AFP: Prime Money Funds Hurt by SEC’s Money-Market Fund Reform

Firms’ short-term cash holdings have moved away from money-market prime funds towards government funds.

Nearly a year after the Securities and Exchange Commission (SEC) implemented money-market fund reform rules, corporate finance professionals are backing away from prime money funds, according to a report from the Association for Financial Professionals (AFP). SEC rules for reforming money market funds went into effect in October 2016. Among other changes, the new rules don’t require prime institutional money market funds to maintain a steady value, and their net asset values can now float.

The Bethesda, Maryland-based trade association for corporate finance professionals reports that its April 2017 AFP Liquidity Survey, underwritten by State Street Global Advisors, of 638 finance professionals reveals that businesses prefer to keep 53% of their short-term investments in bank deposits, with an emphasis on the safety of their principal.

In fact, 67% see safety as their most important goal for their short-term investments, and they consequently favor bank deposits, money-market funds, and Treasuries to hold 76% of their short-term cash holdings. To the extent they consider money-market funds as a short-term outlet, their allocations have moved away from prime funds, towards government funds.

“Money fund reform continues to have adverse impacts on institutional investors, depriving them of a proven, effective cash management tool. The flight from prime funds is also starving the economy of a critical source of short-term capital for large businesses,” said Jim Kaitz, AFP president and CEO. “Despite these changes, many businesses are expanding globally, increasing their cash flow, and beginning to make strategic investments to fuel future growth. These are positive developments for the economy.”

On a net basis, cash holdings were up at 14% of organizations in the last 12 months. Of these, 69% reported that this rise came about as a result of a higher operating cash flow. And for those who expect to increase their cash holdings in the coming 12 months, 79% also say this will come from increased operating cash flow.

And about one-third of those organizations that clamped down on their cash holdings in the last 12 months pointed to rising capital expenditures as the main cause, as do 39% of those who anticipate cutting down on their cash holdings in the coming 12 months.

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