Moody’s: Regulatory reforms will transform MMF industry

Changes in the money market industry will continue, as regulatory developments coupled with market dynamics force some money market funds (MMFs) to close or consolidate, says Moody’s Investors Service.

In its latest special comment “Money Market Funds and Regulatory Reform: A Business Model Hangs in the Balance“, Yaron Ernst, managing director of Moody’s Managed Investments Group notes: “Low interest rates, constrained asset supply, regulatory scrutiny and evolving investor preferences have already begun to transform the characteristics of money market funds.”

Proposed regulatory reforms in the US and Europe that threaten the traditional constant net asset value (CNAV) structure are one of the three key drivers of the changing MMF landscape, says Moody’s.

MMFs are also faced with persistently low interest rates that continue to push investors to higher-yielding fund products, further reducing already-slim profits. In addition, the diminishing supply of highly rated investments are forcing managers to develop and launch new products, as the industry changes shape and business models follow suit, says the rating agency.

The report lays out three scenarios for the industry, as well as the expected implications for fund managers and investors:

(A) Variable net asset value (VNAV) MMFs entirely replace CNAV MMFs — there is a regulatory prohibition on the CNAV product generally. The probability of this scenario is low in the US and in Europe;

(B) Bifurcation of MMFs — Only government/treasury MMFs are allowed to maintain their CNAV structure, while prime and tax-exempt MMFs can only be VNAV. In Moody’s view, this scenario is the most likely in the US, but does not apply in Europe because a separate framework for government funds does not exist;

(C) Buffers/Holdbacks – Requirement for capital buffers and/or redemption limits for all CNAV MMFs. This is the most likely scenario in Europe, with moderate probability of implementation in the US.

“Due to the changing product dynamics,” concluded Ernst, “we expect industry consolidation to accelerate, combined with a significant impact on the overall liquidity product landscape and investor preferences.”

 

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