Ahead of new money market regulations taking effect in October 2016, many cash and liquidity investors are examining the potential impact on their investment practices. The biggest change, in our view at Goldman Sachs Asset Management, is a requirement that institutional prime and municipal money market funds, which invest mostly in corporate debt securities and tax-exempt securities, respectively, adopt a floating net asset value (NAV), shifting the industry away from a stable $1 price per share. These funds will also be potentially subject to liquidity fees and redemption gates, which limit investors ability to access money and may raise the possibility of investors being charged.
But there is another, less frequently discussed change whose implications could be surprising for some liquidity investors: the introduction of multiple intraday price points, multiple NAVs, for many prime funds. Multiple NAVs are not a regulatory requirement, but rather they are an attempt by the money market industry to preserve the same-day liquidity benefits that prime funds have historically offered.
Intentions aside, we think that this change transforms prime funds into a plan-ahead vehicle instead of the traditional same-day liquidity role they have long played. We believe that the implementation details of these funds will be too complex for some investors at least at the outset and that the new features will drive at least some to use government funds, the features of which will remain unchanged by the new rules.
Under the old money market rules, investors generally could access money in prime funds on an hourly basis. In multiple-NAV prime funds, however, a need for precise timing of trade execution arises. We expect situations in which a redemption request made at 8:05 a.m., for example, may take more than three hours longer to receive proceeds when compared with a similar request made at 7:55 a.m.
Why the three-plus-hour wait? The difference results from the redemption window closing at 8:00 a.m. for the 7:55 request and at noon for the 8:05 request. This lag would be a departure from the past, when a difference of ten minutes was generally immaterial.
Three hours may not seem like a lot in some other contexts. For some corporate treasurers with immediate liquidity needs or certain other types of liquidity investors who access cash throughout the day, however, we think this may be a game changer. We expect financial intermediaries in particular to recognize that the relatively simple operational, legal and reporting requirements of single-NAV funds may suffice for many of their clients.
This example of trade timing is just one of the possible implementation challenges. So how can investors adapt to this new prime fund landscape? Our institutional clients tell us that, generally, the following interrelated needs are likely to govern their use of prime funds:
Attractiveness of yields, particularly versus $1, stable NAV government money market funds.
Understanding the frequency and magnitude of the fluctuation of the floating NAV.
Familiarity with fund liquidity and comfort with the probability of fees and gates.
Ease of implementation from an operational and reporting standpoint especially for taxes and accounting.
For starters, we think prime funds can continue to play a vital role in serving many investors cash and liquidity needs. Like money market funds more generally, prime funds time and again have adapted to new market environments, regulations and fund features. This time, too, we believe that the industry and investors will adapt and in some cases gravitate to prime funds that offer a single daily NAV.
More broadly, we believe investors today should think of their liquidity requirements across three buckets: primary liquidity, which consists of two types of cash needs daily and on-demand liquidity as well as the longer-term secondary and tertiary buckets.
We see prime funds today fitting into primary liquidity as an on-demand option, in which cash is not needed every day, and there is desire for incremental return versus daily liquidity options. The key for todays liquidity investors, as we see it, is to take the time to reassess liquidity goals and take careful stock of implementation details. At a time of transition, we think cash management should be kept simple.David Fishman, based in New York, and Kathleen Hughes, based in London, are managing directors at Goldman Sachs Asset Management.
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