Pub. 13 2016 Issue 4

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S Issue 4 • 2016/2017 13 Why the Impact of MMF Reform is Likely to Benefit Community Banks By Glenn Martin, Promontory Interfinancial Network N ow that the SEC’s new rules on money market funds (MMFs) have gone into effect, institu- tional cash managers 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 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 moneymanagers 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 com- mercial paper, had lost more than $900 billion in assets since the beginning of 2015. 1 Source: CraneData’sMoney Fund Intelligence 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 However, more recently, money has started to move out of money market funds entirely. According to Crane’s, in the first two weeks of September 2016, prime 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 invest- ment strategies. Institutional investors have an array of options when it comes to managing their cash deposits, and once a strategy is institu- tionalized, it takes work to go back and evaluate new options. In 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 idiom, “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 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 strate- gies since the financial crisis, even before MMF rule changes. n Why the Impact of MMF Reform is Likely to Benefit Community Banks  continued on page 14