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Treasurers Weigh Options as Final MMF Vote Looms

  • By Konstantine Kastens, AFP Public Policy Analyst
  • Published: 7/15/2014
The majority of corporate treasurers and CFOs who responded to the 2014 AFP Liquidity Survey, underwritten by RBS Citizens, indicated that their organizations would significantly alter their investment policies if money market funds receive an overhaul. They may need to start making those changes as early as next week.

The Securities and Exchange Commission (SEC) is reportedly set for a final vote on money market fund rule changes as early as July 23, according to several news sources. Although not confirmed, the SEC vote will purportedly introduce two new rules governing prime institutional funds that remove their stable $1 net asset valuation treatment and impose fee and delay redemption restrictions during financial shock periods.

Recent final vote speculation is the latest in a three-year stand-off between financial regulators, who want additional structural changes for the funds, and businesses, who say the 2010 SEC-adopted portfolio reforms are sufficient to avert any liquidity squeeze under financial distress.

Along with other business and investment groups, AFP remains opposed to the overhaul of money market funds. As a cash management tool, corporate practitioners rely on money market funds as both a low-risk safe investment for cash and as a purchaser of corporate loan issuances. For many companies’ investment policies, the safety and low yield of money market funds position them as a particularly viable investment tool. Since the rule-change efforts have been underway now for several years, corporate treasurers have leveraged the time to, if necessary, recalibrate their businesses investment holdings.

Jim Gilligan, CTP, FP&A, assistant treasurer for Great Plains Energy, told AFP that corporate treasurers are “anxiously waiting” to see if the SEC will vote to impose a floating NAV and/or redemption gates on money market funds.  “This issue has been debated for several years with treasurers adamantly opposed to any rule change and vocal about the potential disastrous consequences for short-term liquidity and borrowing costs,” he said. “If a rule change is ultimately enacted over the objections of many participants, I hope the SEC will accept significant input from treasurers on how to structure and phase-in rules that will minimize the impact on corporations’ borrowing costs and liquidity requirements.”   

For the 2014 AFP Liquidity Survey, 740 financial professionals provided feedback on how potential money market fund rule changes would affect their organizations’ investment policies. Nearly 75 percent of respondents said that their organizations would alter their investment policies under SEC’s adoption of a mark-to-market net asset valuation for prime funds. Of those reporting that their businesses currently maintain holdings in prime funds, just over half indicated they would sell some or all of their affected fund holdings.   

The survey also indicated unease among respondents about the impact that the new rules could have on liquidity. For companies that issue debt either directly or indirectly through commercial paper markets, prime money market funds are a vital purchaser of short-term debt. The survey found 40 percent of respondent felt imposing redemption limits or altering the shares valuation status would make it more difficult for companies to secure funding through commercial paper markets.

The uncertainty, alone, created by looming regulatory circling over recent years, has already prompted considerable restructuring of short-term investment holdings away from money market funds among businesses. Between 2007 until present, corporate cash and short-term investment holdings on money market funds have been cut in half, from 31 percent to 16 percent, “with much of this cash rolling into banks,” reports the survey.  As such, 36 percent of all respondents reported that their companies have increased their cash reserves over the last year.

Download the 2014 AFP Liquidity Survey here.
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