Schwab Money Funds Q1 Commentary
Charles Schwab Asset Management published its Schwab Money Funds Q1 2022 Commentary and submitted its Comment on Money Fund Reform to the SEC earlier this month. The Q1'22 update, written by Linda Klingman and Rick Holland, tells us, "If this outlook holds, it will likely mean that investors can expect overnight rates to be around 2.4% by year end and approaching 3% by the end of 2023 -- good news for those who rely on money market funds and other fixed income strategies to supplement their individual income needs.... According to Crane Data's Money Fund Intelligence reports, the money market fund industry saw a moderate decrease in total assets over the first quarter (~$139B), ending the period just above $5 trillion. All of the decline could be attributed to the Government/Treasury sector (~$149B) while the Prime and Municipal sectors remained steady, up approximately $10B and no real change, respectively." It explains, "On the surface, implications for a liftoff in the fed funds rate seem straightforward. Money market funds, like other short-term financial instruments, would expect to see higher net yields. However, two key points should be emphasized as we enter this tightening cycle: First, many money market fund share classes are still implementing some degree of voluntary fee waivers. These historically have been used across the industry in near-zero interest rate environments to insulate investors from potential negative returns. The need for waivers diminishes as market yields rise but may also cause an initial lag in the movement of 7-day yields for certain money market funds. We expect the money market fund industry to fully discontinue the use of voluntary fee waivers in the coming months, assuming the Fed continues its aggressive path upward. Second, money market fund 7-day net yields typically do not move in "lockstep" with the fed funds rate. Although there is generally a strong relationship between these two data points, money market fund yields may move prior to or after action taken by the Fed. While we expect money market fund net yields to generally follow the trend of the fed funds rate, there may be variances between the two moving forward." Klingman and Holland comment, "On the regulatory front, there were few material developments on Money Market Fund Reform during the first quarter of this year. In December 2021, the SEC proposed reform measures to potentially improve money market funds for investors and to increase the resiliency of the money market fund industry overall. Public comments on the proposed amendments were due April 11, 2022. Schwab's formal response reiterates the core position which has been noted in our prior comment letters to regulators in 2021 and addresses Schwab's current position related to the SEC's recently proposed amendments." They state, "Our position is summarized below: 1. Schwab believes the SEC should consider requiring a floating NAV for all prime and municipal money market funds to improve price transparency and remove any misperception of an implied 'guarantee.' Government money market funds would remain constant NAV and not be required to have a floating NAV. 2. Schwab supports the removal of liquidity fees and redemption gates and the thresholds aligned with fees and gates. 3. Schwab opposes swing pricing, but if an anti-dilutive measure is necessary, the use of a liquidity fee is preferred. 4. Schwab opposes making all prime and municipal money market funds price with a variable NAV in the event of negative rates. We support the utilization of the reverse distribution mechanism for managing negative rates. 5. Schwab supports increased liquidity requirements but is not opposed to lower liquidity requirements than those proposed. 6. Schwab generally supports proposals that enhance transparency for investors. We believe some elements of the proposed amendments should remain confidential. 7. Schwab supports the enhanced stress testing proposed by the Commission. Across the financial sector, stress testing has proven to be a useful tool for regulators." The piece adds, "While the exact timing is uncertain, we believe the SEC will seek to finalize these rules by year-end and mandate an effective date near the end of 2023.... Schwab continues to evaluate and evolve its liquidity management solutions to meet the changing financial and regulatory climate. We continue to collaborate with our clients, regulators, and industry peers, and we've also developed additional collateral to help support investor education as necessary in an ever-changing environment." Schwab's SEC Comment Letter," written by President Rick Wurster adds, "CSIM is one of the largest managers of money market fund assets in the United States, with 11 money market funds and $146.5 billion in assets under management as of December 31, 2021. Approximately $78 billion of those assets are in prime money market funds (including an institutional fund with a floating net asset value); $12 billion are in tax-exempt money market funds (or 'municipal money market funds'); and $56 billion are in government and treasury money market funds.... Money market funds provide investors with stability, convenience, liquidity and yield. CSIM's money market fund offerings are primarily used by clients of CS&Co and other Schwab affiliates. The Schwab Money Fund offerings appeal to individual retail investors and investment advisers who service individual investors to help manage their cash. Cash is a critical component of the portfolios of individual investor clients, offering a level of flexibility that helps them both manage their day-to-day finances and reach their longer-term financial goals. It is through our clients' eyes that we respond to the reform proposals."
