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SEC

US money market fund reform: an explainer

New rules are already impacting the $2.7tn industry
FTfm

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OCTOBER 15, 2016 by: Joe Rennison in New York

Thelongawaiteddeadlineformoneymarketfundreformhasarrived,withrulescoming
intoeffectonFridayforthe$2.7tnmarket.

Thecollapsein2008oftheReservePrimaryFund,oneofthemoststoriedofUSmoney
marketfunds(https://www.ft.com/content/288d4932d4b811e5829b8564e7528e54),
attractedregulatorsattentiontofundsthathadestablishedareputationasbeingassecure
asbankdepositsbutofferingbetterreturns.

MoneymarketfundsareaprimaryfundingsourcefortheUSgovernment,banksand
companies,andprovideakeyinvestmentvehicleforarangeofinvestors.
TheSecuritiesExchangeCommission(https://www.ft.com/content/2a6cc5ca48aa11e4a
d1900144feab7de)hasledthereformeffort,whichhasalreadyseenborrowingcostsfora
numberofdebtissuersrise,asinvestorshaveflockedoutofprimefunds,orthosethat
caninvestinawidervarietyofassets,intothoselimitedtogovernmentsecurities.

GovernmentfundseclipsedprimefundsinMarch,accordingtodatafromtheInvestment
CompanyInstitute.Itisatrendthatcontinuedsince,withattentionnowturningtowhether
primefundscanrecoupsomeofthoseassetsnowthattheruleshavebeenimplemented.

Whatdotherulesrequireandwhatareregulatorstryingtodo?

SinceApril14,thewebsitesofanumberofmoneymarketfunds(https://www.ft.com/conte
nt/cc55b344667111e48bf600144feabdc0)havelookeddifferent.Requirementsfor
increaseddisclosurehasledtomoredatabeingpublishedforinvestors.

AstherulescameintoeffectonOctober14,fullimplementationisrequired.Primefunds,
andthesmalleruniverseoftaxexemptfunds,arenowrequiredtopublishnetassetvalues
basedonthecurrentvalueoftheassetstheyhold.Thatisabigdepartureforanindustry
thathistoricallyhastouteditsabilitytopreservethevalueofitsinvestmentsat$1ashare,
andwillmeanafundspricewillfluctuatealongwithmarketconditions.

AlsofromOctober,ifthefundsassetsthatcanbeliquidatedwithinoneweekfallbelow30
percentthefundcandecidetoimposeafeeofupto2percentonredemptions.Ifthatfalls
below10percenttheymustimposeafeeof1percent.Thefundcanalsoprevent
redemptionscompletelyforupto10daysifthe30percentthresholdisbreached.

Howmuchmoneyhasleftprimefunds?
Asaresultofthereform,morethan$1tnhasleftprimeandtaxexemptfunds,with
governmentfundsprovingthemainbeneficiary,increasingtheirassetsfrom$1tnatthe
startoftheyearto$2.1tnonOctober12.Thebulkoftheearlymovescamethroughprime
fundsreclassifyingthemselvestobecomegovernmentfundsthemostnotablebeingin
DecemberwhenFidelityconvertedits$115bncashreservesfund.

Sincethen,institutionalinvestorshavealsotakendecisionsonwheretokeeptheircash,
contributingtofurtheroutflows.
Primefundsbracedforoutflowsbybuildinguplargeliquiditybufferstoavoidfalling
beneaththe30percentthreshold.Coupledwithdramaticoutflows,thishasaffected
borrowingcosts(https://www.ft.com/content/007e32868b6911e68cb7e7ada1d123b1)
foranumberofissuersthatreliedonprimefundsasamajorinvestor.

Theyieldon90daycommercialpaper(https://www.ft.com/content/56f71b168c1b11e68
aa5f79f5696c731)shortdateddebtissuedbybanksandcompanieshasshotupfrom
0.56percentatthestartoftheyearto0.81percentnow,althoughithasfallenslightly
fromitspeakof0.91percentattheendofSeptember.ThreemonthLibor,theinterestrate
benchmark,hasalsorisen(https://www.ft.com/content/947ad9b6534d11e6befd2fc0c2
6b3c60),from0.62percentto0.88percentoverthesameperiod.Andstatetreasurers
haveseen(https://www.ft.com/content/c1b84fb27b8911e6ae24f193b105145e)
municipalborrowingcostsrisefromvirtually0percentto0.83percentthisyear.

Whydidprimefundsreclassify?

Althoughtherehasbeensomesuggestionthatinvestorsareunwillingtoadoptfloating
NAVs,fundproviderssaythevastmajorityofmoneyhasshiftedforfearoftheabilityto
takemoneyoutofprimefundsbeingsuspended.
Thisisofparticularconcernforlargeinstitutions,suchasbrokerdealers,thatmanage
retailmoney.Attheendofeachbusinessday,moneyleftoverfromtheactivitiesofeach
individualaccountissweptintomoneymarketfundstopickupadditionalyield.

Fidelityaloneissittingonhundredsofbillionsofdollars,saysPeterCraneatCranedata,
amoneymarkfunddatacompany.Theycantaffordforthattolockup.Itwouldfreezeup
theeconomy.

Willtherebefurtherimpactandwhatisthesignificanceofthereform?

WiththepassingoftheOctoberdeadline,focuswillsharpenoninstitutionalinvestorswho
willhavetoweighupwhethertheextrayieldavailablebystickinginprimefundsoffsetsthe
dragofthenewrules.

ThedifferencebetweentheyieldonJPMorgansprimeandgovernmentmoneymarket
fundshasescalatedinrecentweeks.theprimefundsyieldhasrisenfrom0.38percenton
September15,to0.63percentonThursday.Thegovernmentfundnowyields0.33per
cent,upfrom0.12percentatthestartoftheyear.
Thereisalsotheoptiontoshifttoward(https://www.ft.com/content/f1472b7689e011e6
8cb7e7ada1d123b1)shortdatedbondfundsbutsignificantflowsinthisdirectionareyetto
beseen.

Printasinglecopyofthisarticleforpersonaluse.Contactusifyouwishtoprintmoreto
distributetoothers.TheFinancialTimesLtd.

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