Proposed reforms to the US money market fund industry could result in more than $700bn flooding out of the $2.6tn sector, according to a survey of investors.
The typical client of Institutional Cash Distributors, a money market fund portal, would cut their exposure to money market funds by 41 per cent if a trio of proposed reforms were enacted, with 13 clients saying they would exit the industry completely.
If this ratio held across the sector’s entire institutional investor base it would gross up to $714bn, even if all retail investors were happy to stay put, reducing demand for US commercial paper by $110bn and for US government agency securities by $103bn.
“This is a scary number,” said Tory Hazard, chief operating officer of ICD. “Money market funds are facing a grave threat as government policymakers are considering sweeping regulatory action.”
The survey found 80 per cent of investors are opposed to forcible conversion of money market funds from stable to floating net asset value status, with only 7 per cent in favour.
Opposition was stronger to a proposal that redeeming investors should only receive 95-97 per cent of money back immediately, with the remainder retained for 30 days. A net 31 per cent of respondents opposed the suggestion that funds should have to set aside bank-like capital reserves.
The US Securities and Exchange Commission has floated the reforms in the wake of the global financial crisis, during which the federal government propped up the sector with a $150bn liquidity backstop and 36 US funds were bailed out by their sponsors, according to Moody’s.
However, Mr Hazard argued reforms introduced in 2010, which doubled to 10 per cent the proportion of assets that must have overnight liquidity to cope with spikes in redemptions, had made funds sufficiently robust to survive crises without outside help.
According to Mr Hazard, US money market funds suffered outflows of $133bn in three days in 2011 amid the wrangling over the US debt ceiling, a US credit rating downgrade and the eurozone debt crisis, not far shy of the $180bn of redemptions that spurred the government to intervene in 2008. However, the enhanced liquidity and transparency of fund holdings prevented contagion.
Mr Hazard believed cash that flowed out of the sector would go into European money market funds, riskier enhanced cash funds and bank deposits.
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