While the battle continues over tightening rules on money market funds yet another survey has been released showing investors will flee the funds if the industry goes to a floating net asset value.
The latest survey from consultant Treasury Strategies of 150 European institutions reveals that European investment firms “would seek out investment alternatives should the constant net asset value methodology for MMFs be eliminated.” This follows on the heels on a report from Fitch Ratings, which in early March reported that European treasurers as being worried that a move to floating NAV would have a negative impact on the clarity of the investments, their accounting and tax treatment and their risk profile (see related story here).
Regulators are currently hashing out who has the authority over regulating MMFs. Recently the Financial Stability Oversight Council (FSOC), frustrated that the Securities and Exchange Commission has been unable to come to a consensus on new MMF rules, has been threatening to name some of the largest MMF managers as SIFIs or significantly important financial institutions. But at the same time, there has been pushback from the SEC, namely from SEC Commissioner Daniel Gallagher who feels the FSOC was overstepping its bounds. “As I have said in the past, the structure of FSOC is particularly troubling for an independent agency like the SEC,” Commissioner Gallagher said at a conference in late February. He was particularly troubled by FSOC’s vulnerability to political influence.
“FSOC is composed of individuals who are heads of their agencies — typically making them members of the President’s political party — and led by a Cabinet official who is removable by the President at will. These factors, among others, make FSOC particularly susceptible to political influence which, in turn, can be — and has been — exerted on the agencies led by FSOC’s members,” Commissioner Gallagher said.
Currently a new SEC Chairman is being nominated – Mary Jo White – who many will be a fair but tough regulator. During the nomination process she suggested that once confirmed she would dive right into the MMF fight; but she also indicated that any rules should not interfere with the value of the funds.
Meantime, MMF users are concerned about their value if the funds begin to float the NAV. Treasury Strategies found that if the industry is forced to move to a floating NAV regime, 54 percent CNAV- or constant NAV-only investors would reduce or discontinue using MMFs.” Further, that potential reduction/discontinuance of MMF usage represents 79 percent of the value of CNAV investor portfolios, Treasury strategies said.
Other findings:
•57 percent of CNAV investors would use European bank deposits as an alternative investment in place of MMFs
•57 percent of CNAV investors would use other short-term investment vehicles in place of MMFs
•29 percent of CNAV investors would use bank deposits in other jurisdictions as an alternative investment in place of MMFs
•14 percent of CNAV investors would move their MMF investments to CNAV funds in other jurisdictions
“Corporate treasurers will respond negatively to restrictions to valuation methodologies for MMFs,” Treasury Strategies said in its report. “A large group of MMFs would either scale back their use of money funds or discontinue use of them altogether. Additionally the overwhelmingly majority of investors that exclusively use CNAV MMFs would seek alternative investment products to replace MMFs.”