OLDWICK, N.J.--(BUSINESS WIRE)--New rules governing money market mutual should have minimal financial impact on the insurance industry as a whole, although many companies may need to reassess strategic liquidity planning based on exposure levels, according to a new A.M. Best special report. In 2014, the U.S. Securities & Exchange Commission adopted amendments to the rules that govern money market mutual funds, which in October 2016, will go in effect.
The Best’s Special Report, titled, “Money Market Reforms—Overall Insurance Industry Impact Expected to be Minimal,” states that the new rules require a floating net asset value (NAV) for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with the changes in the market-based value of fund assets. In addition, the new rules provide the boards of non-government money market funds new tools to address runs in the form of liquidity fees and redemptions gates, which can be used in conjunction during times of duress.
With a floating NAV, institutional prime money market funds (including institutional municipal money market funds) are required to value their portfolio securities using market-based factors and sell and redeem shares based on a floating NAV. These funds no longer will be allowed to use the special pricing and valuation conventions that currently permit them to maintain a constant share price of $1.00. While floating NAVs will result in taxable gains and losses, the Internal Revenue Service is proposing new rules to address the treatment of gain/loss calculations and reporting, as well as wash sale rule situations.
A further change stemming from the new rules is the ability of fund issuers to apply a liquidity fee against redemption proceeds, which would be retained by the fund. Such fees are intended to be a disincentive for shareholders to redeem shares of a fund in distress, and also to help bolster the liquidity levels in a fund by infusing the fund with cash withheld from redemption proceeds.
According to the report, the insurance industry’s exposure to Class 1 Money Market Funds, which contain a mix of government and non-government funds and will likely be affected by the new rules, has declined 11.7% to $40.4 billion in 2015 from $45.7 billion in 2010. This largely was driven by a 36.2% decrease in the property/casualty segment from 2010-2011. However, since the new reforms were announced in 2014, the property/casualty and health segments have seen allocations increase 26.8% and 11.0%, respectively, while the life/annuity segment has decreased its holdings by 10.3%.
A.M. Best believes prime funds likely will continue to play a vital role in serving many insurers’ cash and liquidity needs; however, companies may need additional planning as the hourly liquidity benefit may now be lengthened to a few hours or following day depending on the transaction time. Overall, A.M. Best urges companies to be aware of the changes and potential challenges in accessing their historically very liquid money market funds.
To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=254518.
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