We learned from The Economic Times, in an article entitled, "Tata money market fund's NAV dips 5.94% on IL&FS write-off," that the fast-growing Indian money market fund industry could be in for a nasty shock. The piece says, "Tata Money Market Fund saw its net asset value dip as much as 5.94 per cent on October 29 after the fund wrote off the balance 50 per cent of its investment in the commercial paper of IL&FS which was to mature on October 29." India is the 9th largest money fund marketplace in the world, according to the ICI's latest figures, with $66.9 billion in assets (up 25% in the year through Q2'18).
Tata Mutual Fund's head of fixed income Murthy Nagarajan tells the Indian paper, "Since we did not receive maturity proceeds on October 29, we have made 100 per cent provision against the IL&FS exposure." (For more, see our News or Link of the Day pieces: "Speed Bump for Indian Money Funds (9/10/18)," "New Sundaram Indian Money Fund (5/9/18)," "Paytm may launch Indian money fund (1/1/18)," and "Worldwide Money Fund Chinese MFs Plunge US India Up in Q2 (10/1/18).")
The Economic Times adds, "As on October 29, the fund had an exposure of Rs 24.83 crore to IL&FS, which constituted 6 per cent of the assets under management of Rs 430 crore. Earlier on September 17, when the rating of IL&FS was first downgraded to D, the scheme had marked down 50 per cent of the instrument."
In other news, a recent "Money Markets" update from Fidelity Investments tells us, "U.S. taxable money market funds (MMFs) have generally benefited this year from rising interest rates and the repatriation of U.S. corporate cash via a tax cut on repatriated foreign profits in President Trump's tax plan. Taxable MMFs had net inflows of $23 billion by the end of the third quarter, compared with average outflows of $7.5 billion by this point in recent years."
Authors Kerry Pope and Chris Lewis explain, "Most of those gains were in prime funds, where assets grew by $75 billion year to date, including $38 billion for institutional prime funds. Government and agency MMFs saw assets shrink by $52 billion, while assets in Treasury MMFs fell by $1 billion during the same time. Institutional MMFs have seen significant asset growth in 2018 over a year ago, with almost all of it coming from prime funds."
The update continues, "Prime funds experienced outflows following new rules that took effect in 2016 from the U.S. Securities and Exchange Commission requiring a floating NAV, potential liquidity fees, and redemption gates in periods of market stress. Now, rising interest rates are prompting corporate clients to further focus on their liquidity, with the net yield spread between prime and government/ agency funds at 21 basis points at the end of the third quarter.... As market rates have trended higher, institutional and corporate investors are seeing value in segmenting their liquidity portfolios between government funds for immediate operating needs and prime funds for short-term strategic needs."
It adds, "Fidelity's MMFs continue to be well positioned with short weighted average maturities to take advantage of heightened supply conditions and further Fed rate increases, including an expected hike in December. Fidelity's prime institutional money market fund maintains higher levels of overnight and weekly liquidity to provide a buffer over the SEC's liquidity thresholds that, if breached, could result in a liquidity gate or fee."
Finally, Federated Investors recently files its quarterly "10-Q", which contains some risk disclosures of interest to the money market mutual fund community. The report says of the "Current Regulatory Environment," "Deregulation also is a focus of certain legislative efforts. The House Financial Services Committee advanced a bill seeking to reverse certain aspects of money market fund reform and a hearing on that bill was held in the Senate in June 2018. For example, the proposed law would permit the use of amortized cost valuation by, and override the floating NAV and certain other requirements for, institutional and municipal (or tax-exempt) money market funds. These requirements were imposed under the SEC's structural, operational and other money market fund reforms adopted through amendments to Rule 2a-7, and certain other regulations, on July 23, 2014 (2014 Money Fund Rules) and related guidance (collectively, the 2014 Money Fund Rules and Guidance)."
Later, Federated writes, "Management believes that the floating NAV, and fees and gates, required by the 2014 Money Fund Rules, as well as other Regulatory Developments, have been and will continue to be detrimental to Federated's fund business. In addition to the impact on Federated's AUM, revenues, operating income and other aspects of Federated's business described above, on a cumulative basis, Federated's regulatory, product development and restructuring, and other efforts in response to the Regulatory of Financial Condition and Results of Operations (unaudited)."
They also comment, "On April 5, 2017, European Parliament passed EU money market fund reforms (Money Market Fund Regulation or MMFR), which went into force on July 21, 2017. The MMFR provides for the following types of money market funds in the EU: (1) Government constant NAV (CNAV) funds; (2) Low volatility NAV (LVNAV) funds; (3) Short-term variable NAV (VNAV) funds; and (4) standard VNAV funds. The reforms became effective (i.e., must be complied with) in regards to new funds on July 21, 2018 and will be effective in regards to existing funds on January 21, 2019. Federated continues product-type analysis (e.g., whether certain CNAV funds should convert to LVNAV funds), compliance and other efforts utilizing both internal and external resources to prepare for MMFR. Federated also continues to engage with trade associations and appropriate regulators in connection with the MMFR as the European Securities Market Authority and the European Commission continue work on implementing the MMFR."
The disclosure adds, "While the MMFR will need to be complied with in 2018 or early 2019, government CNAV and LVNAV fund reforms will be subject to a future review by the European Commission in 2022. This review will consider the adequacy of the reforms from a prudential and economic perspective, taking into account, among other factors, the impact of the reforms on investors, money market funds, money fund managers and short-term financing markets, the role that money market funds play in purchasing debt issued or guaranteed by EU Member States, and international regulatory developments. As noted above, it is uncertain whether Brexit could delay implementation of the EU money market fund reforms. For Federated money market fund products subject to the MMFR, Federated has begun to take steps to structure such products consistent with the MMFR."
