Proposed Reforms Threaten Investment in Money Market Mutual Funds: AFP Survey

A survey by the Association for Financial Professionals (AFP) suggests that organisations would be less willing to invest in money market mutual funds (MMFs) and would either reduce or eliminate holdings of MMFs in their short-term investment portfolio under three regulatory reform proposals reported to be under consideration by the Securities and Exchange Commission (SEC).

The potential changes are for MMFs to shift to a floating net asset value (NAV), impose redemption holdbacks or seek additional reserve capital through fees. Each of these scenarios would dissuade corporations from investing in these vehicles and they would most likely reduce or fully liquidate their holdings,according to preliminary results from the 2012 AFP Liquidity Survey, to released next month.

The survey was carried out by the AFP in May and 390 responses were received. The results suggest that:

• Sevety-seven percent of companies would stop investing in MMFs if the NAV were allowed to float, with 56% immediately liquidating all or some of their current holdings.
• Eight out of 10 of companies would stop investing if MMFs were subject to redemption holdback provisions, with 73% immediately liquidating all or some of their current holdings.
• Two-thirds (66%) of companies would stop investing if fund companies were required to raise reserve capital (e.g. via fees), with 55%immediately liquidating all or some of their current MMF holdings.

“These scenarios would have a profound effect on the economy,” said Jim Kaitz, AFP’s president and chief executive officer (CEO). “Overwhelmingly, treasurers would trim money fund holdings. Money funds are a main purchaser of commercial paper.  Without a market for commercial paper, many companies would have a harder time funding operations.”

AFP members recently offered their views before Congressional Committees to explain the impact that the MMF proposals would have on both their investment choices and on their sources offunding. 

The highlights of the 2012 AFP Liquidity Survey can be viewed at www.afponline.org/liquidity.

AFP will release the complete results of the survey, underwritten by the Royal Bank of Scotland (RBS) and RBS Citizens, in July.

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