By Ted Howard
While some treasurers are taking steps before October’s MMF rule change, others are taking a more relaxed approach.
Later this year money market funds are going to change dramatically as new Securities and Exchange Commission rules kick in. Prime funds are going to adopt a floating net asset value regime and will also employ, if necessary, limits to accessing fund cash (via gates) and penalties for actually taking the cash out (via fees). Government-only funds will keep the constant NAV.
Some companies have been taking steps to prepare, seeking alternatives or making their investment policies more dynamic and flexible. But for the most part, many are taking a wait-and-see attitude, choosing to see how the rules will impact the market. At the same time many money market fund companies and sponsors have changed their prime stripes, converting funds to government-only funds (some $250 billion worth).
“I think that the reason why people are dragging their feet is human nature,” says Brandon Semilof, managing director at StoneCastle Cash Management. “Treasurers are thinking, ‘Why in the world would I make a move today… for something that’s not taking place for another seven months? I can wait.’”
And not only waiting, but in some cases they are increasing their MMF investment, which some attribute to companies seeking to gain a little yield following the Fed’s December rate hike. According to the Investment Company Institute, MMF assets increased for the fourth straight week (ending March 4), jumping to $26 billion and breaking above $2.8 trillion, their highest level since the end of 2010. Also, cash in government-only funds surpassed that in prime funds for the first time ever. Other surveys show many companies are happy to stay in prime MMFs. According to a SunGard survey from late 2015, 60% of treasurers in the US expect to invest in prime MMFs “at a similar level post-2016 SEC reforms.” Some 37% expect to decrease their holdings, anticipating that accounting, intraday liquidity and investment policy constraints will be big headaches.
Companies right now “should be reviewing their investment policies and formulating a game plan” with their investment portfolio, “so that they can be prepared to implement it in advance of the October Rule 2a-7 change,” says Jerry Klein, managing director at Treasury Partners. At the same time, he adds, many companies are staying with prime funds because they want to take advantage of the fact that they are still highly liquid. “They want to continue enjoying the benefits of these investments today,” Mr. Klein says, “knowing that they can move very quickly if they want to later in the year.”
In a NeuGroup pre-meeting survey for its Treasury Investment Managers’ Peer Group-2, 23% of respondents said they were considering switching to government-only MMFs; 10% plan to switch to separate accounts; 10% are not concerned; and the remainder are making some type of other change or have not decided yet. About one-third said they do not anticipate changing their investment policies due to new regulations, and those that are will make changes by 2Q 2016.
But waiting might not be the best policy as a number of factors are starting to converge that could exacerbate prices and supply ahead of the October rules change. Mainly, no one seems to know what will happen with supply amid the push by investors to move to government-only funds while at the same time, MMF companies convert their prime offerings to government-only. Despite those possible supply worries down the road, there appear to be no concerns about it right now. Mr. Semilof says this is likely due to the Fed’s current reverse repo program which is underpinning supply. The Fed implemented the reverse repo program in a continued attempt to control interest rates.
“The assumption is that the overwhelming majority of institutional assets in prime funds will move into government funds” or Treasuries, Mr. Semilof says. However, “right now the issue of supply is not a big deal because of the Feds reverse repo program.”
The reverse repo program was supposed to be a temporary measure, but many money market firms – particularly those converting their prime funds to government-only funds—are under the impression that it will be around indefinitely. But the Fed has warned that it won’t be. “We would not want to see growth in government-only money funds if it were predicated on a mistaken impression that ON RRP [overnight reverse repo program] would be around indefinitely and with high capacity,” said New York Fed markets chief Simon Potter in February.
In the meantime, if they haven’t already, treasurers should be thinking about where that short-term cash should go if there are major disruptions to the market. Many companies are staying in bank deposits; although that may be short-lived, as several companies in The NeuGroup universe have reported “getting the call” to take their cash somewhere else. Others are looking to commercial paper, separate accounts and other short-term solutions like StoneCastle’s Federal Insured Cash Account (FICA), which distributes deposits among its 600 participating community banks.