Almost two years ago, the SEC adopted amendments to the rules that govern money market mutual funds meant to address the risk of investor runs in money market funds. In summary, the rules in part:
- Require a floating NAV for institutional prime money market funds
- Allow for fees and gates to discourage and/or suspend redemptions temporarily at certain asset thresholds
At the time of the adoption of the money market fund reform, there was much concern from the investment company industry as to what impact these rule changes would have on money market funds and on the funds which make use of them for cash management purposes. Those concerns included:
- Would these measures work in heading off redemption runs?
- How would the changes impact the overall operations of money market funds?
- Would institutions go elsewhere for their cash-management needs – the stable NAV and redemption flexibility are two of the reasons money market funds are used?
- Would active money market funds survive given the interest rate environment and added regulations?
Fast forward to June 2016 – the effective date of these rule changes is imminent – October 14, 2016. While most of the questions above will remain unanswered until the new rules are fully implemented, we can evaluate what impact these rule changes appear to have had so far based on the change in net assets of the institutional money market funds to date.
| Institutional Net Assets in Money Funds | |||
| ($billions) | |||
| As of Dec. 31, 2014 | As of June 2, 2016 | Perc Change | |
| Prime | 938.10 | 746.31 | -20.4% |
| Gov't | 811.25 | 972.17 | 19.8% |
| Tax-Exempt | 70.78 | 46.73 | -34.0% |
| Total | 1,820.14 | 1,765.21 | -3.0% |
| *per Investment Company Institute Statistics |
It is clear from the statistics above that there has been movement out of non-government institutional money market funds, and more is expected prior to the October 14 deadline. This movement is likely a combination of advisors converting prime and tax-exempt funds to government money market funds and others exiting the money market business altogether because of a combination of these new rules and the pressures from the low yields recently experienced.
Of course, some advisors will stay the course and continue to offer these products despite the new rules with the idea that less competition and a changing rate environment might offer the opportunity to succeed.
Given market conditions and the Fed’s recent hints at interest rate hikes, it could be an interesting time to see how this situation continues to develop. Stay tuned!