The U.S. Securities and Exchange Commission (SEC) is currently considering a proposal that would require institutional investors to account for their holdings in prime money-market funds—those that invest in short-term corporate debt—using a variable net asset value (NAV), rather than the stable NAV that is currently the industry standard. The proposal was announced in June, and the deadline for comments is September 17.
The goal would be to increase transparency, in order to avoid a run on money funds in future financial crises like the run that occurred in September 2008 when the Reserve Primary Fund “broke the buck,” repricing shares below $1 to devalue investors’ holdings. Critics of constant NAV money funds argue that their constant $1 price masks movement in the market and that if they’re going to promise liquidity on par with bank accounts, they should be regulated like banks. The problem is that what may seem like a fairly minor accounting change could have a major impact on corporate usage of money funds.
“Companies will have to put in place a confirmation process,” predicts Paul LaRock, a Treasury Strategies principal. “Right now, when you buy or sell a money-market share, you know the price: It’s a dollar. With the floating NAV, the price will vary slightly up and down around a dollar. Buyers and sellers will have to confirm with each other the exact purchase price, out four digits right of the decimal, just like when they trade ultrashort bond funds or equities. That will require a formal confirmation process to be put in place. To the extent that a buyer and a seller have slightly different prices on a trade, there will have to be an exception resolution process to mitigate those problems, and that will require staffing. When they don’t match, people will have to get on the phone and fix it.”
System reengineering. The complexities that a floating NAV would introduce in accounting, tax reporting, and initiation and redemption of money-market funds would likely require a company to upgrade, if not replace, software systems. “As a rule of thumb, the more complex the system and the greater reliance on automated procedures within the systems to transact with money-market funds, the more expensive and elongated the compliance period will be,” Wiley says. “Corporations use a number of different systems to manage investment activity. For companies that manage money-market fund activity within a treasury management system, an ERP, or another specialized software package, the move to floating NAV will be very expensive because they are going to be dependent on the system providers for upgrades. And after the upgrades are available, they’re going to rely on system vendor consultants or implementation resources to configure those systems.
“One larger corporate we talked to likened this to an ERP upgrade,” Wiley adds. “They quoted a low-seven-figure number. It will be very expensive.”