US Money Fund Reform to Transform Cash Management

The FINANCIAL — Money market fund reform will have its largest impact on institutional prime and municipal money funds while fundamentally changing cash management for corporate treasurers, according to Fitch Ratings. The new rules will reshape the landscape of liquidity products for cash investors.

The Securities and Exchange Commission Wednesday released its final money fund reform ruling. The new rules state that institutional prime and municipal money funds must use floating net asset values (NAV), rather than the stable NAV of $1.00 that has been the standard since the industry’s inception and a significant reason investors utilized the funds. Fund managers and their clients will need to make sizable investments in operations to handle floating NAV.

In addition, the rules allow fund boards to impose liquidity fees and gates. Nongovernment money funds (including institutional prime and municipal) will be allowed to charge a liquidity fee of up to 2% on redemptions, and impose redemption gates, if a fund’s weekly liquidity falls below 30% of total assets, according to Fitch Ratings.

Although opposition to the proposed rules has focused mostly on the floating NAV, we believe that fees and gates on redemptions may be just as problematic for many corporate treasurers. Corporations rely on money funds to invest cash for routine business expenses like payroll, and the inability to access this cash if a gate is imposed raises operational concerns.

Importantly, the new rules will require money fund users to update investment policies, whether to approve investments in floating NAV, or to add alternative investment options. This can be a complicated process that will require a careful, strategic approach. We understand many investors have been waiting for clarity on the new regulations before making investment policy changes. The SEC set the implementation period for the main aspects of reform at two years, giving money managers and shareholders time to adjust to the new regulatory regime, according to Fitch Ratings.