TREASURY UPDATE

The majority of corporate practitioners use Money Market Mutual Funds as their benchmark. And, MMMF have long (over 50 years since rule 2a-7) been prevented from investing in securities such as Auction Rate Securities due to the fact that they use an auction mechanism and can't be put back. Will the newly proposed 2a-7 rules really help with liquidity management and liquidity markets?

• Requiring a larger percentage of liquidity to be readily available (percentage to cash: 10% within a day, 30% within a week).
  • Will these percentages really be enough if a 'run' starts?
  • What will funds start to do (after things settle down) with the other 70% of the funds when they are in tough competition for YIELD performance?  Will this cause strange behaviors (buying out on the curve as far as possible? Making a funds holdings disproportionate?
  • Why aren't there simply disclosure rules that perhaps require: show the % of the fund that is liquid within 1, 7, 15, 30, 60, 90 and 90+ days?
    • We are not convinced the proposal is a NET improvement as constructed.
    • Allowing the NAV to float off a buck seems helpful as it adds visibility to a funds true liquidity risk. (The SEC asking for comments on this with regard to adding it to the proposal).
      
• Elimination of Tier 2 Investments (moving from 5% to 0%).
  • Who is comfortable relying on rating agencies alone now anyway? Many of the impaired assets were Tier 1 when they froze up.
  • What funds are currently holding Tier 2 investments?
    • This cleans up the language of the rule – which is pleasant. But, it doesn't appear to make a practical difference. You should be able to see what a money fund holds – whether they have a few percentage
      
• Decreasing the Weighted Average Maturity to 60 Days (from the historical 90 days) and creating the Spread WAM.
  • We are not sure that the change in Weighted Average Maturity to 60 days will have a practical effect on current behavior or actions.Most funds are within 60 days now.
    
  • By addressing floating rate securities the Spread WAM should prove very helpful in keeping MMMF more stable during challenging times.
• Diversification.  The Capital Advisors Group put forth a proposal to place a concentration limit in Financial Issuers. Their point is that there is a high correlation risk between these issuers.
  • We think that this type of diversification (without agreeing to CAG's percentages) is prudent, logical and necessary. The correlation, recently, proved that to be a significant risk.
    
  • We would like to see disclosure/reporting on concentration percentages.

Disclosure may be a far better safeguard than a large number of rule changes meant to make everyone comfortable. At the end of the day it is not about regulations that will make money funds stronger, it is about visibility for the investor.

-c