If the Securities & Exchange Commission implements proposed rules making prime money market funds use a floating net asset value regime while allowing government funds to keep the current fixed-rate program, the expected shift from floating to fixed funds will be tolerable.
That’s the conclusion of one of a several recent Staff reports released by the SEC on MMFs. The SEC announced the group of reports, four in all, under the rubric, “Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform.”
In 2013 when the SEC proposed exempting government MMFs from a floating NAV requirement along with fees and gates, many investors and observers thought the likely scenario would be a rush from prime funds to government funds. This would then boost demand for domestic government securities and safe assets in the economy. But not to worry, the SEC wrote in its report, Analysis of Demand and Supply of Safe Assets in the Economy. There are about $1.8 trillion in assets in prime funds and $952 billion in government funds. If just 20 percent of prime fund investments moved into government funds, “approximately $357 billion dollars would need to be invested in government securities,” the SEC wrote.
“Given the global market for safe assets is estimated to be $74 trillion, it is difficult to envision such flows would create a problem. Moreover, evidence from the 2008 Financial Crisis indicates government funds are able to absorb large inflows, especially if they occur over a period of time.” The Commission citing figures from the 2008 financial crisis, said this already happened back then. That’s because government money market fund assets increased by $409 billion (44 percent) during the “crisis month” of September 2008 whereas prime fund assets fell by $498 billion (24 percent).
The SEC report, written by the Division of Economic and Risk Analysis, says that amid a crisis, said that in any event enough safe assets would already exist or, failing that, be created in order to meet the demand. The report acknowledges that this runs counter to analysis from the International Monetary Fund and Credit Suisse, which has predicted a safe-asset shortfall in a crisis. “In the future, there will be rising demand for safe assets, but fewer of them will be available, increasing the price for safety in global markets,” the IMF wrote in its April 2012 report, “Global Financial Stability Report: The Quest for Lasting Stability.”
But the SEC says that increasing price will just attract more players to the market to create “private label” safe assets. “Arguments supporting the idea of a shortfall … ignore the ability of market participants to adjust to a changing landscape,” the SEC said. “For example, sustained excess demand for safe assets should increase the price of safe assets and lower rates. These higher prices should attract new private-label safe assets to the market. At the same time, market participants have incentives to identify new sources of safe assets and ways to transform asset risk.”
And that’s not all. The higher prices for the assets will send rates lower, thereby underpinning governments and other issuers, “thereby lowering the risk of securities issued and allowing them to perhaps increase the supply of safe assets.”
It’s win-win, according to the SEC.