The 800-pound gorilla | Floating NAV creates operational challenges for MMFs

The SEC’s recent amendments to Rule 2a-7 governing money market funds means that  the fund industry is grappling with the prospect of significant changes to MMF operations. The amendments require that institutional MMFs investing in non-government securities (known as “prime” institutional funds) adopt a floating NAV, beginning in 2016.

iStock_000019000781SmallA recent NICSA webinar addressed the rule change and its potential effects on operational processes and procedures. Speakers from EY Global Services, BNY Mellon, Boston Financial Data Services and Deutsche Asset & Wealth Management summarized the changes they foresee for MMFs. These are the changes that they believe will have the biggest impact:

Intraday valuation

Prime institutional MMFs normally allow shareholders to purchase and redeem fund shares at various times during the day. And an informal Boston Financial poll found that 3 out of 4 prime institutional will continue to offer this flexibility even after the new regulations are in place.

Under a floating NAV regime, prime institutional will need to value portfolio holdings and strike a NAV whenever they permit share transactions. This will require:

  • Reporting of share transactions by the transfer agent to the fund accountant multiple times per day
  • Ability to handle money movements multiple times per day
  • Time-stamping of purchase and sale transactions to ensure that they receive the appropriate NAV
  • Processes that for applying NAV corrections to the appropriate pricing period
  • Modifications to processes for income and expense accruals
  • Dissemination of multiple NAVs per day, through the website and voice response system

Four-digit pricing
Prime institutional funds will be required to calculate a NAV out to the fourth decimal place, or 1/100 of a cent (assuming a base NAV of $1 per share). Systems will need to be adapted to accommodate the longer NAV.

Redemption gates and fees
Other major components of the revised regulations are aimed limiting redemptions during times of stress. If a fund’s liquidity falls below a specified level, its board of directors can suspend redemptions for a time, using a “redemption gate,” or it can impose a redemption fee. (The SEC effectively requires fees when for funds with very low levels of liquidity.)

Transfer agents must develop plans for imposing gates and fees if needed. While existing technology can accommodate gates and fees, they still create operational challenges. For example, if a MMF is used for check writing, a redemption gate or fee could be imposed after a check has been written but before it has been cashed.

And even though gates and fees will be disclosed in the prospectus, communication with shareholders and intermediaries will be critical if they should ever be put into place. Transfer agents must be prepared to act quickly.

Natural person test
Under the new regulations, institutional investors will no longer be able to invest in retail MMFs with stable NAVs. Transfer agents will have to make sure that all the shareholders in retail funds are “natural persons” with Social Security numbers.

Before the new rules become effective, fund families will need to develop a plan for moving institutional investors out of retail funds, which will require the development of new processing routines. And then transfer agents must build procedures to ensure that funds remain in compliance. Again, communication will be a key component of this effort.

The future of MMFs
And all of these operational changes have significant implications for the money market business. The initial indications are that institutions will shift cash into government funds — so that they don’t have to worry about NAV fluctuations, gates and fees.

But will intraday pricing make prime MMFs more attractive to them, especially if interest rates should rise. Or will they consider alternatives, such as bank deposits or private funds?

Panelists predict a more fragmented MMF market in future — one filled with both challenges and opportunities.  



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