Moody’s Says New Money Fund Rules May Reshape IndustryChristopher Condon
New rules being considered for U.S. money-market mutual funds will make them safer for investors while forcing some smaller providers out of the business, Moody’s Investors Service analysts said today in a research report.
The U.S. Securities and Exchange Commission may impose a floating share value on money funds that buy corporate debt and cater to the largest clients, known as institutional prime funds, a person familiar with the matter said May 10. Such a step would apply to funds holding $939 billion, or about 37 percent of U.S. money-fund assets, according to Westborough, Massachusetts-based research firm iMoneyNet.
New rules being considered will “lead to a reshaping of the industry, as some funds close or consolidate, and some of the smaller money-market fund managers either exit the business or reassess their business models,” according to the report.
Regulators have debated how to make money funds more stable since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. The money-management industry has fought the idea of floating the share price of the funds. This year, several companies have urged regulators to limit any rules to prime funds, or those that buy corporate debt, while other firms have lobbied for an even narrower application to only institutional funds.
The closure of the Reserve Primary fund triggered a run on institutional prime funds that helped freeze global credit markets. Luis A. Aguilar said he expects that he and fellow SEC commissioners will vote next month on proposed new rules.
The Moody’s study said the potential transformation of some funds to a floating share value from a constant value “would have a significant impact” on cash-management products available to investors, investor preferences and industry composition.
Moody’s analysts said they didn’t know how broadly or narrowly a floating value may be applied.
Money funds in the U.S. typically maintain a constant $1 share price by booking securities at their expected value at maturity as long as the market value remains within half a cent of $1. The funds distribute investment earnings in cash or new shares.
Some regulators have argued a floating value that constantly reflects the market price of holdings would make funds less susceptible to runs, or large-scale investor withdrawals.
The Moody’s report said funds are also under pressure from low interest rates and a diminished supply of highly rated investments. The combination may push investors into alternatives to traditional money-market funds, such as bank accounts, separately managed accounts and riskier short-term bond funds, the report said.