Adrian Wyld
Canadian securities regulators have slapped new rules on money market funds in a move that could push already puny yields on these investments even lower.
Under the new regulations, these funds, which typically pay investors around 1 per cent a year, will need to hold at least five per cent of their assets in cash or in securities that can easily be converted into cash within a day. In addition, they must hold at least another 15 per cent of their assets in securities that can be converted within a week.
The new restrictions "could impact the yield" on the funds, but managers already hold a certain amount of cash or cash-like securities to meet quick redemptions, said Ralf Hensel, a director of policy at the Investment Funds Institute of Canada (IFIC), the fund industry lobby group.
The implications depend on each fund, but "managers are obviously concerned about their yield and will manage it accordingly," he said.
Canadian investors were rattled in 2007 when they found that some of their money market investments were exposed to troubled asset-backed commercial paper (ABCP) – short-term debt backed by packages of debt like car and mortgage loans, which could not be repaid because of the global credit crunch.
The new rules follow similar reforms by the U.S. Securities and Exchange Commission, which grew concerned after seeing a money market fund run into problems in 2008 because of its holdings of debt issued by bankrupt Lehman Brothers.
But the new cash requirements for Canadian money market funds are less onerous than in the United States, where similar funds must have at least 10 per cent in cash or near-cash securities daily, and 30 per cent on a weekly basis.
The higher cash requirements in the United States reflect the fact that U.S. funds are heavily used by institutional investors that move big blocks of money. In Canada, money market fund are bought mainly by retail investors who use them to park cash before switching into other securities like stocks or funds.
The new Canadian rules, which take effect April 30, also require money market funds to hold securities with an average term to maturity of 180 days compared with 120 days in U.S. funds. A shorter duration limits the exposure of the funds to risks such as sudden interest rate movements.
Canadian regulators bowed to pressure from the industry, which lobbied for a longer average maturity limit because of difficulties finding enough 120-day debt offerings in Canada, Mr. Hensel said.
David Balsdon, chief operating officer of Matrix Fund Management Inc., said he is "not fussed" by the new cash rules because money for redemptions can easily be raised within a day in 99 per cent of the assets of the two Matrix money market funds.
The Matrix funds were among a handful of Canadian funds that did own some ABCP in 2007, but that paper is less than one per cent right now.