The Security and Exchange Commission’s proposal of floating Net Asset Valuation for prime money-market funds will drive corporates to other investments, two new reports assert.
In a new commentary, Institutional Cash Distributors (ICD) argues that the repercussions of implementing a floating NAV would marginalize investment in MMFs and lead companies to move cash into alternative and riskier investments.
ICD notes that most of the debate surrounding MMFs has taken place between academics, economists and regulators, while little focus has been placed on the “ground level” accounting and operational issues that would affect the daily trading process. ICD argues that moving to a floating NAV would force variability on a product whose value is inherently stable.
The commentary points out that corporates—the largest users of MMFs by a wide margin—benefit primarily from the NAV being stable. They carry MMFs as cash equivalent investments without needing to track and report on the daily fluctuations in the value of their portfolio. Allowing the NAV to float would require corporates to monitor their mark-to-market value and report on any minute gains and losses.
Rather than being forced to report on a multitude of slight gains and losses, ICD concludes that corporates would be more likely to either move investments to ultra-short-term bond funds or offshore MMFs. “The offshore fund market has experienced fairly consistent growth over the past few years; a trend that would continue and indeed accelerate if U.S.-based investors can no longer find the right investment products domestically,” the report said.
Moreover, MMFs provide corporates with same-day liquidity, allowing them to sell shares and receive the proceeds from their redemption on the same day. Corporates are thus able to better manage day-to-day operating cash and draw down on their investments only on the day that it is necessary. ICD sees floating NAV disrupting this immediate liquidity. Needing to re-price shares for marginal fluctuating valuations would require MMFs to either:
- Deliver cash on the same day but after the funds are priced for the day
- Price multiple times per day to deliver to the investor in a timely manner
- Settle on all transactions the day after pricing (or T+1).
The U.S. Chamber of Commerce agrees. Last week, the lobbying group released a new report that claims that companies that invest in MMFs would abandon them if the NAV was allowed to float.
According to the report, written by Treasury Strategies, moving from a stable NAV to a floating NAV would cost organizations $1.8 billion to $2 billion up front. Additionally, investors could face $2 billion to $2.5 billion in new annual operating costs.
Treasury Strategies estimates that approximately 8,000 to 10,000 corporations invest in MMFs. Many do not have the resources to comply with the proposed rules, and the Chamber instead sees them moving cash into bank deposits and riskier investments.
“If they are willing to sacrifice some of the key benefits of money-market funds, only the largest money-market fund investors will be able to absorb the high cost of compliance,” the report argues. “Middle market corporations, states, and municipalities that rely heavily on MMFs as stable liquidity tools will have to bear disproportional cost and disruptions or be compelled to move cash out of MMF instruments into bank deposits or other less regulated short-term investment vehicles.”
Corporate treasurers at a recent CTC roundtable discussed the prospect of a floating NAV at length. Nearly all of them indicated that they would at least consider pulling out of prime funds if such a measure were to be implemented. “How comfortable can you get if it’s a floating rate with no S&P and Moody’s ratings? My guess is, people are going to walk away from the floating rate,” said one treasurer.
AFP members echo the sentiments of these groups and are still troubled by the impacts that changing to a floating NAV could have on the short-term investment options available to investors. “In many instances, MMFs are the investment option that most closely matches the risk/return profile sought for surplus operating cash,” said Jeanine H. Arnett, AFP’s Director of Government Relations and Policy. “Changing to a floating NAV would significantly change the risk/return profile of MMFs and will thereby be less attractive to many investors.”
AFP has consistently voiced opposition to floating the NAV and has offered specific data supporting these assertions.