A new Investment Company Institute survey shows treasurers would stop using MMFs if the SEC gets its way.
Almost 80 percent of treasurers polled in a survey on money market funds said they would stop using the instruments if SEC proposals take effect. The SEC’s proposals include imposing a floating net asset value (NAV), imposing a 30-day redemption holdback, and imposing capital requirements.
According to the ICI survey, which was conducted by Treasury Strategies, 79 percent of respondents “would either decrease their use or discontinue altogether” and 61 percent of corporate money market fund assets “would move to other investments” if a floating NAV was adopted.
Money-market funds have been under siege for months, and not just from the SEC. The Federal Reserve has also targeted them as part of a vast shadow banking system that needs to be brought to heel. Fed Chairman Ben Bernanke said recently that short-term funding vehicles like MMFs have led to the “structural weaknesses of the global financial system,” and implied that not addressing them “can … be viewed as a consequence of poor risk management by financial institutions and investors.”
The SEC and the Fed’s main concern is that MMFs and other similar shadow bank funding, like repos, have no defense against panics and runs on banks. Banks and other regulated financial institutions benefit from government-provided safety nets like deposit insurance and Fed backstop liquidity provisions. Shadow banking activities do not have these safeguards, however.
But some contend that the new proposals would likely make MMFs less prone to runs and panics, but wouldn’t put a stop to such runs. That’s because cash leaving money market funds will likely end up in less regulated deposit-like assets in the US and overseas. In that case, runs might become more of a problem.
“There’s a belief in some quarters that treasurers would move their cash and short-term assets to bank checking accounts if money market funds became unusable,” said ICI Chief Economist Brian Reid in a statement. “This study indicates that such investors would move their cash to a variety of other vehicles and investments, some less regulated and transparent than money market funds.”
One big complaint about bank checking or demand deposit accounts is the lack of diversification, in the deposits themselves or in the fact that it is a single bank. As one respondent said, “even with FDIC insurance you may not get all of your funds at once if something happens with the banking system.”
For treasurers, money market funds, with “the buck” format, are seen as invaluable in managing cash. In many cases, investment policy specifically prohibits investing in anything that has a floating NAV. The ICI’s own statistics confirm treasurers are major users of MMFs, with institutional share classes accounting for $1.7 trillion, or 65 percent, of the $2.7 trillion in money market funds asset (end of February 2012).
And treasurers are aware of the risks. “The message from treasurers is clear,” said Cathy Gregg, a partner at Treasury Strategies. “While they value money funds, they will simply abandon the instrument should any of these concepts be adopted. The potential implications of such a widespread run away from money funds are staggering.”
For the survey, Treasury Strategies polled 203 “unique corporate, government, and institutional investors” between February 13 and March 6, 2012. It asked them “31 questions regarding their cash pools, investment objectives, and the three regulatory proposals.” The company reported that 61 percent of respondents oversee short-term investment pools of $100 million or more.