Will they commit significant financial and human capital to design and implement a new system to accommodate more rule changes on a product with less cash- like utility while alternatives are available? We suspect that swing pricing may become the straw that breaks the camel' s back to force some, if not all, fund sponsors to end prime fund offerings.
After undergoing a long and arduous process of converting their systems to handle floating- NAVs and fees and gates, they have fresh decisions to make. Pan writes, " The fund industry and its intermediary partners are faced with a different set of challenges. Swing pricing will be a tough sell to this crowd." In addition, liquidity investors are notoriously risk averse, especially to cash vehicles with esoteric features. However, higher liquidity requirements put prime funds at a yield disadvantage compared to the two alternatives. As noted earlier, the explicit concentration, liquidity and disclosure requirements offer robust shareholder protection when compared to similarly managed private liquidity and ultra- short bond funds. As proposed, the amendments do not make enough economic sense for institutional prime funds to remain attractive to shareholders and funds sponsors alike. The piece comments, " If swing factor provisions survive the final rule, it is difficult to fathom how institutional prime funds will be able to thrive. However, if the industry can solve the swing factor puzzle, prime funds may offer some benefit to investors who desire credit exposure in a very low- duration shared- liquidity vehicle." An existential threat comes from the ' swing pricing' mechanism which, if approved, may result in some funds being shuttered or converted to government funds, creating challenges for shareholders who decide to remain in prime."Ĭapital Advisors also asks, " Will this round of rule revisions reinstate investor confidence in prime funds' cash- like functionality? Will institutional prime funds have a renaissance that rivals their golden age at the turn of the millennium? Unfortunately, we think that if the amendments are ratified as proposed, institutional prime funds will be less distinguishable from government funds and be more cumbersome to manage than ultra- short bond funds, thus making it unlikely that they once again become a popular cash management vehicle. Institutional prime funds are not likely to return to their previous status as the cash management vehicles of choice due to a reduced amount of yield advantage over government funds.
The short verdict is that the approval of the final rules and the associated implementation schedule may not occur until the end of the current interest rate cycle. Pan tells us, " To answer these questions, we need to explore the pending SEC reform proposal. Might prime MMFs be an alternative? Will the amendments alter the utility and attractiveness of prime funds to institutional cash investors? Should investors plunge in before the new rules take effect? ( Note: See the SEC' s " Comments on Money Market Fund Reforms" here.) As the Fed is poised to hike rates aggressively in coming meetings, institutional cash investors are keenly aware that their deposit rates are not likely to keep pace. April 11 marked the end of the comment period for the new round of money market fund ( MMF) reforms proposed by the Securities and Exchange Commission ( SEC). Capital Advisors Group' s Lance Pan asks in his latest commentary, " Will There Be a Renaissance for Prime Money Market Funds? He explains, " As the market' s attention was drawn to the war in Ukraine, supply chain disruptions, runaway inflation, and higher interest rates, a significant deadline quietly passed.
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