One of the great things about money market funds for corporate treasurers are their no-brainer, “set it and forget it” quality. You put a buck in, you get a buck out and there’s little or no accounting to deal with. Any changes in their ease of use, studies have shown, and treasurers might stop using them. That’s because change will likely mean added costs and more risk, not to mention squeeze liquidity in the $2.58 billion industry.
Currently the Securities and Exchange Commission, under the new leadership of Mary-Jo White, is taking another run at the MMF industry. This follows a defeat of proposals in August of 2012 when it could not garner the votes it needed to push on with its MMF agenda. But this time around the SEC is following a new tack (divide and conquer?), proposing splitting the industry into floaters and non-floaters. Specifically, Government and Treasury MMFs will be allowed to keep a constant net asset value (CNAV), while prime and tax-exempt funds will be forced to implement a floating or variable NAV (VNAV).
The problem with splitting the baby in this case is that those in the VNAVs may suddenly start rushing into the CNAV funds. Unfortunately destination CNAV – the treasury and government funds – isn’t so great. Already 97 percent of MMFs have been waiving fees to make up for little or no yields, according the Investment Company Institute. A rush from one set of funds to the other will only exacerbate the situation. Funds could close to new cash because they won’t be able to afford waiving fees forever. And if funds don’t close to new investors, the money invested will yield zero or perhaps less; funds may even start charging for holding much like Bank of New York tried to do a few years ago (it eventually backed off that plan).
But while many of the big guns in the MMF industry are fighting proposed changes, which may or may not include a floating NAV, along with holdbacks and capital buffers, others are stepping in to offer that same security that no-brainer MMFs offer.
Recently BlackRock and Legg Mason’s Western Asset Management announced launch of new products that will will have the look and feel of an MMF. BlackRock will offer BlackRock Ultra-Short Obligations Fund while Legg Mason will offer Western Asset Ultra Short Obligations Fund. Ironically, the new funds will offer a floating NAV, the reason many of MMF investors are fleeing that market. Nonetheless they are offered as safe, low-yielding destinations for those turned off by coming MMF regulation.
Yet another destination for newly orphaned cash is StoneCastle Cash Management’s Federally Insured Cash Account (FICA). FICA, not to be confused with the more familiar Federal Insurance Contributions Act or FICA tax, is a cash management program that offers weekly liquidity, a competitive yield and most importantly, a high level of FDIC insurance.
The FICA product, which has been around for about two years, has seen significant growth in the last six months. Since January assets in its FICA program have grown more than 33 percent with its client base increasing nearly 35 percent. What the FICA product does is slice up a company’s single deposit into in $250,000 increments or less and deposit it at hundreds of community banks around the country, thereby getting the federal insurance. Companies can deposit up to $25mn per tax ID, which means companies with multiple operating entities—and separate tax IDs—could deposit much more.
Meanwhile, other companies are stepping up to offer MMF alternatives. These include PIMCO, Barclays and Guggenheim Investments, all of whom are promoting their short-duration bond exchange-traded funds (ETFs), which are considered cheap, safe and liquid.
Many MMF observers feel it is only a matter of when, not if, in terms of MMF regulation. Still the good news is that any new rules will take some time to propose, comment on, and implement (see related story here). That gives treasurers some time to decide where to put their cash and also financial companies time to come up with even newer places for fleeing MMF cash.