The Securities and Exchange Commission is releasing new rules this spring that would make U.S. money-market funds considerably less appealing to CFOs and treasurers investing corporate cash. The rules also cause yields on money funds to fall in an already low interest-rate environment.
The proposed regulations will arrive in the first or second quarter, says Lance Pan, director of research for Capital Advisors Group, an investment adviser. The SEC’s five commissioners would have to vote on the changes, which were recommended by the President’s Working Group on Financial Markets in 2010.
One proposal would require funds to adopt a “floating” net asset value — meaning the NAV of a fund would rise and fall daily, as happens with other mutual funds. That could scare companies away from investing in money markets, which currently have a fixed NAV of $1 per share, experts say.
Another option on the table would require money markets to establish a “capital buffer” to cushion against losses and redemptions, as well as adopt policies to prevent customers from withdrawing money in a market panic. Instead of taking out all their money at once, investors would have to redeem their shares piecemeal.
The SEC believes further regulation of money markets is necessary to prevent another “run” on a fund, which occurred in 2008 when the Reserve Fund “broke the buck.” Investors pulled out two-thirds of their capital in a day or so.
While capital buffers could attract investors to the market, the money-fund industry’s point of view is that overall the proposals are damaging. They come on the heels of the SEC’s 2a-7 regulations, which circumscribed the kind of instruments a fund could hold.
“That set of regulations [2a-7] was positive, but we think we have to step back and take a deep breath before we think about more regulation,” says Robert Deutsch, head of the global liquidity business for J.P. Morgan Asset Management.
Among other things, the 2a-7 regulations require money-market funds to hold 10% of their portfolios in instruments maturing overnight and 30% in investments maturing within seven days. They also mandate greater disclosure by fund sponsors. Such rules appeal to the majority of CFOs and treasurers, who are more concerned about capital preservation and liquidity than yield, and who want more information about a fund’s risk profile.
Current seven-day yields on money-market funds are low; two basis points is typical. Deutsch says the 2a-7 regulations may have shaved a couple of basis points off money-market-fund yields but that many funds were already under liquidity requirements. But the proposed new set of regs could suppress yields further and cause investors to use other channels for managing short-term cash, says Pan.
Money-market funds are not yet seeing any capital outflows as a result of the coming rules, say bankers. Indeed, money-market-fund inflows in November and December 2011 were the highest in two years. “We had $50 billion flow into our institutional cash funds in the fourth quarter,” says J.P. Morgan’s Deutsch.