Pub. 6 2016 Issue 3

However, more recently, money has started to move out of money market funds entirely. According to Crane’s, in the first two weeks of September 2016, prime money fund assets fell by nearly $100 billion, with only $52 billion of that moving to government funds. 2 So how could this benefit banks? 1. Institutional investors are shifting their investment strategies. Institutional investors have an array of options when it comes to managing their cash deposits, and once a strategy is institutionalized, it takes work to go back and evaluate new options. In fact, for many institu- tional investors, investment practices are written into policies, further increasing the difficulty in reevalu- ation. This structure often leads investors to live by the idiom, “If it’s not broken, don’t fix it.” However, the SEC rule change has effectively “broken” the investment policies for many institutional investors, triggering a reevaluation of investment practices. This opens a window of opportunity for banks. Banks are a trusted resource for institutional deposi- tors and have played a growing role in institutional investment strategies since the financial crisis, even before MMF rule changes. According to the AFP’s 2016 Institutional Cash Management survey, institu- tional money managers allocate 55% of short-term portfolios to bank deposits. For context, the same survey from 2007 showed just 27% of short-term institutional funds allocated to bank deposits. 3 Using Promontory’s Insured Cash Sweep service, or ICS, banks have the ability to offer institutional cash managers the same kind of safety of principal and liquidity that they previously expected in prime funds, without having to lock up the deposits in collateral or repo sweeps. 2. Institutional investors will have fewer cash manage- ment options. Not all institutional investors will be impacted by MMF reform. Institutions that historically have had a greater tolerance for risk and variance in their short- term investments won’t see much of a shift in their practices. But many other institutional investors will face the prospect of a diminished range of short-term investment options. Many institutions are governed by rules that require a guarantee of principal on any deposit. Changes in MMF reform have these risk-averse entities moving deposits out of MMFs or adjust- ing their investment practices to invest solely in government-backed investments, such as treasuries or agency notes, which has significantly reduced the yield on these instruments. Again, bank deposits end up looking like an attractive option for many investors. With fewer investment op- tions offering security for cash deposits, banks should be able to draw in safety-conscious institutional depositors, particularly by using ICS. The ICS service 22 www.azbankers.org MMF Reform w Continued from page 21 FOLLOWING THE SEC’S INITIAL ANNOUNCEMENT OF THE RULE CHANGES, THERE WAS A SUBDUED RESPONSE FROM INSTITUTIONAL INVESTORS. THE TWO-YEAR TIMELINE THAT THE SEC SPECIFIED FOR IMPLEMENTATION GAVE A LONG RUNWAY FOR INVESTORS AND FUND MANAGERS TO ADAPT.