New regulations entered into force at the end of last week requiring a floating net asset value for institutional prime money market funds in the US.

The changes, ushered in by the SEC, also require that the funds' boards to consider imposing liquidity fees and redemption gates if weekly liquidity falls below 30%.

Investors who use money market funds as a cash management vehicle are impacted, as well as corporates, financial institutions, municipalities and others that use them as a source of short-term funding.

Ahead of the legislation, Fitch Ratings noted “massive shifts” out of prime funds and a move to government funds as corporates and institutional investors altered their cash investment strategy.

Jim Santoro, head of liquidity & investment advisory at BNP Paribas Americas admits the combination of several factors associated with the reform including, floating NAV, fees and gates influenced some corporate clients to seek product alternatives.

“Invariably, any instrument that introduces a requirement to mark-to-market a net asset value, even if only required on a one-off or infrequent basis, may increase the amount of accounting work required at an institution,” Santoro told Global Investor/ISF.

“This may influence some corporate clients to seek alternatives due to resource or investment policy constraints."

Depending on the current construct of a client’s investment policy, Santoro says corporate clients that continue to utilise institutional prime funds as part of a liquidity management solution may look to add or alter language regarding floating asset value instruments.

“Those seeking diversification or alternatives, they should examine/review counterparty limits concerning both products and providers to ensure enough flexibility in placing cash.

“Irrespective of regulatory change, regularly revisiting investment policies to ensure that they provide the right level of flexibility in terms of liquidity management while mitigating and/or providing for the right level of risk is an important discipline for all corporate clients.”

With respect to money market reform, Santoro says that there certainly remains a universe of corporate clients that continue to enjoy the benefits that institutional prime funds offer and they have remained in this instrument.

“For the universe of clients that have sought alternative products, while many instruments provide some substitute characteristics (e.g., corporate commercial paper, repo, separately managed accounts, etc.), one of the obvious choices is government/treasury money funds, instruments that continue to provide a stable NAV and do not have redemption fees or gates requirements.”

In addition, due to the similarities of daily liquidity and ability to transact until late in the day, he notes that clients have increased the usage of interest-bearing demand deposit accounts, especially where a high level of comfort with a bank’s credit ratings and where remuneration is meaningfully more attractive than government/treasury money funds.

More changes in the coming months?

While the current reform has been forthcoming for a couple of years, the BNP Paribas execcutive points out that corporate clients will continue to revise and refine their respective liquidity management in response to the reform and the changes in yield for certain products that the reform may bring about. 

“With the fluidity of a changing interest rate environment both domestically and globally, the introductions of new products to meet an ever changing regulatory landscape and ever evolving corporate client liquidity needs, one constant in liquidity management is that change is inevitable,” Santoro says.

“Seminal events like money market reform always provide another opportunity to remind corporate clients of the need to have a well thought out and regularly reviewed investment policy as well as a well-defined strategy for one’s liquidity management. 

“And a key point to emphasize in light of where we are at with this reform is that it is never too late to review one’s investment policy and Liquidity strategy in striving to optimise cash.”