In an AFP webinar last week, treasury and finance professionals received an in-depth look at the new money market fund rules
approved by the Securities and Exchange Commission (SEC). Jim Gilligan, CTP, FP&A, assistant treasurer for Great Plains Energy, and Tom Hunt, CTP, director of treasury services, AFP, who both attended the July 23 SEC hearing in which the rules were adopted, provided an update based on some of the feedback they’ve received from AFP members.
Gilligan explained that while government and retail MMFs are exempt from the new rules, the SEC has made some changes to them as well. Government funds are now classified as any MMFs that invest 99.5 percent (formerly 80 percent) of their total assets in cash, government securities and/or repurchase agreements that are collateralized solely by government securities or cash. “These funds can be subject to gates and fees at the sole discretion of the board, as long as they notify you if you are invested in the fund,” Hunt added. “In addition, there is specialized reporting if the NAV falls below $0.9975. That would have to be updated on their websites as well.”
Retail funds are now defined as funds limited to natural persons. They are tied to social security numbers, rather than asset size. “So we expect to see share classes and structures change and this could be impacted more so on the municipal side of the fund spectrum,” Hunt said. “If a fund is mostly retail investors, they could definitely switch over to a retail class. So if you’re in what is considered a retail fund, it’s worth checking with your investment manager whether you’re going to be subject to these retail fund changes.”Treasury takeaways
Treasurers who have not given much consideration to what they are going to do should begin preparations before this grace period is up, Gilligan said. “Look at your investment policy and consider changes to that,” he said. “You may want to look and see if your investment policy will allow you to invest in money market funds that have a floating NAV. You may also have to see if you are allowed to use funds that have gates or redemption fees. If you’re going to invest in funds that have those restrictions, make sure your investment policy allows those.”
Gilligan also advises practitioners to consider settlement implications with regard to MMFs. “Whether you’ll have same-day or next-day settlement—we don’t know how the funds are going to handle that right now,” he said.
Treasurers should also look at their due diligence for MMFs. Gilligan noted that many practitioners who previously used money market portals probably did not pay much attention to this. “Now you may want to actually look at who makes up the board of directors of a fund. Are they represented on other funds? You want to look at the fund’s family mix, between retail and institutional, perhaps. And all of these funds are going to have new reporting requirements that are intended to increase transparency into the investments and actions of the funds,” he said.
The new rules do not apply to offshore cash… yet. Should investors move money into offshore funds in response to the rules, that could change. Furthermore, it was specifically mentioned at the SEC hearing that these reforms might be treated as a template for other countries taking a look at money funds, Hunt noted. “There very well could be some reform coming closely tied to this outside the U.S.,” he said.
One major concern for some treasury departments is the impact on the commercial paper (CP) market. For example, Great Plains Energy has significant short-term borrowing through the CP market, Gilligan explained. “I personally believe we’re going to see a contraction in the CP market, created by a shift in investors’ money from existing funds that purchase CP products to other funds not subject to a floating NAV and redemption gates,” he said. “That will possibly cause CP issuers to develop alternative markets for CP, and/or lead to issuers turning to their short-term credit facilities, which are typically more expensive than the CP market issuances.”
There could also be a shift to other certificates of deposit and time deposits, Hunt noted. The 2014 AFP Liquidity Survey
revealed a large balance in bank products. “Maybe there’s a new investment out there; maybe it’s separately managed accounts,” he said. “If you want a stable NAV, where are you going to go to find that if you’re not comfortable with some of the things that are in your money fund that weren’t in there previously?”
Based on recent data, it certainly looks like the MMF investment landscape is about to change. The Liquidity Survey
asked corporate treasurers and CFOs if a floating NAV was imposed on prime funds while a stable NAV remained on government funds. Twenty-seven percent of respondents said they would not invest in prime funds altogether, while 28 percent said they would move money into government funds. “So we do expect some money to move,” Hunt said. “But whether it moves out of prime into government funds, back into Treasuries or bank deposits remains to be seen.”