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Various Changes To MMFs Might Trigger Investor Withdrawals

Various changes to how money market mutual funds (MMFs) work could result in c

Various changes to how money market mutual funds (MMFs) work could result in companies no longer investing in these financial instruments, according to a statement released by the Association for Financial Professionals (AFP) on June 20.

According to the preliminary data gathered in the recent 2012 AFP Liquidity Survey, which was underwritten by RBS and RBS Citizens, the decision of MMFs to utilize a floating net asset value (NAV), seek to generate more capital through fees or impose redemption holdbacks could motivate companies to either cease to invest in the funds, or maybe even liquidate those investments entirely.

The survey also discovered that the approval of various regulations that are being considered by the U.S. Securities and Exchange Commission would make financial organizations less likely to invest in the funds or could potentially motivate them to either reduce or eliminate their holdings in the financial instruments.

AFP plans to release the results of the completed survey in July.

Situations that would cause companies to halt their MMF investments

More than three-quarters, or 77 percent of respondents indicated that they would no longer invest in MMFs if the funds allowed their NAVs to be determined on a floating basis. More than half, or 56 percent of participants indicated that if MMFs adopted this means of valuation, they would liquidate some or all of their existing fund holdings.

Four-fifths, or 80 percent of companies taking part in the survey said they would drop investing in MMFs if the funds became subject to redemption holdback provisions, with 73 percent saying they would instantly sell off either some or all of their MMF holdings.

If companies offering MMFs increased fees to raise capital, 66 percent of respondents said that they would stop investing in the funds. In addition, 55 percent would immediately liquidate either some or all of their current MMF investments.

Impact on global economy

"These scenarios could have a profound effect on the economy," Jim Kaitz, AFP's president and chief executive officer, said in the statement. "Treasurers tell us they would trim money fund holdings. Money funds are a main purchaser of commercial paper. Without a market for commercial paper, many companies could have a harder time funding operations."

The stability of MMF shadow NAV declined during the first five months of 2012, according to a recent Fitch Ratings report.