Fitch: US MMF Reform to Further Limit Cash Management Options

The Securities and Exchange Commission’s (SEC) proposed reforms of US prime money market funds (MMFs) would present a new set of challenges for US corporate treasurers, many of whom rely heavily on MMFs as a flexible tool for short-term cash management, according to Fitch Ratings.

The credit ratings agency (CRA) said that the proposed changes, released last week, would impose additional costs and may have accounting and tax considerations for MMF investors, further limiting cash management choices.

Fitch notes that one reform alternative suggested by the SEC is a switch to variable net asset value (VNAV) accounting treatment for prime MMFs. The potential price volatility and resulting gains and losses generated by the VNAV structure likely will sharply reduce the appeal of the product to many investors in institutional MMFs. A recent Fitch survey of corporate treasurers in Europe found that 50% cited the simple tax and accounting treatment for constant net asset value (CNAV) MMFs as one of the product’s main strengths.

Government MMFs would be allowed to continue to operate as CNAV products under the SEC’s proposal. As a result, cash managers may move funds from prime to government MMFs, although the ability of government MMFs to absorb these inflows is uncertain.

The second alternative would require non-government money funds to impose a 2% liquidity fee on redemptions if a fund’s weekly liquid assets fall below 15% of total assets and would allow fund boards of directors to impose temporary redemption gates. While this may allow the MMF to remain a CNAV product, this alternative would introduce uncertainty for corporate treasury cash management, since funds held in a MMF may not be available for withdrawal at a time of severe stress.

The SEC’s proposal is subject to a 90-day market comment period, followed by potential revisions and a long implementation period of up to two years. The SEC has emphasised that it is seeking additional information and stakeholders’ input on the proposal’s effect on the utility of MMFs to investors, including corporate treasurers.

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