Treasurers would vote with their feet if the Securities and Exchange Commission implements some of the changes in money fund regulations currently under discussion. Most say they would stop using money funds or decrease their use if the SEC requires funds to adopt a floating net asset value or imposes a redemption holdback on the funds, according to a survey commissioned by the Investment Company Institute and conducted by consultancy Treasury Strategies.
The survey results raise the possibility of “hundreds of billions of dollars leaving money market funds,” says Cathy Gregg, a partner at Treasury Strategies.
Treasury Strategies surveyed 203 executives with treasury and cash management responsibilities at corporations, governments and institutional investors such as insurance companies and real estate trusts, with 64% representing organizations with annual revenue of more than $1 billion.
If the SEC mandates that money funds move from the constant $1 net asset value to a floating net asset value, 79% of the 136 respondents that currently use money funds say they would decrease their use or stop using them, while 98% of the 61 respondents that do not currently use money funds said they would continue to avoid investing in them.
Treasury Strategies estimates that companies’ money fund investments total roughly $1.3 trillion, or half the $2.6 trillion currently invested in the funds. It calculates that the move to a floating net asset value would decrease those corporate investments by 61%, causing “better than a $700 billion drop in money fund assets,” Gregg says.
There has also been talk of requiring money funds to hold back a certain portion when investors withdraw money from the funds. The survey asked executives how they would respond if funds held onto 3% of the amount they redeemed for 30 days, and 90% said they would decrease their use of funds or stop using them. Treasury Strategies estimates that would result in a 67% drop in corporate assets in money funds.
The SEC may also require money funds to establish a loss reserve, or capital buffer. When asked about that prospect, 36% of finance executives who invest in money funds said they would decrease their use of funds or stop using them. When they were asked how they would feel about getting 5 basis points less in yield because of the cost of such a reserve, 92% of the remaining executives balked.
“If corporations knew or thought they were contributing even a small amount of yield to support the buffer concept, almost all of them would stop or decrease using money market funds altogether,” Gregg says.
Treasurers fleeing money funds would move money to bank accounts, separately managed outside accounts and government securities, according to the survey.
Gregg says the survey results are consistent with what Treasury Strategies hears from its clients, who are concerned about the accounting and administrative complexity that would result from the changes, as well as the possibility they would be unable to access the full amount they have invested in money funds.
The prospect of such large sums of money leaving money market funds raises other issues, she adds, including how banks would handle all the money that would likely head their way and how companies and municipalities would replace money funds as buyers of their short-term debt.
A full report on the Treasury Strategies survey can be found here.