Pub. 6 2016-2017 Issue 4

20 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 C O L O R A D A N S R E A L I Z E D R E A M S Why the Impact of MMF Reform is Likely to Benefit Community Banks FEATURE ARTICLE GLENN MARTIN, REGIONAL DIRECTOR, PROMONTORY INTERFINANCIAL NETWORK Following the SEC’s initial announcement of the rule changes, there was a subdued response from institutional investors. N ow that the SEC’s new rules on money market funds (MMFs) have gone into effect, institutional 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 move- ment in the underlying investments. Addition- ally, 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 inves- tors and fund managers to adapt. With the changes now in effect, institutional money managers are starting to look at how to adjust their investment strategieswithmany in- vestors looking for the exits, at least fromprime funds. Data fromCrane Data’sMoney Fund In - telligence shows that, by the end of September (leading up to the rule change), prime funds, which invest in higher yielding securities like commercial paper, had lost more than $900 billion in assets since the beginning of 2015. 1 Source: Crane Data’s Money Fund Intelligence So far, many investors haven’t completely exited themoney fundmarket, but have largely transferred to government funds. Since Oc- tober 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 shift- ing their investment strategies. Institutional investors have an array of options when it comes to managing their cash deposits, and once a strategy is institution- alized, 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 in- vestors 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 re- evaluation of investment practices. This opens a window of opportunity for banks. Why the Impact o MMF Reform is Likely to Benefit Community Banks By Patrick Melland Regional Director, Promontory Interfinancial Network Now that the SEC’s new rules on money market funds (MMFs) have gone into effect, institutional 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 m rket funds calculate value. Up to n w, these funds ave 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 inv stors and fund managers to adapt. With the changes now in effect, institutional money managers 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 commercial paper, had lost more than $900 billion in assets since the beginning of 2015. 1 Source: Crane Data’s Money Fund Intelligence 1 MONEY FUND INTELLIGENCE XLS - Historical Asset Totals & Crane Indexes, October 2016, Crane Data. 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 Assets in Prime MMFs ($B) TOTAL PRIME MMFs INSTITUTIONAL PRIME MMFs 10/31/15: $1.38 T 10/31/15: $860 B 9/30/16: $490 B (-64%) 9/30/16: $230 B (-73%) Formatted: Centered So far, many investors haven’t compl ely exited the mon y fund market, b government funds. Since October 2015, assets in government funds have n $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 Crane’s, in the first two weeks of September 2016, prime money fund asse with only $52 billion of that moving to government funds. 2 So how could this benefit banks? 1. Institutional investors are shifting their investment strategies. Institutional investors have an array of options when it comes to m and once a strategy is institutionalized, it takes work to go back and fact, for many institutional investors, investment practices are writ increasing the difficulty in reevaluation. This structure often leads i “If it’s not broken, don’t fix it.” However, the SEC rule change has e investment policies for many institutional investors, triggering a re practic s. This pens a window of oppor unity for banks. Banks are a trusted resource for institutional depositors and have p institutional investment strategies since the financial crisis, even be According to the AFP’s 2016 Institutio al Cash Man gement survey 2 MONEY FUND INTELLIGENCE XLS - Historical Asset Totals & Crane Indexes, Septem 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 Assets in Govt. MMFs ($B) TOTAL GOVT MMFs INSTITUTIONAL GOVT MMFs 10/31/15: $1.01 T 10/31/15: $740 B 9/30/16: $1.97 T (+95% 9/30/16: $1.37 T (+