The AFP, or Association for Financial Professionals, published a short article entitled, "Money Funds: The Legislative Push for a Stable NAV Continues," which discusses the long-shot legislation in Congress to roll back the floating NAV. They tell us, "In a hearing last week on legislative proposals to improve small businesses' and communities' access to capital, Rep. Keith Rothfus (R-Pa.) referenced a new letter by the Association for Financial Professionals in support of the Consumer Financial Choice and Capital Markets Protection Act (H.R. 2319). The bill would allow the net asset value (NAV) for prime and municipal money market funds to stabilize if the funds meet certain criteria." (See our Nov. 15 Link of the Day, "ignites on 'Undo' MMF Reform Bill," and our May 24 News, "Stable NAV Bill Re-Introduced in House; Amortized Cost for Inst Funds?" for more.)
The AFP brief explains, "H.R. 2319 has received support from more than 200 groups and community leaders, given the mass exodus out of prime and municipal funds. From July 2015 to July 2017, prime funds went from $1.73 trillion in investments to $0.62 trillion, while tax-exempt funds, a key funding source form municipalities, universities and hospitals, fell from $254 billion to $135 billion, according to Treasury Strategies." They quote Rothfus, "We know what happened; $1.2 trillion has moved out of the private mutual fund sector."
It continues, "Many of AFP's 16,000 members have long relied on prime and municipal for their short-term cash management needs. But once the Securities and Exchange Commission enacted its rule in October 2016, prohibiting money funds from offering a stable NAV to investors other than 'natural persons,' organizations began moving their cash out of prime and municipal funds into other investment vehicles that do not support adequately companies' capital access needs."
The update says, "AFP's members prefer money funds because they provide liquidity, principal preservation, diversification, built-in credit analysis, and ease of accounting. 'In addition, these funds are a key source of short-term financing for businesses to purchase seasonal inventory, pay suppliers, and fund payroll and other expenses when cash outflows are greater than inflows,' Jeff Glenzer, CTP, vice president and chief operating officer for AFP, wrote in the letter. 'Issuing short-term variable rate debt held by money market funds is preferable to secured bank loans for businesses because it provides more efficient and affordable short-term financing, and allows businesses to invest more in job creating activities'."
Finally, the AFP writes, "The implementation of the floating NAV has resulted in the capital pool available to business borrowers shrinking by about $160 billion since early 2016, while many companies are paying higher rates to alternative lenders. Meanwhile, municipal entities and non-government conduit borrowers like hospitals and universities have seen their borrowing costs increase from under 10 basis points to about 90 basis points in that time. Glenzer recommends that H.R. 2319 be enacted as soon as possible 'to reverse the long-term damage being done to the indispensable capital markets financing options provided by money market funds.'"
In other news, BlackRock published a piece on the website Seeking Alpha entitled, "Should DC Plans Give Money Market Funds Another Look?" It states, "Rising rates have drawn assets back into prime money market strategies. Can collective funds help DC plans capture money market exposure? A little more than a year ago, money market mutual fund reform took effect, adding redemption gates and liquidity fees to 40 Act money market mutual funds and, for institutional prime money market mutual funds, a floating net asset value (NAV) requirement.... At the time, money market yields in general were down to almost 0% and spreads between government and prime money market mutual funds were narrow."
BlackRock points out, "Not surprisingly, many investors decided there was not enough additional upside for managing the extra restrictions on prime money market mutual funds. For their part, many defined contribution plan sponsors also opted for money fund investment options less affected by the changes. But that may be changing."
They write, "Rates have begun to rise -- with more hikes expected in 2018 -- and that has made the difference between prime and government yields grow more significant.... Prime money market mutual funds have consistently yielded 30 basis points more than government money market mutual funds since the beginning of 2017."
BlackRock notes, "Interest in prime money market mutual funds has followed, with assets under management increasing more than 17% year-to-date. If this is the new normal for prime money market strategies, DC plan sponsors may no longer find themselves comfortable leaving potentially significant yield on the table for their participants seeking liquidity and stability."
The piece continues, "A prime money market option offered through a collective trust fund (CTF) may help plan sponsors continue to offer a stable NAV investment that may not require liquidity fees and redemption gates, which may help participants who seek to take advantage of the yield spread relative to government MMFs. As CTFs are primarily regulated by the Office of the Comptroller of the Currency (OCC) or state banking regulators, they are not subject to the Securities and Exchange Commission's (SEC) money market regulatory requirements."
It concludes, "Currently, 59% of DC plans offer a money market investment option, and 3.9% of all 401(K) plan assets are invested in money market mutual funds. Money market mutual funds, however are not the only option. Not long ago, implementations such as CTFs were found in only the largest DC plans. Today, these vehicles are widely held and adopted in DC plans. There are now more than 65% of plans offering CTFs on their investment lineups in 2017, up from 48% in 2012."
