New Money Market Regulations impact on Trade Receivables

Update, 23 July-The SEC voted 3-2 to abandon the fixed $1 share price and float in value like other mutual funds. The rules also allow money funds to temporarily block investors from withdrawing their money in times of stress, or allow the funds to impose a fee to redeem shares. Companies would have up to two years to comply with the changes.

As a corporate treasury or institutional investor, you should be smart enough to know that your money market fund’s net asset value does not always equal a buck. That’s accounting heresy.

This Wednesday, July 23, 2014, the Securities and Exchange Commission (SEC) will issue new rules for further regulation of money market mutual funds. The goal is to reduce the risk of investor runs on money market mutual funds similar to what occurred in the 2008 financial crisis.

There are four options under consideration:

  1. Require prime institutional funds to shift from a stable, $1 per share net asset value to a floating net asset value.
  2. Permit funds to impose "gates" on redemptions and charge liquidity fees in times of stress.
  3. Hybrid of the above
  4. Do nothing


The commission is still trying to work on what the final version of the rule will be.   This is a follow up from their vote on 5 June to  propose additional measures - see Nowhere to go - Upcoming Money fund regulations will change Trade Receivables

Should a majority of the five commissioners vote to issue new rules, there will be no immediate change to most money market funds. Should the SEC vote to issue new rules, the SEC will specify the exact length of the implementation period for each new rule.

But we believe any change will ultimately have an impact on trade receivables, given some of the unique characteristics they have as investments that are different from loans, commercial paper and other asset classes.   These differences can be classified as operational.

  1. One is ‘dilution risk’, caused by the possibility that a receivable might not be paid or paid at a discount. Product returns, cash discounts, advertising allowances, volume rebates, good customer programs, and standard pricing disputes are all examples of dilution.
  2. A second is ‘timing risk’ caused by payment being uncertain, especially in some markets. A buyer says they will pay you in 30 days but it ends up being 52 days when you finally get the funds.
  3. Receivables also normally occur at the operating company level, making them senior debt compared to obligations at the holding company level.
  4. Receivables also lack transparency – you can’t go look up data on Bloomberg on HPs or Dells receivables.


The private equity and hedge fund world is very actively trying to figure out how they can play in this space – and due to the lack of transparency around trade receivables, believes significant alpha can be had.

Very soon we will find out if the SEC has made any significant regulatory changes, and if so, the consequences could be far-reaching.

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