Tomorrow, the Association of Financial Professionals will host a Webinar entitled, "Making the Most from the 2013 AFP Liquidity Survey Results" (Tuesday at 3-4pm). Crane Data's Peter Crane will join several others to discuss the recent AFP Liquidity Survey. (See the last paragraph for more details.) Below, we excerpt from the survey's section on potential money fund reforms. AFP writes, "The floating NAV has been integral to several reform proposals in recent years. From the perspective of many treasurers, a floating NAV would undermine the safety of principal that has made money market funds attractive investment vehicles. Should a "floating NAV" rule be enacted, many organizations will have to revise their investment policies and look for alternative investments that offer comparable safety, liquidity and yield. Accounting treatment would also have to be taken into consideration, determining if the classifications of Hold to Maturity, Available for Sale, or Actively Traded rules apply. To investors, this presents new decisions and challenges given their situation."
The survey explains, "Having possible mark to market accounting for a product that doesn't fluctuate all that much and has potential income statement impacts is not all that appealing to investors. A floating NAV fund most likely would not have same-day availability either, as security prices are dependent on outside parties that would most likely have next day availability, undermining the liquidity of same day funds. If the demand for MMFs wanes as a result, a floating NAV would also change market dynamics for debt issuers that supply the securities to the money market fund companies (e.g., commercial paper). For purchasers of MMFs, the return of principal is still a more important driver of the investment decision than is return on principal. For a large number of institutional investors, the potential for loss of principal would preclude investing in floating NAV MMFs."
AFP tells us, "U.S. businesses make their investment decisions based on a variety of factors unique to their organizations. In many instances, MMFs are the investment option that most closely matches the risk/return profile companies seek to hold surplus operating cash, as specified by an organization's own written investment policy. Changing to a floating NAV would significantly change the risk/return profile of MMFs. Nearly two-thirds of financial professionals indicate their organizations would be less willing to invest in MMFs and/or would reduce/eliminate their current holdings of MMFs in their short-term investment portfolio in response to a floating NAV. Large organizations, those that are publicly held and net investors would be more likely than other companies to make changes in their MMF investments in response to reform."
The Liquidity Survey continues, "A proposal to limit redemptions or charge fees for full redemptions of MMF holdings faces similar resistance, particularly from large organizations. Two-thirds of survey respondents at large companies indicate they would take action in response. Overall, 56 percent of respondents would stop investing in money funds if there were fees charged on redemptions in one form or another. Charging fees to redeem balances in a historically stable NAV product is contrary to the principle of safety, and undermines any full return of principal. Many companies would not expect to pay a fee over and above what they are currently paying to the fund for redemptions. While this may be an effort to make investors share the risk from fluctuations in principal, many companies do not want to be burdened with the additional administrative hassle of having to manage redemption fees or understand a complicated structure."
It also says, "It is important to note that corporate investors rely on MMFs as a daily cash management and liquidity tool. Restrictions put in place that limited redemptions of MMFs would create severe operational constraints on investors, rendering MMFs unusable for daily use. Redemption gates would be very unattractive from the standpoint of limiting access to funds when needed to pay expenses, and they could also result in higher and less frequent withdrawals."
AFP comments, "Reform efforts were triggered by the need to ensure that government intervention would not be necessary to support money market funds in the future. It is likely that some companies would expect fund sponsors to prop up or support the funds much like they have in the past. Companies also realize that if the fund were to "break the buck," they could, potentially, lose principal. There is no guarantee of principal preservation: if the event occurs, it will most likely be a credit-driven event, not one resulting from price/rate fluctuations. A small portion of respondents also believes that the U.S. Government would support money market funds, as it did in the past to shore up liquidity in fixed income markets. This probably is not a realistic expectation given recent policies of the Securities and Exchange Commission (SEC), the Federal Reserve and the Financial Stability Oversight Council (FSOC) through the various regulatory efforts underway to remove the implied guarantee expectation that lingers from their past actions in support of money funds."
Finally, they write, "According to financial professionals, a floating NAV -- if enacted -- would be detrimental to the money fund industry. Only five percent of respondents indicate such a measure would render money funds as appropriate investment vehicles for their organizations. Financial professionals consider enhanced liquidity standards or redemption limits/restrictions the most palatable reform proposal. Enhanced liquidity standards are acceptable along with redemption gates assuming that redemptions would be fully redeemable over time and that a time period is specified." [Editor's Note: Keep in mind that most of the AFP's survey had already been completed by the time the SEC announced their Money Market Fund Reform proposals on June 5.]
AFP's Webinar, "Making the Most from the 2013 AFP Liquidity Survey Results", will take place on Tuesday, July 16, 2013, from 3-4 p.m. EDT. AFP says, "Join us as we review the results from the 2013 AFP Liquidity Survey. Pete Crane will provide a market perspective on money market funds and the recent SEC proposals. We'll review what the survey results mean to the corporate investor, discuss various portfolio changes that might be considered along with different investment options. We'll also provide tips and best practices that investors have put in place and include a focus on investment policy updates. We'll conclude with Q&A." Speakers include: Thomas Hunt, CTP Director of Treasury Services, Association for Financial Professionals, Peter Crane, President, Crane Data, and Lesly Murray, Head of Liquidity Product Management Segment - Treasury Solutions, RBS Citizens.
