CFOs and Treasurers Should Prepare for Big Changes in MMFS, Warns AFP

The Association for Financial Professionals (AFP) is launching an information resource for corporate investors who need to know what today’s changes in money fund regulations might mean for their companies. The AFP Money Market Resource Centre supports finance professionals who invest their cash balances in money market mutual funds.

US organisations continue to hold significant cash balances, and AFP research has shown that about 32% of short-term corporate investment balances reside in money market mutual funds (MMMFs). Those money market funds (MMFs) are now under increased scrutiny from the Securities and Exchange Commission (SEC). Fundamental changes have occurred to the guidelines under which 2a-7 MMFs operate.

The SEC has instituted new rules about maturities of fund holdings, types of holdings, amount of liquidity, and the way in which funds report the value of their holdings to the public:

• The weighted average maturity (WAM) of a fund must now be 60 days or less, down from 90 days, mitigating the risk of a fund ‘breaking the buck’. A shorter WAM might decrease the weighted average yield, however.
• To provide investors with greater protection in the event of a market disruption, a fund must have 10% of its assets maturing in one day, and 30% of its assets maturing within seven days. To achieve this additional level of safety, funds may need to purchase more short-dated securities, making them more liquid but lower yielding.
• The SEC is now requiring MMFs to disclose their ‘shadow net asset value’ (NAV) – the mark-to-market valuation that a MMF is required to calculate for each security it owns – with a 60-day delay, beginning 7 February 2011.

Historically, investors have favoured MMFs because of their stable US$1.00 NAV. These new rules could put investors in MMFs in violation of their investment policies if those policies require a constant share price.

“Corporate treasurers need to be prepared for potentially having to explain to their senior management and board why they own or owned a money market fund with a shadow NAV that broke the buck,” said Brian Kalish, AFP’s finance practice lead. “Now that the shadow NAV will be publically disclosed, albeit on a delayed basis, will investors be willing to invest in a money market fund that was or could be reported as worth less than one dollar? This is the question that investment managers at organisations must be asking themselves now so they aren’t caught unprepared when this rule goes into effect.”

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