An Institutional Cash Distributors survey has revealed that a majority of respondents are in favor of a two-tiered system with enhanced protection for stable NAV funds. This would allow investors to select the types of MMFs that best balance their appetite for risk and their preference for yield.
The majority of respondents were supportive of a private emergency liquidity facility and some form of insurance for MMF shareholders. The other reform options were met with skepticism, with the most resounding opposition directed against floating NAVs.
The MMF industry has functioned almost flawlessly for more than 40 years and none of the reform proposals would have prevented the effects of the run that occurred in September 2008, says Ryan Seghesio, CFO and treasurer of California ISO and ICD client survey respondent. Investors understand the risk despite the MMF industrys stellar performance. Reports like these only continue to create false safety nets that do more harm to investors than good.
Conducted in response to the November 3, 2010, SEC request for public comment on the regulatory options presented by the PWG on Financial Markets study of possible MMF reforms, the survey provided a platform for ICDs clients to voice their opinions from the investor side of the marketplace.
The key findings from the survey include:
– The reform option that received the most favorable response was the Two-Tiered System with Enhanced Protection for Stable NAV Funds, which garnered 44% agreement and 26% disagreement. When asked which proposal would be the most helpful, the highest percentage (28%) of respondents selected this option.
– Floating NAV reform elicited the strongest negative response, with 62% of survey takers disagreeing with the reform option and only 22% agreeing. When asked separately what was the least helpful option an overwhelming 44% selected Floating NAV. The surveys second least helpful reform option, Mandatory Redemptions, received only 20% of the respondents votes.
– The Mandatory Redemptions In Kind option was received poorly with 54% respondents disagreeing and 22% agreeing.
– Respondents reacted strongly against Special Purpose Banks with 60% disagreeing and only 10% agreeing.
– The Private Emergency Liquidity Facility option was well received with 36% agreeing and 18% disagreeing.
– Respondents were not in favor of a Two-Tiered System with Stable NAV Reserved for Retail Investors with 48% disagreeing and 22% agreeing.
– Respondents were slightly in favor of Insurance for MMFs with 38% agreeing and 34% disagreeing.
– The Enhanced Restraints on Unregulated MMF Substitutes was nominally rejected with 30% disagreeing and 24% agreeing.
The findings are based on responses from ICDs clients, with more than 50 corporate treasury respondents taking part. The firms client base includes 26 of the 2010 Fortune 500 companies, eight of which are in the 2010 Fortune 100.
The SEC has worked productively with the private sector to bring about important gains in making MMFs more secure, specifically the changes in May of 2010 that increased fund liquidity, shortened the Weighted Average Maturity (WAM) and required disclosed holdings, says Jeff Jellison, CEO of ICD North America. Our clients feel that adding flexibility and some form of insurance may provide additional safety and liquidity improvements with their investments, which meets the primary objectives of corporate treasury.