Bates Research - 04-10-15
New Money Market Rules Prompt Changes
This week major fund providers in the $2.7 trillion money market space took steps in anticipation of new regulations governing how money market funds are priced. We've blogged previously about the new rules that will govern money market funds, but in brief, in an effort to keep funds from "breaking the buck" and falling below a $1.00 NAV (which happened during the Credit Crisis), the SEC is requiring funds to adopt a floating NAV or to comply with other restrictions.
Under the new rules, Prime institutional funds will be required to redeem shares on a floating NAV basis. Even with a floating NAV, funds will still be required to maintain high credit standards, less than 60 days in average maturity, and will have to keep adequate cash on hand to meet various liquidity thresholds. Prime retail funds will still be able to report a stable NAV, as will government money market funds (retail or institutional) that invest 99.5% of their assets in cash, government securities, or repurchase agreements for which either cash or government securities serve as the collateral. The difference in price reporting requirements for Prime funds serving institutional versus retail clients means that the SEC has to delineate between the two, which it has done by stating that retail investors will be limited to natural persons only. The new rules also introduce gates and liquidity fees to prevent investors from running on the funds during times of market stress (for more detail, see our previous post). The new rules are still more than a year away from becoming requirements, but fund companies have already begun to position themselves for compliance.
Blackrock, which has about $218 billion in investor assets in its money market funds, will reduce the number of money market funds that it offers by more than 30%. In order to maintain the right to report a stable NAV, Fidelity has previously announced that it will convert three of its money market funds to government-only funds. This includes the single largest money market fund available, the $112 billion Fidelity Cash Reserves fund. Some firms, like J.P. Morgan Asset Management, are instead preparing their funds to meet the floating NAV requirements.
Money market fund shareholders may be required to vote on some of the proposed changes and are still trying to figure out where this will leave them. Yields, already razor thin, will presumably become even thinner on those funds that will invest in government securities only in order to report a stable NAV. Money market funds are also frequently used as sweep accounts, and BlackRock in particular has noted in its letter to clients that "Conversations with our retail distribution partners highlighted significant concern regarding funds that are subject to gates and fees for retail clients." As fund management companies shift their offerings around in order to comply with the new rules, clients (or their investment advisors) will need to carefully consider each money market fund in order to assess whether or not it meets their needs. In the revised landscape of available funds, it is entirely possible that a fund meeting all of a given investor's needs is no longer available.