Money-market funds are attracting record amounts of cash, even as a regulatory overhaul pins the industry with costly mandatory fees.
The U.S. Securities and Exchange Commission approved measures last year designed to make the $6.42 trillion industry more transparent and prevent investors from yanking money from such funds during market volatility or financial stress like in March 2020. The final piece of the reform requiring fund managers to impose mandatory liquidity fees went into effect on Wednesday.
While such a charge threatened to scare off investments, high yields have continued to lure money—leaving most of the largest institutional prime funds intact. There were, however, at least a dozen institutional prime funds that shut down or converted to government vehicles this year.
“The most striking to me is how smooth it appears to have gone,” said Mark Cabana, head of U.S. interest rates strategy at Bank of America Corp. “The total size of prime institutional funds decreased but it’s quite remarkable how little market impact it had, especially if you compare this to 2016. This is essentially a whimper, not even leaving as much of a mark.”
In the runup to the last series of money-market fund reforms eight years ago, about $1 trillion poured out of the institutional prime space for the government-only sector. Today institutional prime funds are a much smaller portion of the money-market space, roughly about $230 billion of assets, according to the latest Investment Company Institute data. The size meaningfully reduces the impact of the latest overhaul.
After the pandemic’s onset roiled markets, the Federal Reserve was forced to step in to rescue money-market funds for the second time in 12 years, leading to calls for the SEC to impose tougher regulations.
The new rules are designed to discourage huge fund withdrawals and shield remaining shareholders from costs tied to the high level of redemptions. Other parts of the reforms, like the delinking between fees and liquidity levels took effect in October 2023, while other rules that included higher daily and weekly liquidity buffers and enhanced reporting requirements were implemented earlier this year.
“This time it’s been much much more settled,” said John Donohue, head of global liquidity at JPMorgan Asset Management, which oversees $945 billion of assets in global money market funds, referring to the implementation of reforms. “We see clients in prime funds willing to stay through reform and changes.”
Ahead of the new mandate, JPMorgan Asset Management on Aug. 1 adjusted the parameters of its institutional prime fund to a one-strike net asset value, that is, pricing shares once a day and earlier so they have more time to calculate any potential fees to meet the new rule. Other operational changes were instituted to track redemptions throughout the day, according to Donohue.
JPMorgan’s prime money-market fund is one of the largest in the industry growing to nearly $86 billion of assets under management as of Sept. 30, from just roughly $19 billion in October 2016.
Money-market funds have seen nearly $1.87 trillion of inflows since the Fed started its aggressive interest-rate hiking cycle in March 2022, eventually pushing rates well over 5% and making cash an attractive asset class.
Although the central bank has begun reducing rates—with a half percentage point cut last month—investors continue piling into money-market funds given that they tend to be slower to pass the lower rates on to investors as compared to banks. Plus, institutions and corporate treasurers tend to outsource cash management during such periods to capture yield, rather than grapple with it themselves.
There’s also still yield to be obtained in prime funds relative to government money funds, which primarily invest in Treasury bills, repurchase agreements and agency debt.
“Basis points matter,” Donohue said. “When there’s 10 to 20 basis points of additional yield and there is now with rates at these levels, institutional clients want to take advantage of that when they can.”
This article was provided by Bloomberg News.