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AFP Urges Congress to Keep the Stable NAV

  • By Andrew Deichler
  • Published: 8/17/2016

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With money market fund reform less than two months away, the chances that the floating net asset value (NAV) could still be repealed are slim. Nevertheless, with the cost of funding steadily increasing for U.S. businesses, AFP is making one final push.

This week, AFP sent a letter to the chairman and ranking members of the U.S. House Committee on Financial Services, asking for their support for H.R. 4216, the Consumer Financial Choice and Capital Markets Protection Act. The bipartisan legislation aims to preserve business access to liquidity for cash management, and capital access for business and public infrastructure investment.

Many of AFP’s 16,000-plus members rely on money market funds, as both investors and issuers of debt. But with the Securities and Exchange Commission (SEC)’s rule requiring that prime money market funds operate on a floating NAV due to take effect on October 14, organizations that rely on stable value investments are moving out of prime funds. They are instead shifting to other types of investment instruments that do not support the capital access needs of businesses.

“Our members choose money market funds because they provide principal preservation, liquidity, diversification, built-in credit analysis, and ease of accounting,” wrote Jeff Glenzer, CTP, vice president and chief operating officer of AFP, in the comment letter. “In addition, these funds are a key source of short-term financing for businesses to purchase seasonal inventory, pay suppliers, and fund payroll and other expenses when cash outflows are greater than inflows.”

Glenzer added that issuing the short-term variable rate debt held by money funds is preferable to secured bank loans, as it provides businesses with more efficient and affordable short-term financing. It also provides organizations with the opportunity to invest more in job creating activities.

With October 14 fast approaching, AFP has seen the average seven-day interest rate on debt held by prime funds more than double, going from about 25 bps in October 2015 to around 57 bps in June 2016—a clear indicator that the cost of capital is already increasing. Meanwhile, municipal and non-government conduit borrowers have seen their borrowing costs increase nearly fivefold.

AFP pressed the Financial Services Committee to pass H.R. 4216 as soon as possible to avoid potential long-term damage to the financing options that money funds provide. AFP believes that the legislation will provide accounting consistency in the global money funds market, while maintaining other recently adopted regulations regarding asset maturities, credit quality, and transparency.

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