Over the past few years, much has been analyzed, discussed, and written about the SEC Money Market (MMF) reforms that went into effect in the fall of 2016. For those unaware, here is a good link highlighting the summary of the reforms written by Morgan Stanley, along with an easy to understand detailed breakdown on page two.
The new SEC rules regarding MMF’s were passed quite some time ago (2010 and 2014), with the requirement for managers to fully implement the changes by 2017.
Despite these rules being now fully in effect, a stream of dissension and misinformation about these rules has found its way in the public marketplace. The dissension almost always focuses on two basic themes. One, that the SEC, as well as the Federal Reserve, overstepped their role in passing the new rules. Two, that the effects of the new rules have caused harm to investors, credit markets and the financial system as a whole. The readers of this continuous “sky is falling” MMF narrative need to be aware that the sources of these press releases, white papers and analysis are almost always coming from either the fund managers or MMF platforms. These managers and platforms have lost considerable assets, and are struggling to recapture the revenue stream lost as a result of these changes. A Forbes article titled “Fidelity, Federated Lead Charge Against Money Fund Reform” highlights just what is at stake for the industry.
While the MMF reforms implemented were extensive, the SEC was certainly thorough in their research of the funds over past decades, and was thoughtful in crafting the new rule changes. All the research, proposals and fine print on the final changes can be found on the SEC site for MMF’s.
HERE ARE SOME OF THE FACTS THE Money Fund INDUSTRY WILL NEVER DISCUSS WITH YOU
Reserve MMF Fund Fails (2008)- Following the collapse of Lehman Brothers in 2008, the Reserve Primary Fund, the nation’s oldest money market fund, held $785 million in Lehman Brothers debt on the day Lehman went bankrupt.
Over the next two days, the $62 billion fund faced $40 billion in redemption requests. The fund “broke the buck” and investors spent years attempting get their money back.
Investors Rush the Gates– During the week of September 15, 2008, investors withdrew some $310 billion (or 15%) of assets from prime money market funds. A rush to the exit for shareholders of the MMFs created systemic financial stress on the entire industry. This article from the New York Times Post-Lehman,Money Market Fund Protections Still Weak explains the situation in the market at time of the mass redemptions.
US Government Bailout of MMF Industry– Sept 30. 2009. the Treasury Department backstopped US MMF industry to prevent further fund failures. Government Bailout of the industry takes place.
RESERVE FUND NOT THE ONLY FUND TO FAIL- “31” Money Funds FAILED
According to in-depth research done by the Federal Reserve, “The Stability of Prime Money Market Mutual Funds: Sponsor Support from 2007 to 2011“, a different picture of the fragility of Money Funds under times of stress emerges. The Federal Reserve has the responsibility to provide the nation with a safer, more flexible, and more stable monetary and financial system. Here is a quote from the articles summary page:
“This paper presents a detailed view of the non-contractual support provided to MMMFs by their sponsors during the recent financial crisis based on an in depth review of public MMMF annual SEC financial statement filings (form N-CSR) with fiscal year-end dates falling between 2007 and 2011. According to our conservative interpretation of this data, we find that at least 21 prime MMMFs would have broken the buck absent a single identified support instance during the most recent financial crisis. Further, we identify repeat instances of support (or significant outflows) for some MMMFs during this period such that a total of at least 31 prime MMMFs would have broken the buck when considering the entirety of support activity over the full period.”
FURTHER ANALYSIS OF THE MANAGERS PROPPING UP AND SUPPORTING THEIR OWN MMF’S OVER THE YEARS
We quote again from the Federal Reserve Risk and Policy Analysis Unit:
“The data suggest that during the period from 2007 to 2011, sponsor support was frequent and significant to many of the supported funds. Direct support alone totaled at least $4.4 billion, provided to at least 78 of the 341 funds reviewed. Support for these 78 funds occurred in 123 instances with 32 funds receiving support in multiple reporting periods. “
Please see specific support by individual MMF sponsors in the chart below:
WHAT NEW RISKS SHOULD CORPORATE TREASURERS CONSIDER AS THEY EXAMINE WHERE TO INVEST CORE AND OPERATING CASH?
Prime Funds– “Gates and Fees”. Despite the industry for years telling institutional investors that Prime Funds will continue on and with a solid investor base the truth is the money fund rule changes were a death sentence to the product. As of 2017 over1 trillion of assets have left Prime Funds.
Treasury and Government Funds– The recipient of most of the Prime Fund defections, but investors should be aware that MMF Boards may choose to impose “Gates and Fees” upon times of stress. Given the criticism and overhaul of mutual fund boards after the last financial crisis, one would assume these boards will be much more active and inclined to use their executive mandates during the next time of extreme market stress.
MMF Portals– Risks present in “Omnibus Settlement” and “Broker-Cleared” transactions should be reviewed and understood by investors. Additional new concerns such as Cyber Security threats should be understood and examined for web based transactional platforms. A breach of your web or cloud based investment portal could in turn make your enterprise’s network vulnerable to hackers.
About Scott and Jim
Scott Fox and Jim Etten both worked inside the institutional asset management business from 2005 to 2012. Their view and experience is unique due to the fact that they worked with fund companies and in the portal industry. The misinformation that was prevalent in the markets and from the industry led them to create Copper River Advisors in order to work in an open architecture model as an RIA firm and in a fiduciary role for their clients.