US Treasurers Will Leave MMFs Should the SEC Change Regulation, Finds Survey

US treasurers report that they will sharply reduce their use of money market funds (MMFs) if the Securities and Exchange Commission (SEC) adopts any of the three concepts it is considering to reform MMFs. The SEC has said it is pursuing these changes to change the structure of MMFs. Treasury Strategies, conducted a survey to study the receptiveness of corporate treasurers, government and institutional investors to each reform concept.

The report, ‘Money Market Fund Regulations: The Voice of the Treasurer’, concludes that the overwhelming majority of treasurers will either scale back their use of MMFs or discontinue use of them altogether if any of its SEC’s three concepts to change MMF operations takes effect. Those three concepts include floating the net asset value (NAV), imposing a redemption holdback, or imposing capital requirements.

“The large cross section of treasurers surveyed gives this report the ‘voice of the treasurer’ – a voice that spoke out with an overwhelmingly negative response to each reform concept,” said Cathy Gregg, a partner at Treasury Strategies.

The Investment Company Institute (ICI) commissioned the study to help understand the effects of the SEC concepts on MMF investors. The institute will file the study as part of a new comment letter to the SEC. Treasurers are crucial users of MMFs: institutional share classes account for US$1.7 trillion, or 65%, of the US$2.7 trillion in MMFs asset as of the end of February 2012.

Every SEC reform concept will cause a dramatic drop-off in both treasurers’ use of funds and corporate assets in funds:

1. If MMF NAVs were required to float:

• Seventy-nine percent of respondents would either decrease their use or discontinue altogether.
• Sixty-one percent of corporate MMF assets would move to other investments if this concept were adopted.

2. If MMFs were required to institute a 30-day holdback of 3% of all redemptions:

• Ninety percent of respondents would either decrease their use or discontinue altogether.
• Sixty-seven percent of corporate MMF assets would move to other investments if this concept were adopted.

3. If MMFs were required to maintain a loss reserve or capital buffer:

• Thirty-six percent of respondents would either decrease their use or discontinue altogether when the question did not suggest that investors would suffer any reduced yield.
• In a follow-up question directed to the 64% who initially stated they would continue or increase their usage of MMFs, 84% of the follow-up respondents indicated they would decrease or stop their usage altogether if the capital buffer were to reduce the yield of the fund by 5 basis points (bps).
• The report makes no estimate on the decline in assets if the SEC imposes a capital buffer on MMFs. However, the number of treasurers using MMFs is expected to decrease dramatically should this concept be adopted.

“There’s a belief in some quarters that treasurers would move their cash and short-term assets to bank chequeing accounts if MMFs became unusable. This study indicates that such investors would move their cash to a variety of other vehicles and investments, some less regulated and transparent than MMFs,” said ICI chief economist Brian Reid.

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