Halloween may be just around the corner, but corporate treasurers are more likely celebrating Dia de los Muertos – “Day of the Dead” – to honor prime money market funds (MMFs). This two-day holiday, which begins November 1st, originated in Mexico to remember deceased loved ones. Just like a deceased loved one, prime MMFs are now a ghost of what they used to be.
On October 14th, the SEC’s new 2a-7 rules for money market funds making significant structural changes for certain funds came online. Among the many changes for prime MMFs is the shift from a stable net asset value (NAV) to a floating NAV that essentially rendered those funds useless as a cash management options for many corporate treasurers. Thus, it comes as no surprise that over $1 trillion in assets have left prime MMFs since the SEC finalized the rule in July 2014.
While the SEC’s sound economic analysis staved off a Financial Stability Oversight Council recommendation to impose capital requirements that would have turned MMFs into zombies, the SEC made the switch to the floating NAV, despite the high-quality, short-term, stable underlying investments of prime funds. And as if the floating NAV wasn’t enough of a deterrent for institutional investors, the SEC also implemented a provision allowing funds to “gate” redemptions and charge a liquidity fee if investors want access to funds during the gating period.
The key features of prime MMFs that made them such a beloved cash management tool among corporate treasurers were the ability to preserve principal and maintain intraday liquidity. With those features now thrown out the window, corporate treasurers and other institutional and retail investors have fled these funds. According to iMoneynet, assets held in prime MMF as of July 23, 2014 were $1.414 trillion, and have drastically declined to $390 billion on the eve of the new rule’s compliance deadline. Not surprisingly, government MMFs, which must be comprised of at least 95% in U.S. Treasuries, saw a corresponding increase in assets as government MMFs are not subject to a floating NAV or gates and liquidity fees.
The government should be providing opportunities for buyers of corporate commercial paper, which help companies build inventory and access working capital, as well as municipal debt that fund infrastructure such as schools and bridges. Instead, the government put a DNR sign on prime MMFs and regulating itself a sweetheart deal that resulted in over $1 trillion to be invested in the Federal government, whose downgraded rating remains a double A.
With prime MMFs no longer a source of short-term funding for commercial paper, short term financing has become more challenging with LIBOR reaching levels higher than before the 2008 financial crisis. Add to that other new regulations including the Volcker Rule and Basel III’s liquidity coverage ratio and net stable funding ratio rules, and you’ll find that life has been sucked out of liquidity in the markets, making it even more challenging for Main Street to obtain access to capital.
While the unfortunate fate of prime MMFs leads us to honor them on Dia de los Muertos, let’s hope that a new Administration next year will focus on a more diverse and vibrant capital markets to help create more jobs on Main Street and fuel economic growth.