Opponents of the SEC’s proposals to move to a floating NAV for prime MMFs lay out cost, accounting arguments.
Moving prime money market funds to a floating net asset value regime will cost billions of dollars and have material accounting impacts. That’s according to two reports released Thursday from the US Chamber of Commerce and Institutional Cash Distributors (ICD).
The Securities and Exchange Commission voted in early June to proceed with new rules that would require prime money market fund managers to report marked-to-market daily net asset values. These variable or floating NAV (or VNAV) funds would coexist with standard $1-per-share constant net asset value (CNAV) funds, although the CNAV reporting would only be permitted on US Treasury and government securities funds, not prime funds.
The US Chamber proffered the cost argument against the proposal, suggesting that moving to a VNAV would create costs and complexities that would force companies from using the assets.
“The operational complexity, systems alterations, and business process changes needed to support a floating NAV threaten continued use of MMFs for most investors, including corporations and municipalities,” the Chamber said in its presentation. And in order to comply with new rules will cost somewhere $1.8bn and $2bn, the Chamber said, with annual operating costs between $2bn to $2.5bn.
For its part, ICD detailed the operational and accounting issues associated with a moving to a floating NAV. ICD says that a floating NAV will require new settlement alternatives, including either:
- Delivering payments post end of day pricing;
- Pricing several times per day; or
- Day after pricing (or T+1)
On the accounting side, corporations would be required to start monitoring MMF’s mark-to-market value and “report on any minute gains or losses.” Such reporting will result in:
- A need for a significant overhaul of general accounting standards; or
- An additional accounting burden on US corporations
Up to now corporate treasurers have enjoyed the “no-brainer” aspect of MMFs. A dollar in, means a dollar out, and there usually no accounting to deal with. But moving to a floating NAV could change that, opponents say. Several studies have revealed that treasurers might stop using them altogether.
A survey by consultancy Treasury Strategies of 150 European institutions in March showed that European investment firms “would seek out investment alternatives should the constant net asset value methodology for MMFs be eliminated.” Likewise, an Association of Financial Professionals survey in 2012 Association of Financial Professionals revealed that: “Financial professionals indicate that implementation of some or all of [SEC] proposals may cause their organizations to stop investing in MMFs and liquidate some, if not all, of their current MMF holdings.”
No matter what happens, users of MMFs have some time. “Under federal law, rulemaking generally involves multiple stages; the SEC may not simply change regulations overnight,” Federated wrote in a report in May. That means a period of time running from a few weeks to many months for SEC staff and commissioners to hash out the proposal draft, and then when there is agreement, there is a Notice of Proposed Rulemaking detailing the proposed changes along with the reasons for them.
Between now and then there is certain to be more reports showing the damage VNAV will do. In the meantime, many MMF alternatives are cropping up; treasurers and money managers should take the time to explore them (see related story here).