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AFP Press Release

CFOs, Treasurers Should Prepare for Big Changes in Money Market Funds

Shadow NAV Could Fall Below $1. Does this fit in your investment policy guidelines?

WASHINGTON - May 5, 2010 - 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 Center (www.afponline.org/moneyfunds) supports finance professionals who invest their cash balances in money market mutual funds.

U.S. organizations continue to hold significant cash balances, and AFP research has shown that about 32 percent of short-term corporate investment balances reside in money market mutual funds.

Those money market funds are now under increased scrutiny from the Securities and Exchange Commission (SEC).  Effective today, fundamental changes have occurred to the guidelines under which 2a-7 money market funds (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 percent of its assets maturing in one day, and 30 percent 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-yeielding.

The SEC is now requiring money market funds to disclose their "shadow NAV" --the mark-to-market valuation that a money market fund is required to calculate for each security it owns-- with a 60-day delay, beginning February 7, 2011.

Historically, investors have favored money market funds because of their stable $1.00 NAV. These new rules could put investors in money market funds 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 organizations must be asking themselves now so they aren't caught unprepared when this rule goes into effect."

The AFP Money Market Resource Center includes articles, fact sheets, research and a complimentary webinar for finance professionals.  See: www.afponline.org/moneyfunds 

AFP will continue to take a leadership role in this subject in its upcoming liquidity survey.  Results will be published in June.

ABOUT AFP® (www.afponline.org/about )
The Association for Financial Professionals (AFP) serves a network of more than 16,000 treasury and finance professionals. Headquartered outside Washington, DC, AFP provides members with news, economic research and data on the evolving world of treasury and finance, as well as treasury certification programs, networking events, financial analytical tools, training, and public policy representation to legislators and regulators. AFP is the daily resource for treasury and finance professionals.

AFP's global reach extends to over 150,000 treasury and financial professionals worldwide, including AFP of Canada; London-based gtnews, an on-line resource for the treasury and finance community; and bobsguide, a financial IT solutions network.

AFP is not a registered investment advisor and this information should not be construed as legal or financial advice of any kind.

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