While Better Than Expected, Money Market Reform Will Affect Administrators

Despite the potential market significance of the U.S. Securities and Exchange Commission’s (SEC) 3-2 vote in favor of institutional money market fund reform, the rulings will not have as dramatic an impact on fund administrators as they might have, had all the proposals gone through.
By Jake Safane(2147484770)
Despite the potential market significance of the U.S. Securities and Exchange Commission’s (SEC) 3-2 vote in favor of institutional money market fund reform, the rulings will not have as dramatic an impact on fund administrators as they might have, had all the proposals gone through.

Prior to the vote, the SEC had considered amendments to Form N-MFP, the form used to report fund holdings, which could have drastically increased the workload of administrators if the agency approved proposals such as requiring lot-level reporting, which means separating reporting based on when each group of securities was purchased.

“At the low end that might have been about 20 times more data, and it could be more like 50 or 60 times depending on the fund, which would have required a much more impressive amount of effort to be prepared from a data processing point of view,” says Paul Soltis, North American market manager at fund administration technology provider Confluence. “There were some rather good comments around that to the SEC, and to their credit, they responded by removing that requirement. That’s not to to say that the filing has gotten any easier; it’s quite the opposite. Even without the lot-level reporting, there are a number of additions that are going to make an already cumbersome filing a little bit more difficult.”

The SEC will still require changes such as requiring fair value hierarchy reporting for each position, meaning breaking down securities’ valuation into one of the three levels used in U.S. Generally Accepted Accounting Principles (GAAP). Another example of rule changes includes weekly reporting on subscription redemptions, although the form’s filing will still be a monthly requirement.

In order to meet these new requirements, Soltis has two recommendations: “Step one, make sure you’ve got a plan in place so that your platform will be ready. Step two, know where you’re going to get the data,” he says.

As part of the first step, he says, administrators should make sure their platforms can accommodate new data fields, and those who still use Excel may want to consider using these changes as an opportunity to move to an automated platform. As for sourcing the data, administrators likely use some of it for other functions such as semi-annual reports, so they should make sure the data is more readily accessible for the more detailed reporting.

Aside from the Form N-MFP changes, arguably the most noteworthy new requirement is the move to the floating NAV [net average value?], but calculating the more precise figure should not be much of a challenge or change the dynamic between funds and their administrators.

Scott FitzGerald, executive vice president and head of sector solutions sales for the Americas at State Street, says that moving to the floating net asset value (NAV) will not cause a strain on an administrator like State Street, for instance, as they have been preparing for the changes for some time and already have the automation in place.

He also notes that the new requirements are unlikely to change fund managers’ accounting decisions. “The majority of our asset management clients already outsource their accounting functions, and I don’t see that changing with money market reform. It’s a big investment and undertaking. For operational and back office functions, he says, managers should look at whether they move the dial and add value to the performance or distribution of funds. “If the answer is no, it might be worthwhile to look at outsourcing as a solution.”

Even if the funds do outsource the accounting, there are still tax issues to resolve related to the more detailed NAV calculation, although the Internal Revenue Service (IRS) has proposed a simplified accounting method for gains and losses on redemptions by aggregating the transactions over a period.

“I think it’s predictable that the tax and accounting issues will take a while to work out; I think they will work it out, but these are not easy issues…If it’s not done efficiently, it will add complexity and cost,” says Bob Pozen, senior lecturer of business administration at Harvard Business School and former chairman of MFS Investment Management.

Plus, the floating NAV could spook some investors. “I do think institutional money funds will lose some money; some institutional investors will not like that [NAV change],” says Pozen.

Other than sorting out some of these issues and tweaking the rules over time, the U.S. is probably done with money market reform says Confluence’s Soltis. However, there could be changes to traditional mutual funds, he says. “There’s no reporting on that like you have with PF and N-MFP, and there is that potential that in some point in the near future, that there’s going to be an N-MFP type regulation for all mutual funds to fill in that gap of the SEC’s data collection.”

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