ICI Survey: Institutions Dislike Money Market Reform Proposals

Institutional investors say they will sharply reduce their use of money market funds if the Securities and Exchange Commission (SEC) adopts either a net asset value float, a redemption holdback or capital requirements on the industry, according to a report released by the Investment Company Institute.

That could cost money market funds hundreds of billions of dollars in assets, according to Treasury Strategies, author of the report for ICI, called  Money Market Fund Regulations: The Voice of the Treasurer.

Institutions currently account for about $1.3 trillion of the $2.7 trillion held in money market funds, according to the ICI and Treasury Strategies. If a floating net asset value were to come to be, institutions would pull 61 percent of their holdings in money market funds, according to the study.

That would mean more than $700 billion would be pulled out of money market funds, according to Cathy Gregg, a partner at Treasury Strategies.

That could severely disrupt the industry, calling its survival into question, she suggested.

And commercial banks, she said, are not ready to take the additional deposits. They are "awash in liquidity" and can't find productive uses for the assets they already hold. The additional funds also would force them to hold more capital and pay higher federal deposit insurance fees.

The Treasury Strategies study shows that a majority of treasurers would either scale back their use of money market funds or discontinue use of them altogether if any of these three regulatory concepts went into effect. The ICI commissioned the survey, which was conducted by Treasury Strategies, Inc. The consulting firm polled 203 corporate treasurers, government and institutional investors.

In particular, the report’s results show that:

If money market fund NAVs were required to float:

• 79 percent of respondents would either decrease their use or discontinue altogether.

• 61 percent of corporate money market fund assets would move to other investments if this concept were adopted.

2. If money market funds were required to institute a 30-day holdback of 3 percent of all redemptions:

• 90 percent of respondents would either decrease their use or discontinue altogether.

• 67 percent of corporate money market fund assets would move to other investments if this concept were adopted.

3. If money market funds were required to maintain a loss reserve or capital buffer:

• 36 percent of respondents would either decrease their use or discontinue altogether when the question did not suggest that investors would suffer any reduced yield.

• In a follow-up question directed to the 64 percent who initially stated they would continue or increase their usage of money funds, 84 percent of the follow-up respondents indicated they would decrease or stop their usage altogether if the capital buffer were to reduce the yield of the fund by 5 basis points.

• The report makes no estimate on the decline in assets if the SEC imposes a capital buffer on money market funds. However, the number of treasurers using money market funds is expected to decrease dramatically should this concept be adopted.

The Institute will file the study as part of a new comment letter to the SEC. Treasurers are crucial users of money market funds: institutional share classes account for $1.7 trillion, or 65 percent, of the $2.7 trillion in money market funds asset as of the end of February 2012. Key study findings below.

“The message from treasurers is clear. While they value money funds, they will simply abandon the instrument should any of these concepts be adopted. The potential implications of such a widespread run away from money funds are staggering,” stated Gregg.

Tom Steinert-Threlkeld contributed to this report.