Emad A.

Zikry - Implications of Recent Money Market Fund Reform Passage

The 2008 financial crisis raised serious questions regarding the health, security and viability of the
money market mutual fund industry stated Emad A !ikry, "hief E#ecutive $fficer of %anderbilt
Avenue Asset &anagement
The 2008 financial crisis raised serious questions regarding the health, security and viability of the
money market mutual fund industry stated Emad A. Zikry, Chief Executie !fficer of "ander#ilt
Aenue Asset Management and &ember of EO Clubs International, CEO Briefs, Economic
Club of New York, Fixed Income Analysts Society, National Association for
Business Economics, and te International Foundation of Em!loyee Bene"t #lans$
The 'ecurities and E#change "ommission has ado(ted a series of reforms to rules governing money
funds The 20)0 amendments focused largely on *ule 2+a,-- (arameters on the interest rate, credit and
liquidity risks of the (ortfolios *ecogni.ing that more fundamental changes to this market might be
necessary, the 'E" (ressed for/ard /ith debate on a number of other reform (ro(osals The resulting
modifications /ere (assed by a 0-2 vote of the "ommission in 1uly 20)2, /ith a t/o year /indo/ for
funds and managers to com(ly
Emad A !ikry vie/s the likely effects of these aggregate reforms for money market funds as
substantial
3hile the 20)0 reforms focused on bolstering the quality and security of the money market (ortfolios,
Emad A !ikry believes the 20)2 changes address customer access to their accounts, (reventing runs
on the funds in crisis situations and the (roblem of funds 4breaking the buck
Emad A !ikry - The ne/ly enacted guidelines are as follo/s5
Floating $A" 6 7nstitutional (rime funds +those /hich invest across government,
cor(orate8bank and A9' short term (a(er, /ill no/ be required to re(ort their actual :A%
rather than constant ;)00 share (rice
%i&uidity Fees 6 7f a fund<s 4/eekly liquid assets or 3A= +defined as government securities
maturing in under >0 days ? other securities maturing /ithin one /eek, fall belo/ 00@ of total
assets, a fund /ould be allo/ed to im(ose a liquidity fee of u( to 2@ on all redem(tions 7f
3=A fell belo/ )0@ of total assets, then the fund is required to im(ose a )@ redem(tion fee
Redemption 'ates 6 7f 3=A falls belo/ 00@ of total assets, funds can tem(orarily sus(end
redem(tions Ao/ever, the fund must lift the 4gate /ithin )0 days, and can im(ose sus(ension
for no more than )0 days /ithin any B0-day (eriod
Pu#lic (isclosure 6 Cunds /ould be required to (ublicly disclose any instances /here 3=A
falls belo/ the )0@ level, and any liquidity fees or gates im(osed on fund investors
The 20)0 adDustments to *ule 2+a,-- have severely reduced the ability of these funds to generate
e#cess returns through duration or credit decisions Curthermore, these returns +/hich of course in the
case of money market funds are )00@ from yield as o((osed to ca(ital gains, are unlikely to benefit
initially from any Ced tightening activity 4&any fund management com(anies have resorted to
)
/aiving their management fee in order to (revent the net yield from going into negative numbers
$nce rates move higher, they are likely to reinstate those fees stated Emad A !ikry 7n addition to
these Esteady state< outcomes, there could be more deleterious effects from the redem(tion gates and
liquidity fees $ne of the dissenting voters in the 'E" (anel +Fara 'tein, s(ecifically cited the
redem(tion gates as a (otential (roblem, asserting that the e#istence of the gates could s(ur investors
to rush out of funds even earlier in times of crisis rather than remain invested
There is broad consensus that the result of this ne/ regulatory environment /ill be substantial asset
de(arture from the affected +institutional (rime, funds A re(ort from 9arclays concluded that as much
as 20@ of the assets in institutional (rime funds could e#it, either to government money market funds,
bank de(osits, or to other highly liquid investment vehicles Emad A !ikry is convinced that one of
the strongest (ositioned alternatives to institutional (rime money market funds is se(arately managed
short duration accounts
9y moving to se(arate accounts from strictly controlled money market funds, investors could rea( the
follo/ing advantages 5
% &e ability to indi'idually de"ne in'estment (uidelines on credit and
duration witout restrictions suc as tose in )ule *+a,%-
% Se!arate account allows for use of ladderin( or barbell strate(ies to acie'e
desired tar(ets
% .irect ownersi! of te securities in te !ortfolio, wit com!lete
trans!arency of oldin(s
% Assets are not sub/ect to te !otential ne(ati'e e0ects of external
in1ows2out1ows
% No li3uidity fees or redem!tion (ates
% 4ana(ement fees ex!licitly stated and ne(otiable
The money market mutual fund industry gre/ from its beginnings in the early )B-0<s to over ;0
trillion in assets due largely to the convenience for investors and the (erceived safety of the funds
+including a false (erce(tion among many that they are CG7"-insured, 9oth of those factors have
been handica((ed by recent events and the resultant ne/ regulations
3hile a maDority of assets are likely to stay in these vehicles even after all ne/ regulations are
im(lemented, Emad A !ikry, "hief E#ecutive $fficer of %anderbilt Avenue Asset &anagement,
believes a significant (ercentage of assets are likely to seek other investment vehicles consistent /ith
the need for the highest levels of available safety and liquidity
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