After two years of preparations, new rules aimed at preventing a
2008-style stampedeout of money-market funds took effect Friday after
sending ripples through financial markets and forcing businesses to
adjust their money management techniques.
For the most part,
analysts don’t expect to see lasting disruptions. But there are some
implications investors should remain aware of.
the new rules, funds that invest in private-sector debt, such as
commercial paper or certificates of deposit, must let their share prices
float. That is a forced break from the prevailing practice of fixing
share prices at $1.
The Securities and Exchange Commission
contends the increased transparency will prompt investors to adjust
holdings in response to changing asset values. The ultimate aim is to
avoid a repeat of the mass exit from such money-market funds should they
suddenly find out their shares are worth less than a buck. Only one
fund “broke the buck” in the mayhem that followed the collapse of Lehman
Brothers in 2008, but the subsequent panic deprives the money market of
liquidity and amplified the crisis.
The new rules also require such funds to adopt gates and fees that would slow redemptions during rough patches.
a result, investors have pulled money out of such funds and plowed them
back into funds focused on government and government agency debt, which
don’t have the same restrictions. Bloomberg estimated that around $1 trillion worth of assets have been shifted from prime money-market funds into government money-market funds.
the affected prime money-market funds are big buyers of short-term
commercial debt, the outflows have led to higher funding costs for
interbank loans and municipal-debt markets.
interbank offered rate, a measure of the cost for banks to borrow from
each other in dollars that also serves as a benchmark reference rate for
trillions of dollars in private-sector debt—rose sharply as money
managers prepared for the rule change, hitting levels unseen since the
2008-09 financial crisis.
Since the rise has more to do with the
new rules than with a reluctance by banks to lend to each other,
investors haven’t been freaking out about it. But it has, nevertheless,
served to tighten financial conditions in the U.S., as well as for banks
abroad when it comes to dollar funding. Indeed, some observers have
argued that the tighter conditions give the Federal Reserve another excuse to hold off raising rates.
pinch, overall, hasn’t been all that painful. Ratings firm Standard
& Poor’s this week said rising dollar-funding costs might put more
strains on net-interest margins for banks in some countries as they
struggle with low or even negative interest rates in their domestic
But S&P sees little scope for a shortage in dollar
funding for banks in the U.S., Europe, Japan and Australia because their
exposure to U.S. money-market funds have shrunk over the past few
years. The impact is also mitigated by the fact banks are less reliant
on short-term wholesale funding thanks to tighter regulations on
liquidity requirements. Growing reliance on alternative funding sources
and a global flood of liquidity from major central banks are also
helping to cushion the blow, S&P said.
It might take a while for
outflows to fully calm down, “but the bulk of the adjustment appears to
be behind us,” wrote analysts at Commerzbank in a Friday note. They
observed that the spread between Libor and the overnight interest swap, a
closely watched gauge of interbank-lending conditions, has “already
stabilized on levels which we consider reasonable,” given widespread
expectations for a Fed rate rise in December (see chart above).