The Securities and Exchange Commission’s (SEC) proposals
for reforming prime money-market funds came as no surprise to treasury and finance professionals, though many were hoping for a different outcome. Still, the potential reforms—floating the net asset value (NAV) and establishing liquidity fees and redemption gates—are only proposals and nothing is set in stone. It is possible that the MMF debate could continue to drag on for an extended period of time.
Jim Gilligan, CTP, assistant treasurer at Great Plains Energy and Chair of AFP's Government Relations Committee, said he was disappointed in the SEC’s proposals, but not surprised. “If given a mandatory choice between the two choices I would choose the liquidity gates, but I hope there is still opportunity for discussion,” he said.
Gilligan is still optimistic that a more favorable resolve is possible. “I don't think we will see any immediate movement of funds since these are still proposals and there will lots of continued comments from participants in this discussion,” he said.
However, Craig Martin, executive director of AFP’s Corporate Treasurers Council was able to get immediate feedback at Thursday’s CTC roundtable in Atlanta. Attendees said that the 2 percent liquidity fee on redemptions—also known as a hold back—could be a “show stopper” for many corporate treasurers. “This is a no-go for some corporates,” said Martin. “But this proposal also states that the fund’s board of directors may elect not to do it. It’s also after the fund is basically impaired by 15 percent, which is big.”
Of course, the floating NAV is also a point of controversy for many treasurers. At another recent roundtable
in New York hosted by the CTC and BlackRock, some attendees said they would likely pull out of prime funds if the NAV is floated.
“I think the floating NAV is going to make us think about taking it out and then going to CP,” said one treasurer at the New York roundtable. “But then you’re trading off overnight investing rates, versus your average tenor of 30-45 days. It’s something we’re starting to think about now but it seems that it’s not worth putting too much effort into because it keeps getting pushed out for so long. Even if they agree [on a floating NAV] there will probably be a two-year roll-in period.”
The treasurer added that he would continue to look at the information as it comes out and consider the potential for the gain/loss on the NAV amount. “We can have $400 million or $500 million invested. How much is that gain or loss for one month or one week? It’s quite a risk. That’s going to be a question. It may be that we’ll take some risk, but up to $200 million and anything over that we’ll invest in something else,” he said.
Another treasurer said that if a floating NAV is implemented, his organization would likely move out of prime funds and into government funds or the bank. “I think that is initially what we would do,” he said. “We tend to have more of a conservative approach. But we don’t really keep large overnight balances. We strive to have tight cash management. Whatever sits at the bank, we’ll divert it to just an overnight investment because we have an internal short-term fund that we invest in. So it’s always available the next day to that internal vehicle.”
Now that the SEC has come out with a ruling, Martin believes treasurers will begin to have conversations with their auditors and accounting staff regarding the accounting impacts of a floating NAV. “They haven’t had those conversations because there really wasn’t anything to talk about yet,” he said. “So the verdict is out on whether corporates will be affected by that from an accounting perspective.”