On Wednesday, January 27, after careful deliberation and review of approximately 120 comment letters (including SVB Asset Management's), the U.S. Securities and Exchange Commission (SEC) adopted new regulatory requirements for money market mutual funds. Once final, this new set of rules would govern the ability to offer a steady $1.00 Net Asset Value (NAV) and would include a variety of new requirements designed to strengthen the stability of money funds in times of crisis.
SVB Asset Management views these developments as substantially positive for money fund investors. The Money Market Fund Reform program promotes greater transparency for investors, and it reduces the risk- (and of course return-) taking ability of money fund providers. Renewed investor confidence in the fund industry will solidify its unique and important role as a provider of yield on immediately liquid cash. The reduced risk profile of funds will also make money funds more desirable for those who seek to increase the return on their cash holdings, while providing safe but diversified portfolio management.
The funds we utilize for our clients are already in compliance with several of the newly proposed changes and we believe they are well-positioned to be in compliance with all SEC regulations at or before the yet-to-be-announced implementation date.
The new rules would be effective 60 days after their publication in the Federal Register, with the mandatory compliance with some of the rules to be phased in during the year. We expect that the publication will take place within the next few days.
With more restrictive rules, we expect that money market fund yields will be diminished in any given rate environment, relative to what they could have earned under the old rules. This is a largely separate phenomenon from the historically low-to-no-yield situation money funds are encountering today, which is driven ultimately by the 0-0.25 percent Fed Funds interest rate environment and a preference towards safety and liquidity. To increase return, investors should focus on creating proper asset allocation, combining the functionality and liquidity of money funds with safe short-term investments for idle cash. For a detailed discussion on how your cash portfolio may benefit from an active management approach; please refer to our advisory titled "Creating Value with Active Cash Management".
Many of the changes just proposed met our expectations of where the SEC would make changes. The main changes include:
A Focus on Providing Liquidity:
- New minimum daily and weekly liquidity standards – Funds would be required to maintain a minimum 10 percent of assets in daily liquid assets and 30 percent of assets in weekly liquid assets. Effect: greater liquidity, lower duration based yield.
- More stringent maturity limits – Maximum weighted average maturity is lowered from current 90 days to 60 days. Effect: greater liquidity, lower price volatility, lower duration based yield.
- New weighted average life (WAL) restriction – WAL utilizes a floating rate security's final maturity instead of the next coupon or reset day. The maximum WAL would be 120 days. Effect: greater liquidity, lower price volatility, a new limit on the ability of funds to invest in higher yielding long-term floating rate securities.
A Higher Standard for Understanding Credit Quality:
- Tier-2 securities – More stringent restrictions on the amount of Tier-2 securities permitted, and a shortening of the permitted maturity from 397 days to 45 days for Tier-2 securities. Effect: lower risk, removing much of the ability of funds to buy higher yielding Tier-2 securities.
- Rating agencies – Fund providers would need to continue to perform an independent credit analysis, and to utilize ratings from at least four Nationally Recognized Statistical Rating Organizations, for the purpose of satisfying minimum rating agencies. (As such, the credit rating serves as a screen on credit quality, but it may never be the sole factor in determining investments.) This will also promote competition among the rating agencies. Effect: presumably lower risk via reduced reliance on outsourced credit ratings.
Higher Operational Transparency:
- "Know Your Investors" procedure – Fund managers will have to establish procedures in order to identify potential large redemptions from their investors, and have sufficiently liquid securities in place to meet these needs. Effect: greater stability via better manager understanding of different cash flows from "stable" investors versus "hot money" investors.
- Improved disclosures – Monthly disclosure of money market fund portfolio holdings on fund Web sites and detailed reporting of information to the SEC within five business days from month end. The information provided to the SEC, which would include mark-to-market valuations of a fund's net assets, will be made available to the public after a 60-day delay. Effect: greater stability via greater investor transparency.
- Affiliate support – The rules would expand the ability of affiliates to purchase distressed assets from funds in order to protect a fund from losses. The current rule allowed for such support only after a ratings downgrade or default. Effect: greater stability for funds with diversified parent companies via increased flexibility to remove troubled assets from their portfolios.
Investor redemption protections – The rules requires funds to be able to process electronically at a price other than $1 per share, to facilitate share redemptions if a fund were to "break the buck". If the fund breaks the buck and decides to liquidate, the fund can suspend redemptions to allow for an orderly liquidation. Effect: greater structural stability in times of market crisis.
This latest action was the first step taken by the SEC for the Money Market Fund Reform program, and more regulatory changes for money funds may be forthcoming. The SEC continues to work with the President's Working Group on Financial Markets on several other possible changes which require further review and study. SVB Asset Management continues to monitor the developments closely, and we will keep you abreast on any notable changes in the landscape.
SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value.
This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.