NEW YORK -- Wednesday morning at New York Cash Exchange 2016, Tony Carfang, partner, Treasury Strategies attempted to clear up some misunderstandings about money market fund regulations set to take effect in October. While some treasurers might be concerned over the floating net asset value (FNAV), liquidity fees and redemption gates, he pointed out that the market already imposes these factors on all other instruments.
Myth 1: Floating NAV
Carfang noted that prime money market funds have been able to maintain a stable net asset value because the Securities and Exchange Commission (SEC) granted them some unique privileges other instruments do not have. “Moving to a fluctuating net asset value is really nothing more than taking that privilege away, and putting prime funds back on par with other instruments,” he said.
He added that if Treasuries, agencies and commercial paper (CP) aren’t held to maturity, they fluctuate every day. “They already have a variable net asset value,” he said. “So the point is, the fluctuating net asset value doesn’t penalize money market funds, relative to other instruments, it simply brings them back down from a privileged position. That’s generally misunderstood.”
Myth 2: Liquidity fees
In terms of fees, Carfang advised attendees to consider bank time deposits. “If you were to exit a time deposit prematurely, you will pay a penalty,” he said. “You may forfeit some interest, you may pay a fee, you may have to sell it at a discount. There is a penalty for basically early access to liquidity.” Likewise, liquidity fees provide a fund the opportunity to stabilize itself.
He added that “part of the goal of imposing fees is to, very simply, require the funds to reflect the reality of the underlying instruments in the money market.”
Myth 3: Redemption gates
By Carfang’s estimation, redemption gates are the most misunderstood part of the regulation. While treasurers may be apprehensive about not being able to pull their money out of a fund as needed, the fact is that other instruments also impose gates. “Bank deposits are subject to gates, but you don’t hear that a lot. Bank boards have a privilege known as suspension of convertibility, which is to convert your money into cash,” he said.
Banks rarely employ this tactic, but they do. “If you want to know the probability of a gate being imposed, think about the 3,000 or so banks that have failed in the last 20 years and then think about the one money fund that failed,” Carfang said. “Where do you think the probability is?”
Carfang added that many corporates are under the false impression that under the new MMF regulations, if the fund’s liquidity drops below 30 percent, it will immediately impose a gate. In actuality, its board is required to vote on imposing a gate if liquidity falls below 30 percent. “They’re not required to do it at all; they’re required to vote on it,” he said.For more insights on what treasurers should do as they prepare for the upcoming money market fund reforms, be sure to download the CTC Executive Perspective, A Dialogue with Asset Managers: Time is Running Out to Reassess Your Investment Policy here.