The new rules for money market funds in the United States will likely lead to a variety of knock-on effects, including shifts in strategy by both fund managers and investors, and possible industry consolidation, says Moody’s Investors Service in a new report.
The U.S. Securities and Exchange Commission (SEC) voted to adopt a series of amendments to the rules for the U.S. money market fund (MMF) industry on July 23. These measures “are a significant change” for the industry, says Moody’s.
“The new rules represent the biggest changes to the MMF product characteristics since the inception of MMFs in the 1970s, with wide-ranging implications,” said Moody’s managing director, Yaron Ernst. “Changes include floating net asset values (NAV) for prime and municipal money market funds held by institutional investors, and redemption gates and liquidity fees for all non-government money market funds.”
The result, Moody’s suggests in its report, will likely lead funds to alter their investment strategies. Moody’s expects the introduction of price volatility will lead fund managers to more conservative investment behaviour, in order to limit investor exposure to daily price fluctuations.
It also says that the tax treatment of these funds will likely change to accommodate floating NAVs. “The SEC has confirmed there will be new tax guidance proposing new regulations that will allow floating NAV investors to use simplified tax accounting methods to track gains and losses, and is likely to be approved,” Moody’s reports.
Certain other features of the rules, such as redemption gates and liquidity fees are being left to the discretion of fund boards, but Moody’s says that they “are unlikely to be implemented, absent extreme conditions, as they would drive investors away from sponsors utilizing these measures.”
It also expects the changes to cause some investors to shift away from MMFs and to alternative liquidity products to avoid floating NAV pricing, and the risk of gates and fees. “These changes also only add to the challenges that smaller to medium-size sponsors are facing already, and it is likely that some of them will exit the industry,” it concludes.