Will US treasurers make a return to prime funds?

A key trend in the Association for Financial Professionals’ (AFP) recently-published 2017 Liquidity Survey was that US organisations have no plans to put invest in prime money market funds (MMFs), following the 2016 reforms by the US Securities and Exchange Commission (SEC). But could that change sometime soon?

Let’s back up for a moment. An exodus from prime and municipal funds was not unexpected; the AFP has been saying for years that imposing a stable net asset value (NAV) and liquidity fees and gates could lead treasurers to eschew these funds in favour of government or Treasury funds.

And that’s pretty much what happened. According to national association the Investment Company Institute (ICI) US government funds received $851bn of inflows in 2016, while prime and municipal money market had $881bn in outflows. Overall, more than $1.15 trillion has left non-government funds since 2015.

What could cause a move back?

But while much of the talk around money funds has been around why corporates left, AFP’s survey attempted to dig a little deeper. We asked practitioners what might entice them to come back. Would it be a stable NAV? Is it a certain number of basis points? Is it the uncertainty around it?

What we found was that there may be a dim light at the end of the tunnel for the corporate treasury/prime fund relationship.

While 41% of organisations said that they do not plan to invest in prime funds at all, 23% of respondents indicated that they might invest in prime if the NAV doesn’t fluctuate very much. Another 20% said that they would consider investing in prime funds if the spread between prime funds and other investments becomes significant. Larger and publicly-owned organizations would be more likely to move back to prime due to such a spread than smaller companies would.

But how significant would that spread need to be? We asked that question too. A third of respondents said that their organisations would invest in prime funds if the spread were at least 50 basis points or more. That’s pretty substantial, but another 18% would invest if the spread was only 15 basis points.

On the other hand, 40% said that they wouldn’t invest in prime, regardless of the spread – and that’s 10 percentage points higher than last year.

European funds

Survey recipients were also asked for their thoughts on European MMF regulation, which takes effect next year. Just like the rules implemented in the US, the EU reforms were implemented to make money funds more resilient to market shocks.

Surprisingly, nearly two-thirds (65%) of respondents said they were unaware of the changes in Europe. Only 15% are aware of the changes and planning for them. The remaining 20%, though aware of the reforms, have no plans to address them.

That’s a rather troubling outcome. US-based companies with operations in Europe and which use money funds there need to familiarise themselves with these reforms because they will impact their investments. They should also be talking to their fund providers to get a better grasp of what’s coming.

Planning for the future

There is currently legislation on the table in the US that could ultimately restore the stable NAV. At this juncture, we really have no idea how all of this is going to shake out. But should the floating NAV go away entirely, logic would tell you that we’d see another mass exodus – back into prime funds.

In the meantime though, if you’re trying to determine what to do with your money in the face of the new regulations, there are several options out there that many of your peers are taking advantage of. Respondents to the survey are making use of the following tactics:

• Separately managed accounts (31%).
• Ultrashort funds (26%)
• Extending maturities (21%).

Additionally, organisations are trying some other tools and strategies:

• 2a-7 like funds with stable NAVs (26%).
• ETFs bonds or cash strategies (16%).
• Doing direct repo transactions (14%).

Whatever your decision, just be clear that for now the MMF landscape is vastly different than it was just a few short years ago. We may see a shift back to the way it was before – but if not, then treasury and finance professionals will need to reconsider their long-term investment strategies.

* This is an edited version of a blog originally published on the AFP website.

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