New rules proposed for money market funds could have a big impact on how and whether treasurers use the tools, according to a Fitch Ratings report. Fitch touted MMF’s allure as a short-term cash management tool on which treasurers rely heavily. Meantime, the Financial Stability Over Council announced it would step aside if the Securities and Exchange Commission comes out with new MMF proposals before it completes its own MMF study and recommendation process.
“US money market fund (MMF) rule changes would challenge the flexibility of these tools for corporate treasurers,” Fitch said in its report.
Further, the price volatility that requiring a variable net asset value – or a floating NAV – would likely bring to the assets would trigger accounting and tax implications and consequently “sharply reduce the appeal of MMFs to many institutional investors.” The report cited a recent Fitch survey of corporate treasurers in Europe that found that 50 percent said the “simple tax and accounting treatment for constant net asset value” (CNAV or the “buck”) of MMFs were their “main strength.”
“The change to require that MMFs switch to a variable net asset value (VNAV) from CNAV based on amortized cost accounting has been suggested by the SEC in the past and is likely still on the ‘short list’ of proposals,” Fitch said. “A VNAV structure would not necessarily alter how Fitch assigns ratings on MMFs and would offer investors additional price transparency.”
Fitch was equally negative on the other proposed rules for MMFs, specifically liquidity holdbacks and/or capital buffers. “Mandatory liquidity holdbacks would create a host of issues for investors, especially for those engaging in active day-to-day cash management,” Fitch said. “While capital buffers would clearly provide additional credit and liquidity support, they would also introduce increased costs at a time of exceptionally low yields and new conflicts between traditional MMF investors and those providing the capital buffers.”
FSOC deferring to SEC
The SEC, under new head Mary Jo White, is said to be preparing to reintroduce the proposals from which it backed down in 2012. After ending its effort at reform – the commission didn’t have the votes to move forward – the FSOC threatened to step in to regulate MMFs itself under Section 120 of Dodd-Frank. Section 120 allows the FSOC to recommend special measures to the appropriate primary financial regulatory agency (in this case the SEC). Failing that – or if that regulatory agency fails – then the FSOC can make a determination that MMF companies are systemically significant.
However, the FSOC has taken a step back and has given the SEC more time to act on its earlier proposals. The FSOC is currently in the midst of the “Section 120 process,” whereby it is reviewing the 150 comment letters it received on its MMF proposals. In its just released annual report, the FSOC said that if the SEC “moves forward with meaningful structural reforms of MMFs before the Council completes its Section 120 process, the Council expects that it would not issue a final Section 120 recommendation to the SEC. The Council understands the SEC is currently in the process of considering further regulatory action.”
According to a Bloomberg report in early April, SEC Commissioner Daniel Gallagher said the SEC’s staff is working through the technical details of the proposals that failed to move forward in 2012; and they’re getting close to releasing new proposals. Mr. Gallagher said he and the other commissioners were not held back by the changes in SEC chairmanship and expected the agency to make its recommendations by June.
“It’s not going to be long now that we get the draft up and start working through it and in the very near term have a proposal,” Gallagher told Bloomberg.