Fitch: US Money Fund Reform Puts Focus on Liquidity Risk
OREANDA-NEWS. New disclosure regulations for US money market funds (MMFs) that go into effect today will sharpen investors' focus on liquidity as a key risk metric, according to Fitch Ratings.
We believe the unparalleled transparency that comes with daily fund reporting, combined with upcoming key structural changes facing the industry, are game changers for many money fund investors.
Effective Thursday, money funds are required to begin disclosing daily and weekly liquidity, daily net inflows/outflows and the fund's net asset value rounded to four decimal places for the preceding six months. In October, institutional prime and municipal MMFs will also have to adopt provisions for fees & gates tied to a weekly liquidity threshold of 30%. If weekly liquidity drops below 30%, fund boards may impose a liquidity fee of up to 2%. Additionally, the fund's board may suspend redemptions for up to 10 business days. If weekly liquidity falls below 10%, fund boards must impose a 1% redemption fee unless the board determines that it would not be in the fund's best interest or that a higher (or lower) fee is more appropriate.
Many investors in institutional MMFs are uncomfortable with the risk for fear that their liquidity could be gated or subject to a redemption haircut. Businesses, municipalities and not-for-profits rely on MMFs to provide timely access to their investments to meet daily operational cash needs. For those who get comfortable with a potential redemption or having their fund gated, Fitch believes there will be heightened focus on the fund's liquidity and its proximity to a weekly liquidity trigger.
We believe it's probable that these funds will need to maintain a liquidity buffer above the carefully watched 30% weekly threshold. Funds that fail to maintain an adequate buffer may face heightened redemption risk, which could result in further liquidity pressures and escalated risk of investor redemptions. Fitch believes managing against the new liquidity trigger will further put the focus on how MMFs manage liquidity risk.