New Money Fund Regs May Require Enhanced Disclosures

From current financial reports, it's impossible to tell whether companies are parking cash in prime or government money market funds.
Vincent RyanAugust 17, 2016

Corporations that heavily rely on money funds for cash management may need to enhance disclosures and risk management in light of upcoming money fund reform, according to a report from Fitch Ratings.

Regulatory changes to money funds coming into effect on October 14 are expected to cause some U.S. companies to re-examine their comfort level with prime money market funds. That’s because the reforms allow institutional prime money funds, in particular, to restrict an investor’s liquidity during times of stress.

The rules, created in response to disruption in money fund markets during the financial crisis, allow a funds’ boards of directors to impose liquidity fees on shareholders looking to redeem cash, or to restrict fund redemptions altogether, if the fund’s liquidity level falls below the required regulatory threshold.

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The restrictions are going to cause some treasurers to shift excess cash into government money market funds, which typically hold low-risk government and municipal debt securities. They are not subject to the new regulations.

Non-financial corporates historically have been big investors in money funds in absolute terms, holding $573 billion in money fund investments as of the end of the first quarter of 2016, according to Federal Reserve data.

Fitch’s analysis of the non-financial firms in the Fortune 100 showed that 33 noted investments in money funds and 22 disclosed the amount invested in money funds. For the 22 firms that disclosed investments, money funds accounted for 26% of their cash and cash equivalents on average.

Some corporates use money funds sparingly or not at all, while others utilize money funds extensively for daily cash flow management and strategic cash buffers, says Fitch.

Walgreens, for example, held $2.4 billion in money funds in the first quarter, which accounted for as much as 72% of its cash and cash equivalents, as shown in the chart above. Cisco Systems was the largest money fund investor in the sample, with holdings of $7.2 billion, accounting for 81% of its cash and cash equivalents. Conversely, Apple invested $3.3 billion in money funds, representing a modest 18% of its cash and cash equivalents.

According to Fitch, “it is unclear whether [companies] invest in prime funds, government funds, or both. For corporations that continue to rely on money funds, enhanced disclosures and risk management will be important to appropriately monitor key weekly liquidity measures in prime funds.”

Graphic: Fitch Ratings

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