New rules requiring floating net asset values and potential withdrawal restrictions on institutional prime money market funds won't take effect until October 2016, but some money managers and consultants are warning the time to move out of them is now.
Among the issues with delaying, they warn, are the potential for investment losses and reduced liquidity from a last-minute rush to the exits that could negatively affect the nearly $1 trillion of assets now in institutional prime funds.
“I understand why some people might have the perspective that it's too early. ... But it's not too early to have these conversations,” said Kimberly Gillett, manager research analyst-U.S. fixed income, Towers Watson & Co. LLC, New York. “Decisions will need to be made, and if you can already make the change to Treasury and government money market funds, it's an easy change to make.”
Prime funds are popular tools for pension funds, endowments and foundations, and custodians for cash sweeps and short-term transitions for rebalancing; they're seen as highly liquid with a set $1 NAV. But on Oct. 14, 2016, Securities and Exchange Commission rules will require floating NAVs on institutional prime money market funds, and the boards of money market funds will be allowed to impose fees and restrictions on investors that want to withdraw funds in times of financial crisis.
Retail prime funds will keep the fixed $1 NAV but their boards will be allowed to impose the same fees and restrictions as institutional funds; government money market funds will have the fixed NAV as well, but will have no fees or restrictions.