Top issues I’m following in 2018: US Tax Reform, Cryptocurrency, Brexit, and Money Market Reform … again

by AM admin on February 9, 2018

Peter Finnerty, PwC US Mutual Funds Leader –

There are a number of issues facing the Asset and Wealth Management industry in the early going of 2018 – US Tax Reform, Cryptocurrency and Brexit to name a few. One though that could easily be overlooked — but shouldn’t — is the discussion around money market reform.

If there is one thing that US Tax Reform, Cryptocurrency and Brexit have in common, it’s the incredible pace of change that’s underpinned by uncertainty. It’s fair to say that each – whether it is the value Bitcoin reached, the fact that the UK really is leaving the EU or the passage of US Tax Reform into law – moved at a furious pace.

While perhaps movement related to money market reform is a bit quieter, there is momentum to take notice over, should it accelerate as these other issues have.

October 14, 2016 seems like a long time ago.

The date represented the final and likely most significant compliance date for the SEC’s money market reform rules. Provisions around floating NAV’s, redemption fees and gates and fund definitions were adopted by asset management firms by this date.

Reflecting back on the adoption of the efforts, we have seen the following:

  • The industry embarked on, and successfully completed, a massive adoption effort that touched nearly every party involved in the money market asset class including those charged with governance, distributors, service providers and many functions across asset managers.
  • The effort was costly and time consuming, requiring multi-million dollar investments over multi-year periods.
  • While money market assets in total have remained relatively consistent in recent years, investors clearly made known their preference for a fixed $1.00 net asset value (‘NAV’).  Based on weekly data published by the Investment Company Institute, money market fund assets from January 2016 through January 2018 have increased only modestly, by approximately 2% to $2.799T, while government funds have seen significant inflows, increasing 77% to $2.204T. These increases are offset by asset declines of 45% and 64% for tax-exempt and prime funds, respectively, over the same period.

Introduced by Rep. Keith Rothfus (R-PA), H.R. 2319, the Consumer Financial Choice and Capital Markets Protection Act of 2017,” takes aim at the reforms and would do the following:

  • Allow all money market funds to make an election utilize amortized cost or penny rounding resulting in a move back to a consistent $1.00 per share NAV;
  • Exempt any fund making the above election from liquidity fees; and
  • Prohibit any federal bailout of money market funds.

The above would of course remove two significant provisions to the reforms – floating NAV’s and liquidity fees. Such changes are needed, in the view of the bill’s sponsors, to help lower borrowing costs of municipalities who have seen demand for their paper shrink as assets have flowed out of municipal money market funds, required by the reforms enacted in 2016 to have a floating NAV. What’s notable about the current bill is the momentum it has, namely, the passage through the House Financial Services Committee and the bipartisan support of 64 co-sponsors, with the most recent sponsor joining the bill on January 29, 2018.

Compounding these legislative developments is the industry split–consensus on the reform has yet to be reached.

Certain industry players are of the view to keep legislation as is citing the substantial investment made to achieve compliance, the future financial burden incurred to reverse the course already set along with concern that any repeal will bring the financial services industry back into the political spotlight for debate on even more legislation. Advocates for the reversal of the reforms note the disadvantage faced by certain industry participants – namely municipalities – seeking to access the short-term funding markets.

The absence of a consensus is somewhat different than what was seen within the industry against the initial reforms which were ultimately passed in 2014 and put into play in 2016.

While we can’t predict the future outcome of H.R. 2319, I am confident that the pace of change we are seeing will not slow down and matters which may appear to have little momentum today may charge ahead tomorrow. For this reason, don’t let money market reform fall off your radar!

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