Marquette Associates on MMF Reforms
Institutional investment consultant Marquette Associates posted a commentary entitled, "Money Market Reform and Implications for Institutional Investors." It says, "Marquette expects to see a wave of institutional investors switching from prime MMFs to government MMFs. We also expect to see investment managers who provide institutional prime MMFs launch institutional prime commingled funds in order to retain clients. We expect to see certain prime MMF assets flow to stable value funds as a third alternative. In a normal environment, a prime fund would yield eight to twelve basis points higher than a comparable duration government fund. From our discussions with various money market fund managers, the consensus expectation is for this gap to rise an estimated 25 to 50 basis points because the inflow of investors switching to government funds will boost prices and reduce yields for government funds, while the outflow of investors from prime funds will depress prices and increase yields for prime funds. With regard to liquidity fees and the gating of client redemptions for institutional and retail MMFs (but not government MMFs), Marquette expects MMF providers to refrain from using these mechanisms in normal market environments. They have been established by the SEC as a means to maintain stability should the markets become stressed. Therefore, we expect MMF providers to use these mechanisms only in financial crises like the one we experienced in 2008." It continues, "Marquette recommends that clients engage in a dialogue with their consultants on the best course of action. The four key alternatives for liquid cash investments are: 1. Accept the vNAV of the institutional prime MMF from October 2016 going forward: the NAV of an institutional prime MMF is not expected to vary much over time. 2. Switch from a prime MMF to a government MMF: the reduction in yield for the benefit of the cNAV must be considered in this scenario. However, the government MMF will not impose liquidity fees or client redemption gates. 3. Switch from a prime MMF to a prime commingled fund: this option offers the enhanced yield of a prime fund over that of a government fund, but additional paperwork is involved to participate in a commingled fund. In addition, many of these commingled funds have been newly launched, so fund assets under management and critical mass should be considered. 4. Switch from a prime MMF to a stable value fund: this option offers even greater yield, but has the downside of reduced liquidity, as most stable value funds have put provisions of 24 to 36 months. This means that if a plan wishes to move its assets from one stable value fund provider to another, there are instances when the stable value provider may require the plan to wait 24 to 36 months."
