The Securities and Exchange Commission (SEC) rules on floating net asset value (NAV) come into force on 14 October and are set to overhaul the money-market fund (MMF) industry, which is reportedly worth $2.7 trillion. This is what treasury needs to know about the new rules.

No one wants risk at the moment

Under the new rules, prime institutional money-market funds, which invest in short-term corporate debt, must allow the value of their shares to fluctuate to reflect the current market price of their underlying holdings. The value of prime MMF share prices has until now been kept at a fixed rate of $1, regardless of changes in interest rates and market or credit conditions. The floating rate will mean that investors could gain or lose – introducing an element of risk that many corporate investors are likely to find unpalatable.

This has led to a capital shift, with many investors moving money out of the prime MMFs, to money funds that invest exclusively in government bonds, which are not subject to the new rules and will maintain a fixed NAV. More than $280 billion has been moved out of prime MMFs in the past six months, according to the Investment Company Institute, despite the fact that government funds offer lower rates of return.

The Wall Street Journal (WSJ) points out that, to reassure investors, MMFs have been required to publish their per-share net asset values daily, based on market prices. And these daily values show that there is little fluctuation on either side of the $1 value.

Other concerns: fees and restrictions

However, while the introduction of the floating NAV has grabbed most of the headlines regarding the new SEC rules, the redemption fees and liquidity restrictions are a greater concern.

The rules, which were passed in 2010 as a response to runs on money funds during the 2008 financial crisis, also introduce special fees and redemption restrictions. For example, non-government MMFs will be able to apply a 2 per cent redemption fee if a fund's level of weekly liquid assets drop below 30 per cent of total assets.

Money funds that could be subject to exit gates and redemption fees are far less attractive to fund companies, according to a Jerry Klein, head of the corporate cash management group at HighTower Treasury Partners, quoted in Investment News. 

Decline in MMF use is long-term, not just about NAV

A number of funds have also ceased to exist since the floating NAV rules were announced, with further exits from the market expected. But the Association of Financial Professionals (AFP) notes that investment in MMFs (both government and prime) has been declining since 2008. The association's surveys suggest that corporate cash held in bank deposits has more than doubled since the financial crisis, while the percentage of surplus cash invested in MMFs has fallen from 39 per cent to 16 per cent. The AFP's Tom Hunt writes that “it is unlikely that there will be a large change in balances from prime from our short-term/operating cash investors”, saying that it's more likely that movements are more likely to come from other types of short-term institutional investors.