Maintaining Liquidity after Rule 2a-7 Implementation of “Floating NAV” Prime Money Market Funds

Abstract

Institutional prime money market fund investors may face a number of liquidity challenges after October 2016. Floating net asset values, potential fees and gates on redemptions and unpredictable institutional shareholder behavior during times of stress all present potential obstacles. Cash investors may be able to avoid these difficulties with direct investments in cash equivalent securities in a Capital Advisors Group Liquidity Account™.

Introduction

In the fall of 2016, when institutional prime money market funds will be required to adopt floating net asset values (NAVs) as well as provisions for fees and gates on redemptions, investors who remain in the funds will face a number of challenges. In previous papers we have addressed a few concerns resulting from the forthcoming amendments to U.S. Securities and Exchange Commission (SEC) Rule 2a-7; in this paper, we will briefly revisit them and highlight a potential solution.

Lack of Control in Prime Funds

Individual shareholders in prime funds have always lacked the ability to
control specific credit exposures in money market funds. In the past, this
may have been less problematic for investors, as they could look through to
the credit strength of the fund’s sponsor bank as an unofficial backstop in
the event of any trouble with individual credits. However, the new SEC rules
make sponsor support far less likely, magnifying the significance of
individual credit decisions – and making investors’ lack of control over the
fund’s credit selections more troublesome.
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