The Securities and Exchange Commission’s proposed regulations for the money fund industry would entail significant changes for prime funds that target institutional investors, changes that could discourage treasurers from using such funds. If the regulations are adopted, many treasuries are expected to shift cash out of prime funds to government or treasury money market funds, or to alternatives like bank accounts.
The SEC put forward two alternatives last week. One would require prime funds—those that invest in short-term corporate debt—for institutional investors to adopt a variable net asset value (NAV), instead of the constant, $1-a-share NAV that’s now standard for money market funds. The requirement wouldn’t apply to government money funds or funds for retail investors, which are defined as those that limit shareholder redemptions to $1 million a day.
Semilof sees “significant headwinds” for companies moving money into either government money market funds or bank accounts. Given the limited supply of government securities, “there’s probably going to be a period when Treasury and government funds will no longer accept new deposits,” he said. And to the extent that corporate treasurers buy Treasury or government agency securities directly, rather than investing via money funds, they contribute to the supply shortfall, he said.
Nor are banks eager for more deposits. “The appetite for deposits is sitting at historical lows,” Semilof said. “We’re hearing rates are de minimis. If you are getting an earnings credit rate, banks are lowering your earnings credit rate.”