The new regs boost safety, but probably will constrain returns.

Most corporate treasurers look to money market funds as safe places to park funds that may be needed in a few days or weeks to, for instance, cover payroll or execute an acquisition. In January, the SEC issued new regulations that were designed to make the funds even safer. These regs come at a price, however: Returns are likely to be lower, says Brian Kalish, finance lead with the Association for Finance Professionals.

Several of the rule changes, in brief:

• The maximum WAM, or weighted average maturity, of the securities within money market funds has dropped from 90 to 60 days.

• Within the fund, 10 percent of the securities have to mature every day, and 30 percent within 7 days.

• When calculating the weighted average life. or WAL, the actual maturity date of a security must be used, Kalish says. Before, fund managers could calculate the WAL on floating rate notes by using the reset date. That’s no longer the case, he says. “You have to calculate the WAL as a function of the final maturity.”

• Funds can have up to 3 percent of their value in tier-2 securities; the previous limit was 5 percent. In addition, funds can only own .5 percent in a specific tier-2 issuer; this is a drop from 1 percent.

Some of the SEC’s new rules, such as those involving liquidity and portfolio quality, went into effect last month. The changes in portfolio maturity become effective this month, while several reporting requirements start later this year.

One reporting requirement that may become problematic is that of the fund’s “shadow net asset value” or NAV, Kalish says. The shadow NAV is based on the mark-to-market price of all securities in the portfolio and must be provided to the SEC within 5 days after the end of each month and made public after 60 days. The idea is to let investors look at the historical pricing of a particular fund and determine if it’s something in which they want to invest, Kalish says.

This reporting change shouldn’t really impact investment decisions, given that the information will be released with a 60-day delay. However, the disclosures could become political footballs, particularly if one shows that a particular fund had broken the buck, even temporarily, Kalish notes. “You have to decide as an organization if you’re comfortable owning a security that in the past may not have been worth $1,” he says. Some treasurers and CFOs may simply decide that it’s not worth the potential headaches that would accompany a decision to invest in such a fund. Instead, they’ll simply find another place for their funds.

At the moment, the full impact of all these changes is hard to determine. Of course, they will make it more difficult for funds to own longer securities, since they’ll have to include a greater number of shorter securities in order to bring down the overall average. However, with interest rates barely above zero – discount rates on 30-day commercial paper range from .20 to .43 percent – it’s hard to say right now how this legislation will change the money fund environment. “We won’t see the impact until we get back to a normal interest rate environment,” Kalish notes.

So, what about treasurers on the other side of the table – that is, those that are issuing commercial paper? Most likely, these firms will find themselves either issuing very short-term securities and facing the accompanying rollover risk, or going out even longer. And, with demand for longer securities dwindling, yields on these will have to head up in order to attract investors. “They’ve kind of wiped out the middle,” Kalish says.

Had these changes been in place in September 2008 when the Reserve Primary money market fund broke the buck, they may have helped contain the fallout. However, they probably would not have entirely eliminated it. After all, if a fund’s WAM is anything longer than one day, not all investors are able to get out on any particular day anyway, Kalish points out. “It minimizes the problem but doesn’t make it go away.”

Of course, investors will be the final judges of the new regulations. If they decide they don’t like the revamped money market funds, they’ll simply move to other options. ###