Corporate treasury executives appear to be more willing to accept new regulations impacting prime money market funds (MMFs) that go into effect in October, and more insight into how they will respond to the requirements will arrive much sooner.
Debbie Cunningham, chief investment officer at Federated Investors, noted in Treasury Strategies’ recent Quarterly Corporate Cash Briefing webinar that a year ago corporate clients vowed to avoid prime money market funds (MMFs) facing the new requirements. Those regulations will impose floating net asset value (NAV) as well as fees and gates when funds’ liquidity drops below a certain level, requirements that will not apply to MMFs investing in government securities.
The same clients today, she said, express far less reservation about prime funds, given their higher yield compared to government MMFs and the unlikeliness of sufficient volatility to activate fees and gates.
“Our clients are definitely less concerned about fees and gates than they were six or nine months ago, and it’s really due to the spread between prime and government [MMFs],” agreed Anthony Carfang, partner and director at Treasury Strategies.
The new rules have prompted many prime MMFs to convert to government MMFs, and that’s largely completed by now. However, the extent to which clients will withdraw balances from prime funds and move into the government space remain remains unclear, and the abundance of volatility globally adds to the uncertainty about how the MMF market will proceed.
“We still have a lot to learn, and perhaps we’ll learn more in April,” Ms. Cunningham said, when new reporting and disclosure items kick in, which will require marking to market funds’ NAV on a daily basis, going back six months, as well as posting liquidity numbers daily.
Ms. Cunningham added that rates have widened on six- to nine-month paper, stemming from the Federal Reserve’s December rate increase. Spreads have widened as well for nine- to 12-month paper, with maturities running into the effective data for the new MMF requirements. “That’s definitely a reflection of fund managers avoiding those longer dated securities,” she added.
Peter Matza, engagement director at the London-based Association of Corporate Treasurers, who also participated in the webinar, noted that Europe’s regulatory reform of MMFs is still in the works. He said it will likely end up as hybrid of floating and constant NAVs, the latter of which is a NAV calculated to two decimal places compared to the floating NAV’s four, and therefore is less apt to fluctuate. He added that fees and gates may also be a part of the mix, but the proliferation of other regulations impacting areas such as transfer pricing have bumped MMF reform down treasury executives’ list of concerns.
Mr. Carfang said other “game changers” in 2016 include foreign exchange (FX) volatility and diverging central bank policies. The panel members tended to agree that the Fed is likely to raise rates another 50 bps to 75 bps this year, and Mr. Matza said the Bank of England may also start to tighten.
Roger Merritt, managing director at Fitch Ratings and another panel participant, noted the unique circumstances for today’s “lift off” from zero interest rates in the U.S. He said that over the last four rate cycles, the Fed has raised rates an average of 300 bps in successive hikes, over periods lasting about 13 months.
“Clearly the forecast is not for anything like that this time around, so it’s interesting to see how different this rate cycle is,” Mr. Merritt said.