On August 13th I had the opportunity to participate in a joint Boston Financial/DST Systems webinar on Money Market Reform moderated by Craig Hollis, Chief Compliance Officer for Boston Financial. Joining us from DST was Nick Horvath, Regulatory Solutions Officer. We were pleased to have over 130 clients in attendance, reflecting the significance of these changes and the potential impacts across the industry.
Craig provided background on the evolution of money market reform over the last five years and reiterated the reform’s objective to increase the resiliency of money market funds to economic stress and reduce the risk of runs on the funds. He highlighted some of the concepts from the 2010 proposal, including improved liquidity, higher credit quality and shorter maturity limits. The early proposals also included the requirement for money market funds and their transfer agents to support processing of transactions at a price other than $1.00 per share.
Nick provided an overview of the reform, noting that the final rules are very similar to the earlier proposals by the FSOC and the SEC. The major components are:
- Floating NAV for institutional money market funds
- Rounding a floating NAV to the fourth decimal place
- Liquidity fees and redemption gates
- Supplemental reforms around transparency, stress testing and diversification
Nick mentioned that Jeff Cook, Director for Regulatory and Compliance at DST, will be publishing a detailed systems and operations focused interpretation of the final rules in the coming days.
After the overview on the regulation, we turned our attention to fund and operational impacts. I spoke to how the reform rules will influence product development and fund rationalization to meet the regulatory requirements and the investment needs of fund shareholders. In order to maintain a stable NAV, funds will be required to adopt and implement policies and procedures reasonably designed to restrict beneficial ownership to a natural person. This becomes a bit more complex as you consider, for example, accounts established as retirement plans, college savings plans, Keogh plans, and ordinary trusts. Omnibus accounts present further challenges since funds will need to establish protocols with their intermediaries to ensure fund policies are followed, in order to maintain a retail designation.
Although all money market funds are impacted by the reform to some degree, institutional funds will bear the brunt of the changes due to the floating NAV requirement. Even with the potential for tax relief for reporting gains and losses, some institutional investors may shift to government funds to maintain a stable NAV.
During the session we asked our webcast participants a few questions. First, did they plan to offer an institutional prime money market fund with a floating NAV. 26% said yes, 32% said no, and 42% replied to be determined.
We also asked if they plan on using something other than a $1.00 NAV. 93% said they would be using a $1.00 NAV, 7% indicated using a $100.00 NAV.
The floating NAV for institutional funds also jeopardizes the liquidity feature institutional investors rely on today. We believe there will be a market driven demand to support some form of intraday liquidity. To provide for same day settlement, intraday pricing must occur. This is dependent on the transfer agent reporting activity to the fund accountant so the NAV can be calculated and then returned to the transfer agent to be applied to the appropriate transactions.
We are working collaboratively with DST, State Street and our clients to define the framework of how a floating NAV money market fund would operate and provide same day liquidity. We asked our webcast participants if they were to provide intraday liquidity in a floating NAV money market fund, how many intraday pricing and settlement cycles were they considering. The results are represented in the following chart.
Nick also presented a high level assessment of the system impacts driven from the regulations. The most significant of the changes include managing multiple intraday prices and supporting an NAV with 4 decimal places.
This was the first in a series of client webcasts devoted to money market reform. We plan on hosting additional ones to delve deeper into system requirements, tax reporting and operational impacts. What is the impact of money market reform on your firm? Post a comment and share your thoughts.