By: NICSA’s Transfer Agent (TA) Committee
September 16, 2008 was a fateful day for money market fund investment products. A large market money fund deviated from the presumed $1.00 NAV, significantly impacting investor perception of the funds as a risk-free, stable investment option while spurring government action to consider investor safeguards for money market products.
After 6 years of discussion and deliberations the Securities and Exchange Commission issued final regulations in July 2014 consisting of 869 pages of rules and requirements aimed at reducing risk and protecting investors in money market funds, which become effective in October 2016. The rules include options for money market fund boards to implement liquidity fees and redemption gates during times of fund stress along with changes requiring Institutional Prime and Tax-free funds to price with 1/100th of one percent rounded precision (or 4 decimals on $1.0000 NAV). Furthermore, the rules require the certain funds to value their portfolio securities at market value rather than amortized cost resulting in a floating NAV price.
With $billions in assets under management (AUM) at stake, major money fund managers have been considering the future of their money fund offering with some funds deciding to discontinue their money market fund investment option. Many large money fund managers have announced plans to transition some or all of their Prime Money funds to Government Money funds, side-stepping the floating NAV requirement. Fund managers committed to Institutional Prime and Tax-free funds plan to adopt intra-day pricing valuations to preserve same-day investment liquidity.
Given the market shifts, what is the outlook for the estimated $900 billion in assets currently held in Prime and Tax-free money funds? Industry leaders expect that a substantial amount of Institutional Prime Money Market assets will shift to Government Money Funds prior to the reform effective date; but what will they do over the long-term? It is anticipated that the fate of Institutional Prime Money funds will be determined by the yield differences with Institutional Government Money funds. If yields are the same, there is no incentive to hold positions in Prime funds. So what is the tipping point for yields that will drive cash to Prime vs. Government? Is it 15-20 basis points as some have suggested?
Will the initial flight of cash from Prime to Government saturate the market for short-term government securities negatively impacting the yield of these funds? These are some of the uncertainties currently facing money fund managers, consumers and their business partners. With less than one year from the reform effective date, the industry is diligently moving forward with plans to address technology, product and operations challenges of Money Market Reform based on the insight currently available, while anticipating refinements prior to or after reform is in place.
To that end, at the General Membership Meeting held in Boston on October 29th, the NICSA Transfer Agency Committee gathered a panel of speakers representing a variety of the impacted parties, covering Compliance, Product, Distribution and Fund Administration to provide their very insightful perspectives on the far reaching impact of Monet Market Reform not only to their respective firms but to the industry as a whole. The session was heavily attended and provided an array of information and thought provoking topics.