New US MMF rules come into force on Friday. Here is a brief reminder of the changes and what they mean for asset managers and corporate investors.
On Friday (14th October 2016), the long-awaited US money market reforms (MMFs) will be fully implemented. Put forward by the Securities and Exchange Commission (SEC) in the wake of the 2007/8 global financial crisis and the collapse of the Reserve Primary Fund, the reforms have been designed to create a more robust industry and safeguard it against any future crises.
For asset managers and short-term investors, however, it is a major upheaval that is set to re-define the industry.
A spotlight on the rules
In April, the first tranche of amendments made to Rule 2a-7 of the Investment Company Act of 1940 were enforced. These changes forced US prime funds to report a range of new information – daily and weekly disclosures of market-based NAVs, for instance – on their websites. This information is significant for treasurers as it may help them improve risk assessment.
The latest, and final set of changes will see prime funds impose a floating or variable net asset value (VNAV). This will allow the funds to fluctuate with market conditions, rather than preserve the value of the investment at US$1 a share as had previously been the case under the traditional constant net asset value (CNAV) model. The CNAV model can be maintained, however, only if funds invest in government securities.
In addition to these changes, liquidity fees and redemption gates are also to be enforced. Asset Managers will be permitted to impose a 2% fee on redemptions, if the percentage of a fund’s assets that can be liquidated within one week fall below 30%, and a 1% fee if that metric falls below 10%.
Redemptions can also be prevented completely for up to ten days if weekly assets fall below the 30% threshold.
The impact of these changes has already been felt with prime funds witnessing notable outflows. Data from the Investment Company Institute, for example, claims that over US$420bn has left prime MMFs in the past year. This had seen assets under management (AUM) drop below US$1trn for the first time since 1999.
Funds investing in government debt, which still allow funds to promise investors a full return on their investments have seen assets rise from US$991bn to US$1trn.
The shift in AUM can be explained by not only the steady outflow from prime funds from investors in preparation for the changes but also as funds proactively convert prime funds to government funds in anticipation of that product being in high demand from institutional investors.
That being said, some Asset Managers, including HSBC Global Asset Management, remain adamant that prime products will continue to be in demand despite the switch to VNAV.
What is next?
What is for sure is that these regulatory changes will radically alter corporate’s short-term investment options. The big question will be whether the additional yield available in prime funds offsets the various challenges posed to them by the new rules. Indeed, for those in a position to tolerate a floating NAV, there will be incremental yield in prime MMFs that corporates can capture.
There are other considerations that have to made. Corporate treasury departments, for instance, may need to see if their treasury management system (TMS) is able to recognise VNAV MMFs. Investment policies may also need to be altered to allow the use of VNAV MMFs.
Treasury Today will continue to monitor the fallout of the US MMF reforms over the coming months and next week we will speak to the Asset Management community to hear about the immediate impact of the new rules being enforced.
For those wanting to know more about MMFs and corporate short-term investments more broadly please see our recently published handbook, which is free to download.