.” According to Wells Fargo, since 2010 the annual variability of its funds was 2 basis points or less. The bigger concern among corporates has been the record‐keeping challenges of a floating NAV. Fortunately the SEC’s final rules exempt shareholders from having to recognize losses from the sale of securities if they purchase substantially identical shares within 30 days before or after the sale. And they can net gains and losses in a fund over a period of time instead of reporting them individually. ICD, the global money market products provider says that the auditors and companies that it works with have told the company that monthly gains and losses would be accrued, and that would be put below the line, so not affecting EPS, right where accrued interest would be.

Another issue that ICD said was overblown was the fear gates and fees. What’s so bad about fees and gates? Nothing that corporates aren’t already familiar with: most other short‐term investment alternatives, whether CDs, time deposits or commercial paper, already have utilize gates and fees. ICD also pointed out that 30% is a very high weekly liquidity minimum, but fund managers will ensure their funds stay above that threshold, because they don’t want to have to call a board meeting to determine if those measures are necessary.

Corporates planning to continue investing in prime MMFs through their treasury workstations must ensure integration with investment portals has been properly updated to comply with the new rules. ICD said that if there was anything members should take away from the meeting, it should be making sure treasurers “get those integrations straight, and if you haven’t already, those conversations must start immediately.”

One final takeaway was that the death of prime MMFs is greatly exaggerated. ICD said prime MMFs will likely see a greater outflow as the rules’ effective date approaches, but the spread between prime and government MMFs far outweighs potential losses from floating NAV. That means eventually the market will likely see prime assets above where they are today. In fact, prime MMFs still hit all the right buttons from a corporate treasury perspective, with government-only MMFs coming in second.

Overall, the anticipated wave of corporates shifting funds to government‐only MMFs will likely make their yields even less attractive than they are already. ICD anticipates European regulators issuing similar regulations affecting prime MMFs a few years down the road. Aside from the perceptions associated with headlines, the reality of the prime fund option is that it still seems to be a very viable investment option.

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