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Capital Markets

Outflows from Prime MMFs Increasing

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August 05, 2016

Companies continue to pull cash out of MMFs as they don’t want to be the one to turn the lights out in October.

Blue fish red fish(1)Prime money funds continue to lose cash, signaling companies are getting skittish about remaining in them ahead of coming regulations in October.

According to Fitch Ratings, prime institutional money market funds saw big outflows, declining $79 billion between May 31 and July 8; government institutional funds increased by $93 billion in the same period. Since October 27, 2015, prime institutional money funds lost $301 billion.

On October 14, 2016, prime money market funds will move to a variable net asset value regime while government funds will be able to keep the traditional fixed NAV. Prime funds will also see the possibility of liquidity fees and redemption gates if weekly liquidity falls below 30%.

“Fund providers have been aggressively marketing that these changes will make MMFs better but people are realizing this isn’t true,” said Brandon Semilof, managing director at StoneCastle Cash Management. “They’re just not attractive anymore.”

Since liquidity is beginning to pick up, other companies are looking to make sure they’re not the last ones in prime funds. This is having the effective of draining liquidity from the market. According to Fitch, fund managers, in anticipation of a pick up in redemptions ahead of the October reform deadline, “have been building weekly liquidity buffers in excess of the key 30% regulatory threshold that could trigger liquidity fees or redemption gates. As of July 8, average weekly liquidity for prime institutional funds was 53.4%, with four funds' liquidity below 35% and no funds' liquidity falling below 30%.”

All of which is creating a lot of uncertainty. “When it comes to managing cash, no one likes uncertainty,” said Mr. Semilof. “It’s just not in cash managers’ lexicon.”

ICD, the global money market products provider, has acknowledged that MMFs will likely see a greater outflow as the rules' effective date approaches. However, it argues that the spread between prime and government MMFs far outweighs potential losses from floating NAV. That means eventually the market will likely see prime assets above where they are today.

Companies ahead of the implementation have been seeking out places to put their cash, aside from going to government funds. Many are staying in bank deposits, although that may be short-lived, as several companies in The NeuGroup network have reported “getting the call” to take their cash somewhere else. Others are looking at European commercial paper, separately managed accounts and other short-term solutions like StoneCastle’s Federal Insured Cash Account (FICA). Amid the scramble to find destinations for cash, FICA has seen demand pick up, according to the company. FICA offers next-day liquidity with no transaction fees, or redemption gates, which will be difficult to come by in a few short months.


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