NEW YORK--(BUSINESS WIRE)--Money fund reform as currently proposed could lead to some dislocation in the industry, including outflows from US institutional prime money funds that cater to corporate treasurers and are particularly targeted by the SEC for reform, according to Fitch Ratings. In response, some fund managers are repositioning product offerings to capture potential outflows and take advantage of changes to how investors might approach cash management.
Potential operational difficulties stemming from the proposed reforms could also overwhelm smaller corporate investors who may sharply reduce MMFs as a cash management tool. The reform proposal would impose additional costs on investors by requiring them to upgrade systems to reflect structural changes in money funds. In addition, the proposal's accounting and tax considerations could prove a significant burden if not resolved. Money market fund flows are stable as investors wait for the final rules; Fitch expects any outflows to be gradual given the proposed long implementation period.
Fund managers are taking divergent approaches to the upcoming regulatory reform, with some being proactive while others adopting a more measured stance. Some managers have instituted significant client outreach and launched alternative liquidity products, including short-term bond funds, new government money funds, and floating net asset value money funds. Managers have also encouraged clients to move cash into separately managed accounts to capture some of the potential outflows from institutional prime money funds. For example, Invesco announced last week the launch of the Conservative Income Fund, a new ultra-short bond fund that, like money funds, is focused on the short-term market but can take more credit and interest rate risk.
On the other hand, some fund managers are relying on a likely long implementation period for reforms (1-3 years) to react once rules are finalized. Some money managers have told Fitch they are not launching any new products until after they have had time to review the final proposal.
Any proposed reform is likely to fundamentally alter the choice of liquidity products for cash investors. Importantly, both managers and some corporate clients have been focusing on reviewing the corporate clients' cash investment guidelines to ensure flexibility with the new paradigm in money markets.
The SEC in June voted to propose two reform alternatives for the industry, but the rule hasn't been finalized. SEC Chair Mary Jo White said in May that new rules will be out soon while studies released for public comment by the SEC in March to refine key points of the original proposal also suggest progress. Still, recent media reports note disagreements among the SEC's commissioners that could further delay the final rule.
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