Treasury Strategies hosted a "Quarterly Cash Briefing" webinar yesterday, where panelists discussed the new money market fund disclosure regulations that went into effect April 14. Moderator Tony Carfang said, "It's a big day for the US money market fund industry," as managers began disclosing percentages of daily and weekly liquid assets (DLA and WLA); daily net inflows and outflows; and, current market NAVs (or MNAVs) rounded to four decimal places. (The other `Phase II MMF Reforms that kicked in yesterday deal with portfolio diversification, reporting, and stress testing -- see our Feb. 18 News, "Dechert Says April MMF Reform Deadline Approaching; JPM on Basel III for more.) Others also published news releases related to the SEC's Additional Disclosure Reforms. Fitch Ratings sent out, "US Money Fund Reform Puts Focus on Liquidity Risk," and another was entitled, "ICD Unveils Comprehensive Money Market Fund Reform Solutions for Corporate Treasury."
Federated Investors' Senior Portfolio Manager Sue Hill, who participated on the webinar along with Carfang, Treasury Strategies' Kevin Ruiz, Fitch's Roger Merritt, and the Association for Corporate Treasurers' Peter Matza -- summarized the "Phase II" changes. She said, "Today's a big day from the disclosure perspective for money market funds. Fund companies need to disclose 6 months of history on daily and weekly liquidity percentages for funds, the shadow NAV of the portfolio, and also, net shareholder flows. We need to show 6 months of history and then, from this point on, disclose all of those metrics on a daily basis."
Hill continued, "It's a big step from our standpoint. The industry is approaching the October 14 deadline and investors are struggling to make final decisions. Many of them can now use the information that will publicly available to them. If fees and gates are their issue, they can see what typical daily and weekly liquidity percentages look like for any given portfolio or portfolio type. Or, if the floating NAV is one of their big hurdles, they can look to see how the shadow NAV of MMFs has behaved over certain time periods and environments. We're hoping it gives investors the tools to come to final decisions about their investment options and gives them some comfort in that process."
Fitch's Merritt added, "It certainly is a sea-change for the industry, and I think it’s going to have far reaching implications. The changes that go into effect today are going to give an unprecedented level of transparency into the shadow NAVs for these funds, how much weekly liquidity they hold, and net inflows or outflows. Liquidity, in particular, is going to be top of mind for investors as we approach October -- particularly for funds that may face the possibility of having to impose fees and or gates in the event weekly liquidity falls below 30%. That's probably going to be the most important implication. It means that funds are going to have to be managed more conservatively than they have in the past. We are already seeing that as money funds are building liquidity -- on average north of 40% -- for prime money market funds. I suspect that will continue to grow."
Fitch's "Liquidity Risk" release explains, "New disclosure regulations for US money market funds (MMFs) that go into effect today will sharpen investors' focus on liquidity as a key risk metric, according to Fitch Ratings. We believe the unparalleled transparency that comes with daily fund reporting, combined with upcoming key structural changes facing the industry, are game changers for many money fund investors."
It continues, "Effective Thursday, money funds are required to begin disclosing daily and weekly liquidity, daily net inflows/outflows and the fund's net asset value rounded to four decimal places for the preceding six months. In October, institutional prime and municipal MMFs will also have to adopt provisions for fees & gates tied to a weekly liquidity threshold of 30%. If weekly liquidity drops below 30%, fund boards may impose a liquidity fee of up to 2%. Additionally, the fund's board may suspend redemptions for up to 10 business days. If weekly liquidity falls below 10%, fund boards must impose a 1% redemption fee unless the board determines that it would not be in the fund's best interest or that a higher (or lower) fee is more appropriate."
Fitch adds, "Many investors in institutional MMFs are uncomfortable with the risk for fear that their liquidity could be gated or subject to a redemption haircut. Businesses, municipalities and not-for-profits rely on MMFs to provide timely access to their investments to meet daily operational cash needs. For those who get comfortable with a potential redemption or having their fund gated, Fitch believes there will be heightened focus on the fund's liquidity and its proximity to a weekly liquidity trigger. We believe it's probable that these funds will need to maintain a liquidity buffer above the carefully watched 30% weekly threshold."
In related news, online money fund trading "portal" Institutional Cash Distributors announced reform related enhancements. The press release says, "Institutional Cash Distributors (ICD) today released comprehensive treasury reform investing solutions in their latest ICD Intelligencer: Navigating the New Treasury Investment Era. This industry desk reference will significantly help corporate treasury manage the challenging complexities brought about by Dodd-Frank, Basel III and Money Market Fund 2a-7 reform."
Tory Hazard, ICD President & COO, says, "Our interdisciplinary team of treasurers, MMF executives, trading specialists and technology engineers developed dozens of ICD Portal and Transparency Plus enhancements that provide actionable MMF reform intelligence throughout ICD Portal. These advances enable ICD clients to meet the new MMF reform challenges and properly manage portfolio risk and liquidity." (See the April issue of our Money Fund Intelligence for a "profile" of ICD and Hazard; watch for excerpts next week.)
The release continues, "ICD Portal's new Gain/Loss Report allows corporations to efficiently take advantage of the IRS and U.S. Treasury proposed Simplified Tax Accounting Method for Variable Net Asset Value MMFs.... The new corporate treasury settlement model is beginning to unfold with the majority of fund complexes leaning toward three intraday strikes at 9am, 12pm, and 3pm ET, enabling Prime MMF investors to receive settlement of cash throughout the day. Some fund companies are also adding an end-of-day strike at 5pm ET that would operate on a T+1 basis, which is useful for locking in the transaction and price to facilitate an early redemption settlement on the following day."
"Integrated systems and automation become even more important with the complexities of intraday pricing and settlement," says ICD SVP & Head of Global Trading Sebastian Ramos. "We have worked with fund companies, transfer agents, clearing and custody banks, technology vendors and clients on streamlining VNAV MMF workflow to provide daily liquidity, seamless integration with treasury workstations and automated settlement solutions."
ICD's release concludes, "Regulatory changes have already had an effect on corporate treasury portfolios as evidenced by the AFP Liquidity Surveys of 2014 and 2015. The mean number of investment vehicles used by survey respondents with over $1 billion in revenues increased from 2.8 in 2014 to 3.2 in 2015. While other money market instruments are getting deserved attention, Institutional Prime MMFs remain the most popular investment for ICD clients because of their low risk, high liquidity and competitive yield."
