Money Market Fund Reform Fallout Requires New Cash Management Mindset
Money market funds have become more resilient since SEC reforms transformed the industry with higher credit, liquidity, transparency, and oversight standards. The 2008 bank run that broke the buck in the old prime funds is, for now, just a bad memory fading into the rear view mirror.
But unanticipated side effects of those historic reforms have created a new risk/reward calculus that is substantially changing the roles and responsibilities of institutional cash managers. Our May research report, The New Money Fund Reality, takes a fresh look at what this new world looks like five years after the reform rules were written in 2014.
By now, everyone knows how the floating net asset values mandated by the SEC ended dollar-in, dollar-out liquidity. The subsequent trillion-dollar migration of assets from prime funds into lower-yield government money funds is old news now as well. But less obvious is the new mindset the reforms have gradually forced corporate cash managers to adopt.
In the past, managers could view money market funds as safe, simple cash repositories. Investment portfolio management was not necessarily top-of-mind. Instant liquidity with reasonable, modest returns left treasury professionals with little to worry about other than how much cash they were holding.
But the introduction of a variable NAV forced a change in that mindset. Prime money market fund shares are now more of an equity-like instrument and less of a simple liquidity vehicle. As with any equity holding, investors in the new prime funds have to be a lot more sensitive to potential changes in the value of the underlying asset. Which adds up to more risk management.
Faced with low yields on government funds, treasury professionals are also adjusting their portfolios to include a broader mix of other cash investments providing higher returns. So a significant economic downturn—which cash managers haven’t had to deal with since the reforms—could spell big trouble. Cash managers must pay more attention than ever before to risk-adjusted return as an investment criterion.
Very large institutional cash management shops have comprehensive credit analysis teams and risk management expertise to monitor complex portfolios. They’re likely to catch the early-warning signs of impending problems. But heightened awareness of risk, even in conservative cash portfolios, now is also the responsibility of treasury professionals in smaller organizations.
If you’re in the latter group, there’s a first step you can take. Adopt a new mindset. You’re no longer simply a corporate cash manager. You’re now a responsible cash investor.
The second step is easy, too. Download our research report, The New Money Fund Reality. It’s a step-by-step walk through many more of the intended and unintended consequences of those historic money market fund reforms.