After resisting the idea of mark-to-market for years, large money-market-fund sponsors such as Goldman Sachs, Fidelity Investments, JPMorgan, and BlackRock are now partially embracing it.
Instead of waiting for regulators to force them, these fund sponsors have started voluntarily disclosing the day-to-day fluctuations in their funds’ per-share market value, called net asset value (NAV). The move is a win for corporate treasurers who want more transparency in these popular short-term investment vehicles, some of which experienced investor “runs” in 2008.
“This is the biggest development in money-market-fund reform since 2010,” says Lance Pan, director of investment research at Capital Advisors Group.
Jerry Klein, managing director at HighTower Treasury Partners, which manages investment portfolios for corporations, calls it a “fairly bold move. If you look back at 2010 when [money-market] rules were first modified, [sponsors] only agreed to disclose monthly to the [Securities and Exchange Commission], and on a 60-day lag to the public. To go to daily disclosure is really a very significant leap forward.”
Adds Klein: “It will be comforting to investors to be able to access [market-value] information on a daily basis and see it with their own eyes, and if there ever is another major shock to the system, [they] know that they will be able to see what is happening in their funds.”
But a large portion of the industry is still doing things the old-fashioned way. Instead of disclosing per-share market value, it is trading and reporting at a fixed NAV of $1 per share, as it has for years. That forces treasurers and other investors, as they have always done, to wait for outdated valuation reports or to dig into a fund’s securities holdings to determine its true value.
On the table are proposals from U.S. regulators to force money-market funds to adopt a “floating” NAV. With a floating NAV, shares in a money-market fund would be priced at the actual market value of the funds’ assets, and the price would rise and fall daily. As a result, investors would be exposed to possible loss of their investment principal. Many fund sponsors vehemently oppose the idea, though, saying the transparency would not stop investors from panicking and withdrawing their money in a crisis.
In a comment letter to the Financial Stability Oversight Council, fund sponsor Wells Fargo said regulators have failed to show that a floating NAV would reduce the perceived risk of runs, and that so far there is only “conjecture and speculation” about the benefits of a floating NAV.
Indeed, the voluntary disclosure by fund sponsors could be a proactive measure to head off the imposition of a floating NAV, says Pan. Money-market NAVs move in a few tenths of a cent, if at all. “You could say they might be doing this to show that the ‘shadow’ NAV doesn’t move much and that therefore we don’t need a floating NAV,” says Pan.
But Pan himself believes “the industry is getting serious about touching the third rail, floating NAV. People thought if you touched it you were going to die.”
Regardless of fund sponsors’ motives, daily disclosure of mark-to-market values accomplishes much of what a floating NAV would, Pan says, without “wreaking operational havoc,” i.e., putting administrative burdens on corporate treasury departments.
“The investor can see the underlying value of the securities and yet still has the convenience of trading in and out of the fund at $1 per share,” HighTower’s Klein points out. “The investor does not have to worry about booking gains and losses on its transactions, about auditors questioning the ‘cash and cash equivalents’ designation [on the balance sheet], or about changing its investment policy,” he says.
The ball is now in the court of the regulators. The Financial Stability Oversight Council, whose 10 voting members head the different regulatory agencies, published a series of reform proposals, which include a floating NAV, last November. And the council recently extended the comment period on those proposals to February. Conceivably, in reaching terms with money-fund sponsors, the council could require a floating NAV, ditch the floating NAV and formalize the daily disclosure of the “shadow” NAV, or keep NAV rules status quo.
While the SEC regulates money-market funds, the council stepped into the fray last summer when the SEC failed to push through a set of reforms. SEC Commissioner Daniel Gallagher recently accused the council of “hectoring” the SEC over money-market reform and focusing on money-market funds instead of trying to avert the next financial crisis.
Gallagher said the SEC will lay out its own new reform plan before the end of this quarter.
The money-market-fund industry and corporate treasurers are looking forward to gaining clarity on the matter of further regulation. Treasurers’ interest in money-market funds waned with the first round of money-market reforms and the creation of the Federal Deposit Insurance Corp.’s Transaction Account Guarantee (TAG) program, an operating accounting that lets treasurers earn a comparable rate along with a federal government guarantee of their cash. But with TAG’s expiration at the end of 2012, money funds will become an integral cash vehicle once again, say experts.
“The returns on both types of investments are extremely low,” says Klein, “but many treasurers would rather have the diversification of an institutional money-market fund or a number of institutional money-market funds as opposed to the concentrated bank risk that they would take by maintaining a deposit or an earnings credit balance.”