This spring, the Securities and Exchange Commission is releasing new rules that would make U.S. money-market funds considerably less appealing to CFOs and treasurers investing corporate cash. The rules would 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 investment adviser Capital Advisors Group. 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 a fund’s NAV 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.
Another option on the table would require money markets to establish a “capital buffer” to cushion against losses and redemptions, and 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 Primary Fund “broke the buck” as its share price dipped below $1. Investors pulled out two-thirds of their capital in two days.
While capital buffers could attract investors to the market, the money-fund industry’s point of view is that, overall, the SEC’s proposals are damaging. They come two years after the agency’s 2a-7 regulations, which circumscribed the kind of instruments a fund could hold and mandated greater disclosure by fund sponsors.
“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.
Current seven-day yields on money-market funds are low; two basis points is typical. But the proposed new regs could suppress yields further and cause investors to use other channels to manage short-term cash, says Pan. (See “Where to Stash the Cash?”)
Money-market funds are not yet seeing any capital outflows as a result of the coming rules, say bankers. Indeed, 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 Deutsch.