Money fund managers continue executing what we've called the "big sort," which involves going through funds and accounts and determining which one are Institutional and which ones are Retail. (See our Jan. 15 News, "The Big Sort: Who's Going Retail or Floating Inst Among Prime MMFs?") The next phase involves actually removing institutional investors from retail funds, and we've started to see some activity in this regard. Charles Schwab recently posted a document entitled, "News and Resources for New Money Market Fund Rules," which spells out the sorting process and includes implementation dates. Invesco also released an update on "reform implementation dates." We cite these below, and we also excerpt from a story on the Association for Financial Professionals' website called, "Money Market Fund Regulations: 3 Myths Debunked."
Schwab's update, targeted at advisors, says, "Some of your clients' accounts will not qualify for retail prime and municipal money market funds under the SEC's "natural person" exception as part of its new money market fund reform rules -- these accounts will be categorized as "institutional." Accounts that are categorized as institutional and that hold retail prime and municipal money market fund shares are required under the new rules to have those positions removed before the SEC deadline of October 2016. For these accounts, purchased positions in retail prime and municipal money market fund shares will be redeemed before the compliance deadline of October 2016. The cash proceeds will be deposited into the accounts' existing free credit balance feature."
It continues, "Also, certain cash sweep features will no longer be available to institutional accounts. Accounts that now fall under the "institutional" definition may currently have a sweep feature for which the account will no longer be eligible, and as such, will need to have the sweep feature updated according to the new rules. Accounts deemed to be institutional will not be eligible to make purchases of retail prime and municipal money market funds (or enroll in certain sweep features) starting June 1, 2016."
Schwab's Timeline explains, "4/4/16: Your affected clients will be mailed a 60-day notice about the changes to their accounts. The sweep change letter will be a negative consent letter, and the purchased positions letter will be a notification only.... 6/1/16: New and existing institutional accounts will not be permitted to enroll in retail prime and municipal sweep money funds. If eligible, government sweep money fund may be the only money market fund sweep option.... June–September 2016: Schwab will take the necessary actions in affected accounts, including selling retail prime and municipal money market fund positions and replacing ineligible sweep features."
Finally, it adds, "No action is required on your part. Schwab will automatically determine which of your clients' accounts are affected by the new SEC rules, and will evaluate positions and sweep features as required. Affected clients will receive a notification ... to let them know about the actions that Schwab will take in their accounts. Schwab will take those actions sometime between June and September 2016. A list of affected client accounts will be available through your relationship manager or service team.... If you feel that a client's account has been incorrectly identified as being ineligible for retail money market funds, please call your relationship manager or service team to discuss any needed documentation to re-categorize the account."
Also, an Invesco's "Money market regulatory reform" update says, "On or about August 1, 2016, Invesco's CNAV and prime and municipal funds will only accept new accounts that are beneficially owned by natural persons and will no longer accept new institutional accounts. Existing institutional clients may continue to transact as usual." It adds, "On or about October 4, 2016, Institutional investors will no longer be eligible for our CNAV prime and municipal funds and we will begin transitioning remaining institutional clients out of these funds. Invesco intends to communicate with impacted clients prior to Oct. 4." Finally, "On or about October 6, 2016, Invesco's designated FNAV prime and municipal funds will begin transacting at a floating net asset value."
In other news, AFPonline featured a MMF Regulation story last week on "3 Myths Debunked." The AFP says, "Wednesday morning at New York Cash Exchange 2016, Tony Carfang, partner, Treasury Strategies attempted to clear up some misunderstandings about money market fund regulations set to take effect in October. While some treasurers might be concerned over the floating net asset value (FNAV), liquidity fees and redemption gates, he pointed out that the market already imposes these factors on all other instruments."
It explains, "Myth 1 -- Floating NAV: Carfang noted that prime money market funds have been able to maintain a stable net asset value because the Securities and Exchange Commission (SEC) granted them some unique privileges other instruments do not have. "Moving to a fluctuating net asset value is really nothing more than taking that privilege away, and putting prime funds back on par with other instruments," he said. He added that if Treasuries, agencies and commercial paper (CP) aren't held to maturity, they fluctuate every day. "They already have a variable net asset value," he said. "So the point is, the fluctuating net asset value doesn't penalize money market funds, relative to other instruments, it simply brings them back down from a privileged position. That's generally misunderstood."
The AFP piece continues, "Myth 2 -- Liquidity fees: In terms of fees, Carfang advised attendees to consider bank time deposits. "If you were to exit a time deposit prematurely, you will pay a penalty," he said. "You may forfeit some interest, you may pay a fee, you may have to sell it at a discount. There is a penalty for basically early access to liquidity." Likewise, liquidity fees provide a fund the opportunity to stabilize itself. He added that "part of the goal of imposing fees is to, very simply, require the funds to reflect the reality of the underlying instruments in the money market."
It adds, "Myth 3 -- Redemption gates: By Carfang's estimation, redemption gates are the most misunderstood part of the regulation. While treasurers may be apprehensive about not being able to pull their money out of a fund as needed, the fact is that other instruments also impose gates. "Bank deposits are subject to gates, but you don't hear that a lot. Bank boards have a privilege known as suspension of convertibility, which is to convert your money into cash," he said. Banks rarely employ this tactic, but they do. "If you want to know the probability of a gate being imposed, think about the 3,000 or so banks that have failed in the last 20 years and then think about the one money fund that failed," Carfang said. "Where do you think the probability is?"
Finally, the AFP brief says, "Carfang added that many corporates are under the false impression that under the new MMF regulations, if the fund's liquidity drops below 30 percent, it will immediately impose a gate. In actuality, its board is required to vote on imposing a gate if liquidity falls below 30 percent. "They're not required to do it at all; they're required to vote on it," he said."
