More than 95% of respondents polled by Institutional Cash Distributors (ICD), an independent money market fund (MMF) trading and risk management company, stated that their company would reduce MMF investments if the SEC implemented proposed changes to MMFs. This would lead to a US$714bn reduction in MMF investments, according to ICD.
The ICD client survey focused on the following MMF reform actions currently under SEC consideration:
- Additional capital buffer requirements.
- Principle redemption holdbacks.
- Conversion to a floating net asset value.
The ICD survey findings that are discussed in a new ICD Commentary: Costs and Consequences revealed that nearly all of the survey’s respondents would decrease their MMF investments if the proposed reform options are enacted. Thirteen out of the 121 surveyed stated they would exit MMF investments entirely, with the average net estimated reduction of all respondents totalling 41%. Total institutional MMF investments are approximately 66% of the US$2.6 trillion in US MMF investments. Applying the survey’s 41% asset reduction across US institutional MMFs, these SEC proposed MMF regulations would result in an estimated loss of US$714bn in MMFs.
MMFs currently invest in about 38% of total commercial paper assets. Assuming a 27% (66% x 41%) MMF reduction, their contribution to commercial paper financing would decrease by US$110bn. This would challenge companies such as General Electric (GE), Johnson & Johnson, Harley-Davidson, Procter & Gamble and other enterprise companies who rely on commercial paper as a means to finance accounts receivable, maintain inventories and meet short-term liabilities.
MMFs contribute 12% of all US Treasury securities. Assuming a 27% reduction, MMF contributions to Treasury Department securities financing would decrease by approximately US$89bn. This lowered credit supply for treasuries would increase US borrowing costs. With the nonpartisan Congressional Budget Office projecting total US debt at greater than $20 trillion by 2016, it is critical that treasury financing remain as low as possible.
MMFs contribute 37% of the investment funding for all US government agency securities. Assuming a 27% reduction, MMF contributions to agency securities financing would decrease by US$103bn. This would burden these agencies, which are integral components of the home loan and farm credit systems.
“The significant corrective reforms made to Rule 2a-7 by the SEC in 2010 are working, witnessed by MMF steadiness and control during the 2011 US debt ceiling showdown, US credit rating downgrade and the ongoing eurozone debt crisis,” said Tory Hazard, ICD’s chief operating officer (COO)/chief financial officer (CFO). “To add further unnecessary regulation will negatively impact US corporations, municipalities and the US Treasury with more expensive financing at the worst possible time.”
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