We wrote last week about the Association for Financial Professionals' "2022 AFP Liquidity Survey. (See AFP's press release; our June 17 News, "AFP'​s 2022 Liquidity Shows Deposits, MMFs, T-​Bills Still Kings of Cash;" and our June 15 Link of the Day, "AFP Releases Liquidity Survey.") Today, we quote from the section on Money Market Funds. (Note: Thank you to those who attended our Money Fund Symposium this week in Minneapolis! Conference materials are available in our "Money Fund Symposium 2022 Download Center," and recordings will be posted in coming days.)

The survey reports, "There are various drivers that play a role in the selection of money market funds. The three factors that play the most important role are yield, fund ratings and fixed or floating NAV. The 11 factors listed in the survey are ranked exactly as they were last year. Sixty-one percent of treasury and finance professionals cite yield as a primary driver (among the top three drivers), while 57 percent cite fund ratings and 42 percent cite fixed or floating NAV as having a significant role when selecting a mutual fund."

It continues, "To put some perspective on the weighting for type of money market funds, -- the vast majority of companies that invest in them choose Government money market funds almost three times more often than Prime funds. Government money market funds account for 14 percent of current allocations and Prime funds account for five percent. A logical conclusion is that the vast majority of organizations that viewed fixed or floating NAV as a dominant driver in the past now do not see that as a hurdle because the limited fund selections prevent organizations from investing in such funds as well as the larger update in ESG investing which might be a driver as well."

It explains, "Banks play a key role in supporting organizations in their cash and short-term investment strategies by providing them with critical information on economic indicators and trends. The past year has been challenging for financial professionals (as well as the current economic situation described earlier) to accurately predict the economic environment, and organizations are more likely to look to their banking partners for sound advice. This year's survey results substantiate this claim: 91 percent of financial professionals identify banks as resources their organizations use to access cash and short-term investment holding information."

AFP's survey says, "Other resources used by treasury and finance professionals include: Investment research from brokers/investment banks (cited by 38 percent of respondents); Credit rating agencies (32 percent); and, Money market fund portals (30 percent). Over half the survey respondents (51 percent) would prefer to receive information regarding operating cash and short-term investment holdings electronically (via email) and 49 percent from email, website, conference calls and in-person."

It tells us, "The primary rationale for investing in U.S. domestic Prime/ Floating NAV Funds is yield (cited by 68 percent of respondents) followed by fund ratings/credit quality (37 percent). Other primary rationales noted by respondents are diversification of underlying instruments (21 percent) and ease of transaction process (21 percent). As discussed earlier in this report, the current allocation to Prime funds is five percent, so this perspective is probably more that of the opportunistic-type investor with a higher risk tolerance or those taking advantage of ESG investing in funds."

AFP mentions, "For those organizations that do invest outside of the U.S. and in a European MMF, the most popular type of fund invested in is a low volatility NAV short-term MMF. Seventeen percent of respondents indicate their companies invest in this type of fund, 11 percentage points lower than the 28 percent reported in 2021. Fifty-four percent of respondents are still researching a decision; that is a large contingency given the high allocation to euro-denominated vehicles."

The survey continues, "Fifty-six percent of respondents expect that with the advent of real-time payments, the money market industry would provide 24/7 liquidity while 19 percent do not anticipate that to be so. Last year 53 percent of respondents expected the money market industry would provide 24/7 liquidity. A quarter of respondents is unsure if real-time payments operating in a 24/7 environment should require the money market industry to provide 24/7 liquidity. In 2021 a slightly smaller share of respondents (53 percent) expected that the money market industry would provide 24/7 liquidity."

It states, "In December 2021, the SEC proposed the following changes to money market funds: Improved fund liquidity provisions for all money funds; Removing gates and fees altogether; Enhancing reporting requirements; and, Implementing 'swing pricing' for institutional Prime and tax-exempt funds. Of these proposals, implementing 'swing pricing” is the most controversial and could spell trouble, primarily for Prime funds.

AFP comments, "Swing pricing would involve complex system changes and essentially require funds to price their underlying investments during the day -- which has never been done; it's always been done at close. During the day, it would require monitoring flows; if those flows impact a fund's liquidity buffers, it would need to implement an NAV cost adjustment to the holders to bring the NAV back to whole. It's difficult because it has to take into consideration the potential pricing impact; given an assumption of flows and the timing for the pricing of securities, fund managers may need to sell to support the liquidity in the fund."

They add, "The comment period for the underlying proposed changes recently closed. While the SEC is still gathering information, it looks like there is support for removing gates and fees, but instead of 'swing pricing' placing redemption fees as an alternative solution. It's not clear the direction the SEC might take. Redemption fees would not be refundable to the client, but instead serve as a cash infusion to boost the NAV to benefit the current investors. There are varying opinions on this, but it is clear that Prime funds are likely to experience a downshift if the SEC rules on its swing pricing proposal and it moves forward."

Finally, the survey states, "Seventy percent of respondents report that if all the proposed revisions are enacted, they are unsure as to what they would do with their organizations' money fund allocations which are subject to the proposals. The remaining 30 percent have varied responses: 9 percent do not expect that SEC will pass these proposals, 8 percent will move out of Prime funds due to swing pricing, 10 percent will stay in Prime funds to allow the market to digest swing pricing, while only three percent would move into Prime funds if the gate provision were removed."

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