If proposals reportedly under consideration at the U.S. Securities and Exchange Commission (SEC) to shift money market funds (MMFs) from fixed to floating net asset values, require more reserve capital, or impose redemption holdbacks move forward and become regulations, companies' interest in these investments will plummet. That's according to preliminary results of the 2012 AFP (Association for Financial Professionals) Liquidity Survey.
In a speech at the annual meeting of SIFMA (Securities Industry and Financial Markets Association) late last year, SEC chair Mary Schapiro discussed some of the arguments in support of these ideas. With respect to the concept of a floating net asset value, Schapiro said, "A money market fund's $1.00 stable NAV is brittle. Money market funds have no committed source of stability to draw upon, except for the discretionary support of their sponsors. This support may be there, or it may not."
Schapiro went on to say that money market funds, because of their size and role in the short-term credit markets, are "significantly intertwined" with the economy. In the event of a financial crisis, the country would be between the proverbial rock and a hard place: having to choose between providing support to money market investors or risking a breakdown of the broader financial system.
At the same time, requiring MMFs to maintain a capital buffer would ensure the availability of capital during an emergency and reduce the incentive for investors to flee, Schapiro said. Today, such capital comes from the support of the fund's sponsor, which is discretionary.
Many in the industry oppose the recommended changes, arguing that they would effectively decimate the market for money market funds. In a roundtable discussion conducted by the SEC in May 2011, Carol DeNale, senior vice president and treasurer with CVS Caremark Corp., stated, "I will not invest in a floating NAV product. I do not have the capacity," she said. "We will pull out of money market funds…."
In a January 2011 comment letter to the SEC, the Investment Company Institute stated that it was "highly skeptical" that a move to floating NAVs would reduce risks in any meaningful way.
The opposition of many corporate finance professionals to the proposals is clear in the AFP's survey results. More than three-quarters of companies say they would stop investing in MMFs if the funds moved to floating net asset values. Four in five would stop if MMFs were subject to redemption holdback provisions, while two-thirds would if fund companies were required to raise reserve capital through fees.
At the same time, SEC chair Schapiro has continued to express her support for the ideas. In a March 2012 speech before the Society of American Business Editors and Writers (SABEW) Annual Convention, Schapiro said, "To avoid the likelihood of another money market fund run, there are two serious options I am hoping that the SEC will propose: either float the net asset value, so that a money market fund's value goes up and down like any other mutual fund, or impose capital requirements, combined with limitations or fees on redemptions."
It's not clear at this point whether any of the changes that have been discussed will move forward.