Staying Afloat in a Floating Net Asset Value Money Market Fund
This commentary addresses a number of liquidity challenges concerning institutional prime money market funds after October 2016. The floating net asset values, the provision of fees and gates and the institutional shareholder syndrome each presents a unique set of challenges. The reformed institutional prime product can remain viable for a certain population of current institutional shareholders, but we suggest a more comprehensive lineup of liquidity vehicles that include government and prime funds as well as individual government and other liquid instruments of laddered maturities.
It is fall of 2016. The dust has settled on money market fund reform. Institutional prime money market funds have adopted floating net asset values (NAVs) with optional liquidity fees and gates provisions. Institutional investors demanding NAV and liquidity certainty have eschewed the product for other liquidity options. Will floating NAV funds retain a critical mass to stay afloat as a viable cash management tool? How will fund dynamics be different? For remaining shareholders, what are the liquidity challenges?
Assets in institutional prime funds more than doubled in less than a decade after the start of the new millennium, from $496 billion in 2000 to $1.1 trillion in 2009. For the first six months of 2015, fund balances dropped from $1.0 trillion to $968 billion1. For a liquidity product that will undergo dramatic structural changes as prescribed by the 2014 SEC rule amendment, little is known about the liquidity characteristics of the institutional prime fund come October 2016.
Our baseline assumption is that there will be a meaningful core base of corporate cash investors who will continue to use institutional prime funds based on economic, relationship or risk management reasons. In this paper, we will address a few liquidity concerns resulting from the forthcoming changes to institutional prime funds.
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