Pub. 7 2016 Issue 4

Winter 2016 25 West Virginia Banker Why the Impact of MMF Reform is Likely to Benefit Community Banks By Erich Buckenmaier, Regional Director, Promontory Interfinancial Network © 2016 Promontory Interfinancial Network, LLC. N ow that the SEC’s new rules on money market funds (MMFs) have gone into effect, institutional cash man- agers are taking a new look at community banks. The October 2016 launch of the new SEC rules, coming after a two-year implementation period, changes how prime mon- ey market funds calculate value. Up to now, these funds have transacted at a stable net asset value (NAV)—meaning that they could be bought and sold at the same price, regardless of the movement in the underlying investments. Addition- ally, the new rules provide for redemption gates that can be enforced during times of financial stress on the funds, as well as liquidity fees. Following the SEC’s initial announcement of the rule changes, there was a subdued response from institutional investors. The two-year timeline that the SEC specified for implementation gave a long runway for investors and fund managers to adapt. With the changes now in effect, institutional money man- agers are starting to look at how to adjust their investment strategies with many investors looking for the exits, at least from prime funds. Data from Crane Data’s Money Fund Intel- ligence shows that, by the end of September (leading up to the rule change), prime funds, which invest in higher yielding securities like commercial paper, had lost more than $900 billion in assets since the beginning of 2015. 1 Source: Crane Data’s Money Fund Intelligence Why the Impact of MMF Reform is Likely to Benefit Community Banks By Patrick Melland Regional Director, Promo tory Interfinancial Network Now that the SEC’s new rules on money market funds (MMFs) have gone into effect, institutional cash managers are taking a new look at community banks. The October 2016 launch of the new SEC rules, o ing after a two-year implementation period, changes how prime money market funds calculate value. Up to now, these funds have transacted at a stable net asset value (NAV)—meaning that they could be bought and sold at the same price, regardless of the movement in the underlying investments. Additionally, the new rules provide for redemption gates that can be enforced during times of financial stress on the funds, as well as liquidity fees. Following the SEC’s initial announcement of the rule changes, there was a subdued response from institutional investors. The two-year timeline that the SEC specified for implementation gave a long runway for investors and fund managers to adapt. With the changes now in effect, institutional money managers are starting to look at how to adjust their investment strategies with many investors looking for the exits, at least from prime funds. Data from Crane Data’s Money Fund Intelligence shows that, by the end of September (leading up to the rule change), prime funds, which invest in higher yielding securities like commercial paper, had lost more than $900 billion in assets since the beginning of 2015. 1 Source: Crane D ta’s Money Fund Intelligence 1 MONEY FUND INTELLIGENCE XLS - Historical Asset Totals & Crane Indexes, October 2016, Crane Data. 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 Assets in Prime MMFs ($B) TOTAL PRIME MMFs INSTITUTIONAL PRIME MMFs 10/31/15: $1.38 T 10/31/15: $860 B 9/30/16: $490 B (-64%) 9/30/16: $230 B (-73%) Formatted: Centered So far, many investors haven’t completely exited the money fund market, but have largely transfer government funds. Since October 2015, assets in government funds have nearly doubled, from aro $1 trillion to nearly $2 trillion. Source: Crane Data’s Money Fund Intelligence However, more recently, money has started to move out of money market funds entirely. Accordin Crane’s, in the first two weeks of September 2016, prime money fund assets fell by nearly $100 bill with only $52 billion of that moving to government funds. 2 So how could this benefit banks? 1. Institutional investors are shifting their investment strategies. Institutional investors have an array of options when it comes to managing their cash depo and once a strategy is institutionalized, it takes work to go back and evaluate new options. fact, for many institutional investors, investment practices are written into policies, further increasing the difficulty in reevaluation. This structure often leads investors to live by the id “If it’s not broken, don’t fix it.” However, the SEC rule change has effectively “broken” the investment policies for many institutional investors, triggering a reevaluation of investmen practices. This opens a window of opportunity for banks. Banks are a trusted resource for institutional depositors and have played a growing role in institutional investment strategies since the financial crisis, even before MMF rule changes According to the AFP’s 2016 Institutional Cash Management survey, institutional money 2 MONEY FUND INTELLIGENCE XLS - Historical Asset Totals & Crane Indexes, September 2016, Crane Data. 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 Assets in Govt. MMFs ($B) TOTAL GOVT MMFs INSTITUTIONAL GOVT MMFs 10/31/15: $1.01 T 10/31/15: $740 B 9/30/16: $1.97 T (+95%) 9/30/16: $1.37 T (+85%) So far, many investors haven’t completely exited the money fund market, but have largely transferred to government funds. Since October 2015, assets in government funds have nearly doubled, from around $1 trillion to nearly $2 trillion. Source: Crane Data’s Money Fund Intelligence wever, more recently, money has started to move out of money marke funds entir ly. According to Crane’s, in the first two weeks of September 2016, pri e money fund assets fell by nearly $100 billion, with only $52 billion of that moving to government funds. 2 So how could this benefit banks? 1.Institutional investors are shifting their investment strat gies. Institutional investors have an array of options when it comes to managing their cash deposits, and once a strat- egy is insti utionalized, it takes work to g back nd eval- uate new options. In f ct, for many stitutional i v stors, investment practices are written into policies, further increasing the difficulty in reevaluation. This structure of- ten leads investors to live by the idiom, “If it’s not broken, don’t fix it.” However, the SEC rule change has effectively “broken” the investment policies for many institu ional in- vestors, triggering a reevaluation of investment practices. This opens a window of opportunity for banks. Banks are a trusted resource for institutional depositors and have played a growing role in institutional investment strategies since the financial crisis, even before MMF rule changes. According to the AFP’s 2016 Institutional Cash Management survey, institutional money managers allo- cate 55% of short-term portfolios to bank deposits. For context, the same survey from 2007 showed just 27% of short-term institutional funds allocated to bank deposits. 3 With the changes now in effect, institutional money managers are starting to look at how to adjust their investment strategies with many investors looking for the exits, at least from prime funds  Why the Impact of MMF Reform is Likely to Benefit Community Banks — continued on page 26