The SEC’s changes to money market fund regulations aim to make the funds less vulnerable to a rush of withdrawals in times of financial stress. But the new rules will also make money funds, especially prime funds, a less hospitable destination for short-term corporate cash.
For corporate treasurers, the regulatory changes pose challenges ranging from the uncertainty created by the possible imposition of liquidity fees and gates to the effort and cost treasuries will have to expend to prepare for the changes.
The SEC voted in July to allow money funds to use liquidity fees and gates to limit investor withdrawals in times of stress. The agency also mandated that municipal funds and institutional prime funds—those that invest in corporate debt—use a floating net asset value (NAV) instead of the stable, $1-a-share pricing that is currently the standard. Money funds have two years to comply with the changes.
“Part of the advantage of money funds has always been the stable NAV and the ease really of working with them, as well as diversification and professional management,” said Greg Fayvilevich, a director at Fitch Ratings. “Now you have some of these advantages going away, at least for some funds, especially the institutional prime and municipal funds, which are going to have floating NAV.”
The changes “make it operationally probably a little more difficult to work with money funds,” Fayvilevich said.
Tom Deas, chairman of the International Group of Treasury Associations and vice president and treasurer at Philadelphia-based FMC Corp., said fees and gates may be a bigger concern for treasurers than the floating NAV.
Treasurers’ “first responsibility is to assure we have access to the corporation’s funds, that we’d be able to get at them if we need to,” Deas said. “The whole essence of the liquidity gate is that once it comes down, you may not be able to get your funds.”
Investment Policies and Escrow Agreements
Treasuries also have work to do to prepare for the changes. For starters, most companies will likely have to revise their investment policies.
Policies may not specify that money funds must have a stable NAV, but they often talk about the importance of capital preservation and liquidity, said Tom Hunt, director of treasury services at the Association for Financial Professionals (AFP). Given the rule changes, companies will want to be more specific in their policies about what they’re willing to invest in, Hunt said.
Revising an investment policy can be a big project, especially now that more and more policies have to be approved by the company’s board, he added.
“When you enter into a new arrangement where you want to increase your investment options, you go through a process where you get certain people comfortable with it, typically, and then you bring it to the board,” Hunt said, citing accounting, internal audit, and external auditors as some of the parties treasury would need to educate about the change.
Deas noted that many treasuries also have escrow agreements, in some cases many escrow agreements, and each of those agreements includes directions on how the bank is to invest the money in the escrow account. “All of those agreements are going to have to be changed in some way,” he said. “It’s just a big administrative effort that’s got to get underway.”
Tax and Accounting Implications
Switching to a floating NAV from a constant NAV also entails tax and accounting changes as companies deal with the gains and losses on the funds. In conjunction with the SEC’s changes, the U.S. Treasury Department and the Internal Revenue Service proposed allowing corporate treasuries to simplify the accounting by aggregating gains and losses on money funds. Tyler Haws, director of business development at Clearwater Analytics, wrote in an email that that announcement “alleviated many of the concerns with floating NAV.
“Now, [money market fund] investors will not be required to track gains and losses individually, and will be able to instead take more of a net approach,” Haws wrote.
But Deas, pictured at left, said treasurers are still working through analyses to determine whether the IRS exception will work for their company’s particular circumstances and under various market conditions.
Even if treasuries can aggregate the gains and losses, they still have to keep track of them, which will require systems changes. “Both fund managers and the investors who will invest in floating-NAV money funds will have to make some systems changes that will cost money,” Fayvilevich said.
“Our systems are not geared up to keep track of these changes in net asset value or the associated short-term gains and losses that would arise from buying a share at one price and selling it at another price,” Deas said. “Those would all have to be programmed into treasury systems.”
Impact on Same-Day Withdrawals
There’s also concern that money funds using a floating NAV might not be able to provide withdrawals on a same-day basis. “There are times when we want to get the money out during the day, and we’re presently able to do that,” Deas said. “But it could be that the funds are going to restrict redemptions until maybe the next morning, when they’ve computed after the close what the exact NAV is based on the price of securities at the close.”
Fund companies have not said how they will handle the question. But Fayvilevich said fund companies operating funds with floating NAVs will have to decide how many times a day they will price the securities in those funds. “Getting that kind of information can be costly for them,” he said. “Do you mark to market every hour? And if you do, does that limit redemption requests to certain times during the day?”
Any move away from same-day settlement would be another factor making money funds less popular with treasurers, Deas said.
There’s speculation that many corporate treasuries will exit prime funds once the rules take effect, perhaps to move to government funds, which aren’t required to use a floating NAV. Treasuries have already trimmed their holdings of prime funds in recent years. AFP’s 2014 Liquidity Survey showed just 9% of the assets in treasury portfolios were held in prime funds, down from 16% in 2009.
Yields are currently very low on both prime funds and Treasury funds, which means there’s little financial incentive for treasurers to take on the additional risk and go through the administrative chores required to continue investing in prime funds once they shift to a floating NAV, Hunt said. “If govvie funds were earning 4.5% and a prime fund 5%, maybe some companies would say, ‘I’m comfortable with the risk, I’m comfortable with the accounting treatment,’” he said. “But in this environment, probably not.”
If treasuries do pull their money out of prime funds, that could end up hurting companies that get some of their funding by issuing commercial paper, one of the types of securities purchased by prime money funds. “A lot of Tier 2 commercial paper issued by industrials like my own is purchased by these prime money market funds,” Deas said. “If there’s less demand, then our rates could go up.”