Reforms under consideration could undermine the convenience and stability of money market funds—and turn businesses away from these funds. The resulting effects could cause significant disruption of how businesses manage their cash and the availability of credit to fund their operations.
- Hobble Cash Management for Companies
Businesses look to money market funds for stability, a high degree of liquidity, and a historically higher yield than competing products. Without the ability to operate at a stable NAV, money market funds could not provide businesses with the cash management services they seek. In fact, in a recent survey of corporate money market fund users by consultants Treasury Strategies Inc., 77 percent said they would move cash out of these funds if their NAV was changed from stable to floating.
- Drive Up the Cost of Doing Business
Businesses use money market funds to hold excess cash for short periods of time. Floating the NAV would undermine the convenience and simplicity using money market funds for cash management by confronting businesses with new tax, accounting, and legal hurdles. The consequences of such a move would increase costs and affect all sectors of the US economy.
- Impact Business Operations and Employment
Money market funds hold more than one-third of the commercial paper that businesses use to meet short-term obligation, such as funding payrolls, replenishing inventories, and financing expansion. If proposed reforms drive investors out of money market funds, the flow of short-term capital to businesses will be significantly disrupted. Federal proposals could drive up the costs to these companies, affecting business operations, current employment and future growth.
- Banks, Alternative Funds Can’t Step Up to Fill the Gap
Few immediate substitutes are available to fill the financing gap that would be created by a rapid shrinkage of money market funds. Even if banks could raise the new capital needed to meet corporate and municipal demand, the lending market would be less efficient and costs would rise.