On October 15, US treasurers investing in prime – i.e. non-government – money market funds (MMFs) will face the consequences of the Securities and Exchange Commission’s (SEC) Rule 2a-7 reform on money market funds (MMFs).
The most talked about impact of this legislated reform is the introduction of a floating net asset value (NAV) for these prime funds. In fact, in the Association for Financial Professionals’ (AFP) 2016 Liquidity Survey, released last month, respondents were not only talking about it, but suggesting they would abandon prime funds for the perceived safety and liquidity of government funds or bank products. While other surveys have seen softened attitudes about how much cash will be reallocated away from prime funds, talking about shifting away from prime money funds and actually doing it are different things.
Should there be significant outflow from prime to government funds, the differential in yields between prime and government funds will widen. This would challenge another finding of the AFP survey, which found only 2% of respondents citing yield as a driver for where they park their excess cash. It is easy to say that yield doesn’t matter when there isn’t much to chase. However, when a comparitively higher rate of return is on offer, then perhaps some of those respondents will change their tune.
Yield aside, that same AFP survey question also found that just over two in three respondents favour security and the remainder prioritise liquidity when making choices to invest operating cash. While no- one would dispute these important factors, it is worth investigating the impact that MMF reform has on both priorities.
In addition to the floating NAV, MMF reform also allows for redemptions fees and gates to be employed at the fund’s discretion. Although the potential is there for liquidity to be interrupted, it is unlikely that gates would be implemented. Many fund providers argue that gates temporarily halting fund redemptions would not have been required in 2008 which, if there was any time in recent history that one would expect to see such behaviour, it would have been during the onset of the credit crisis.
For those who prioritise maintaining liquidity, it can be argued that prime MMFs continue to meet that need – and potentially with the bonus of additional basis points (bps) for at least the initial months after legislation comes into effect.
It should come as no surprise that most treasury professionals surveyed by the AFP suggested that security was their biggest priority. After all, treasury’s mandate is to protect an organisation’s financial assets. So if the value of the money fund decreases after you invest cash, it is possible that you could see an implied negative return on cash. Most corporate investment policies don’t allow for negative yield (according to the survey) so this is a legitimate concern.
That said, the composition of prime MMFs won’t suddenly become more risky on October 15 than in the preceding days. In fact, an argument could be made that fund companies may choose even more conservative underlying assets to smooth the movement of the fund’s NAV. And, to be fair, we are still talking about T-Bills, Repos, and short term corporate paper; products that are often permitted within a corporate investment policy.
While it is expected that there will be some movement in prime money fund values, it remains unlikely that corporates will lose part of their investment through a prime MMF.
So what’s all the fuss about?
Even if concerns over liquidity and security are largely put to rest, there remain logistical issues that can be a pain for treasury teams.
First and foremost, there is new information to track. Whether managing via spreadsheets, within trading portals, or via a treasury management system (TMS): cash managers will now be tracking price per share/unit and daily gains and losses (unrealised). Currently, tracking money funds is easy as cash managers track holdings and daily interest factors. Going forward, the greater information and complexity of calculations requires more time and effort; something that most treasury teams do not have in abundance.
Secondly, there is the matter of unrealised gains and losses. Anyone familiar with the introduction of financial reporting standard FAS133 will recall the advent of mark to market (MTM) calculations and posting ‘on paper’ gains and losses to either income or balance sheet accounts. While calculations for MMFs will not be nearly as complex as hedge accounting, there will be decisions that need to be made on how to document unrealised gains/losses and how to account for them. Regardless of how this is done, extra reporting will be required meaning more time and energy must be devoted to managing prime funds.
For those organizations that lack straight-through processing (STP) and treasury automation, these additional challenges could easily be enough to dissuade the use of prime money funds. That said, those treasurers who have made good choices in their treasury systems – i.e. the few who are actually ready for October 15 – will find for the most part that the fuss is much ado about nothing.