Moody's Investors Service has warned that up to 50 per cent of investor assets are likely to leave US prime money market funds (MMFs) ahead of major regulatory reforms in October.

The sector has already seen sizeable outflows in the past six months, the Financial Times reports, although this trend saw some respite in the third week of April, when net inflows took the total assets held in prime money markets up to $1.2 trillion, which is still down from $1.46 trillion in October 2015.

SEC's MMF rule change

The US MMF rule change on 14 October 2016 will see the introduction of variable net asset values (NAV) for institutional prime and institutional municipal MMFs. “We expect US prime fund managers to limit investments in securities with maturities past October as they proceed cautiously in anticipation of the switch to floating net asset values,” said Rory Callagy, senior credit officer at Moody's.

The rules are designed to reduce the interest rate, credit and liquidity risks of money market fund portfolios. According to the SEC, “the new rules require a floating NAV for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets and provide non-government money market fund boards new tools – liquidity fees and redemption gates – to address runs.”

Fluctuating rates could deter investors

US prime money market funds are likely to be less attractive to corporate treasurers when the floating NAV rules come into effect, as the floating rate will introduce a further element of volatility and risk. Until now, MMFs have been seen as a safe and solid investment option for short-term cash parking.

However, demand for euro prime funds is expected to be resilient despite record low yields and uncertainties around Brexit, perhaps buoyed by a lack of comparable investment alternatives, according to Moody's. The ratings agency expects these funds to be a safe haven ahead of the Brexit referendum in June.