Immediately following the recent AFP webinar on money market funds, Jim Gilligan, CTP, FP&A, assistant treasurer for Great Plains Energy, and Tom Hunt, CTP, director of treasury services, AFP, held a question and answer session with treasury and finance professionals in which they provided further insights into the Securities and Exchange Commission’s new rules.
It has been widely reported that up to $500 billion of assets may exit money funds. Do you agree with this estimate? What impact do you see for companies which rely on commercial paper (CP)?
Correct, we agree that money will likely flow out of prime funds; we just don’t know how much. As we noted in the presentation, the current allocation of 9 percent in prime funds was down from 16 percent in 2009. We expect the extra accounting issues along with reporting changes will not entice investors to stay, especially with gates and fees implemented on prime and municipal funds as well. We anticipate the CP market for issuers will be tighter and more restrictive. We encourage issuers to work with their CP dealers to determine a good course of action.
Will the reforms affect money market funds within IRA and 401K accounts? Will bank money market accounts be impacted by the changes?
Yes, the reforms impact all money market funds. Including those in defined benefit plans and defined contribution plans such as 401k accounts.
What is meant by municipal issuers needing government backing? Are LGIPs (Local Government Investment Pools) exempt as government MMFs?
Certain government municipalities need investments with the backing and support of the federal government through an explicit guarantee such as FDIC insurance. We anticipate that prime funds will see a pickup in redemptions, and those funds will flow to government funds or into bank products as our research indicated. It will become more important for municipals that need the support to find the proper liquidity they need. In terms of LGIP’s qualifying under the rules, it will depend on the LGIP. If they are 2a-7 regulated and part of the investment company act of 1940, then yes. Otherwise, it’s best to check with the state treasurer that oversees the LGIP.
Will banks reduce account maintenance fees (FDIC Fees) if more funds move to bank deposits?
It’s difficult to say. Our research indicates that funds could flow back into either government money market funds or possibly into bank products. With Basel III being implemented by banks and the desire for more stable deposit base that could result, some clients could see a reduction and others not. It would be best to have a discussion with your bank to determine the best course of action and what the possible options are.
What are the unique conditions that the SEC Commissioners think exist that would make prime MMFs subject to runs in the U.S. but not necessarily in other countries?
As noted in SEC Chair Mary Jo White’s opening remarks of from the hearing: “Today’s reforms fundamentally change the way that money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system.” Ultimately, the Federal Reserve doesn’t want to be the backstop again and support the money fund market like they did during last banking crisis. As our research shows, the majority of cash investments outside the U.S. is (1) held in banks and (2) held in money market funds. The SEC can only regulate the U.S. market but did mention that other countries should not necessarily see this reform as the best path to take.
If a government money market fund did not originally opt-in to gating/fees and disclosed this in their prospectus, wouldn't the fund still be able to enact gating and fees in a liquidity event if they quickly held a fund board meeting and voted to opt-in?
This is a good question to ask your fund manager. Ask for the SAI (Statement of Additional Information) and the prospectus to understand where they have set their policy in terms of their use of gates and fees. Also, ask the fund what are their emergency measures. You should also see any change announced in the fund’s reporting.
What are the major accounting implications of floating NAVs?
As was noted in the presentation, recording of gains and losses will be in aggregate. Setting the time horizon is up to the owner and most likely will be driven by the fund as well since they will probably have to assist in the reporting of this. Realized gains and losses are treated as short-term and the funds are not subject to the “wash sale rules”. For more information on this, please see the IRS Proposed Ruling and consult your tax counsel.
The survey was prior to the IRS simplifying the tax rule and introducing the NAV method. Do you expect that to significantly impact the results?
There is a likelihood the extra administrative burden resulting from the accounting and tracking will cause some treasurers to divest, since they aren’t comfortable with the extra work required for the low rate of return received in this current interest rate environment. If yields rise and spreads widen relative to government funds, then there might be a more compelling reason to invest in prime/muni funds that have more involved administrative procedures.
The second part of this Q&A will be available soon. Stay up-to-date on the SEC’s new rules with AFP’s Money Market Resource Center.