Money Market

How to Think About the Impact of a Floating NAV

How to Think About the Impact of a Floating NAV
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For decades, institutional investors have utilized 2a-7 money market funds to invest cash in a diversified portfolio that seeks to maintain principal and provide daily liquidity with competitive returns. On July 23, 2014, the U.S. Securities and Exchange Commission (SEC) issued new rules governing the structure of money market funds (MMFs) that become effective on October 14, 2016.

These rules, commonly referred to as money market reform (MMR), were developed to strengthen the resiliency of money market funds during times of severe market stress while maintaining the many benefits of money market funds.

One key change that investors are taking a closer look at is the requirement for Institutional Prime and Institutional Tax-Exempt money market funds to price their fund shares using a floating net asset value (FNAV).  Institutional money market funds falling under the new SEC FNAV rules will be required to:

  • Transact business at a floating, market-based NAV rather than at the traditional constant $1 NAV
  • Price portfolio securities at market value instead of amortized cost
  • Use basis points rounding to calculate each fund’s NAV out to four decimal places instead of two
  • Shareholders may continue to classify their investment in a money market fund as cash equivalent for purposes of U.S. generally accepted accounting principles

These new rules from the SEC will affect four Dreyfus Institutional MMFs which will convert to FNAV on October 10, 2016.

Taxable vs Tax Exempt

History Lesson

Although past performance cannot predict future results, the past does demonstrate that FNAV pricing may not have much impact, if any, on the prices of Institutional money market funds.  For years, Dreyfus has calculated a daily market value on money market funds and history has illustrated that NAV fluctuations have been minimal.  For example, during the period 11/30/2010 through 6/30/2016, the actual fund share price movements in the Dreyfus Cash Management fund has only fluctuated from a high of 1.0003 to a low of 1.0000 (see chart at left).

DREYFUS CASH MANAGEMENT FUND

Market Value NAV

Market Value NAV

What to Expect Going Forward

At Dreyfus, we do not anticipate that the required move to a fluctuating NAV in our Institutional Prime or our Institutional Tax-Exempt money market funds will result in any large or material changes in net asset value (barring an extreme event that may impact the overall market valuation).  Our funds will continue to be conservatively managed seeking as high a level of current income as is consistent with the preservation of capital and the maintenance of liquidity.

TAX RELIEF FOR FLOATING NAV MONEY MARKET FUNDS

Even though the market value NAV fluctuation is expected to be minimal, the reality is that redemptions may incur a gain or loss. Multiple purchases and redemptions to meet liquidity needs can become onerous to track. In order to reduce this burden, the IRS has issued guidance for Institutional prime and tax-exempt money market funds.  A summary of this guidance can be found below. This overview is for informational purposes only. Please consult your tax advisor regarding your specific situation.

SIMPLIFIED METHOD OF ACCOUNTING FOR FLOATING-NAV MMF SHARES (NAV METHOD)

In response to concerns regarding tax compliance with frequent redemptions of shares in FNAV MMFs the IRS  provided guidance which allows FNAV fund shareholders to use either conventional gain/loss recognition rules or a new NAV Method. Under the NAV method, shareholders would determine gain or loss by looking at the change in the aggregate value of their  shares in the FNAV MMF, instead of tracking individual lots or the adjusted cost basis of the fund shares. A gain or loss on FNAV money market fund redemption is not required to be reported on Form 1099-B or Form 1099-DIV.

To help facilitate a shareholder’s calculation for reporting short-term gains or losses, Dreyfus has enhanced its account statements to include a section that summarizes the net investment activity in the FNAV money market fund and any liquidity fees that may have been assessed during a calendar year. Shareholders should consult with their tax advisor for questions or additional information.

WASH SALE RULE

A wash sale occurs when shares of a mutual fund are liquidated and then within 30 days a purchase is made in the same fund.  Since gains or losses are determined for each computation period, and no gain or loss is tracked for any particular redemption of a taxpayer’s shares in a floating-NAV MMF a shareholder in a FNAV MMF will not be affected by the wash sale rule.

Whether the shareholder uses the NAV Method or cost basis accounting for their FNAV money market account, there is no need to track or consider the impact of wash sales. For further information on wash sales shareholders should consult with their tax advisor for questions or additional information.

Money market funds continue to provide a competitive and efficient investment option to invest cash. We believe these changes provide greater protection of principal while still providing competitive income to enhance an investor’s overall portfolio.

Should there be a slight movement in the NAV, what can investors expect?  The following table displays hypothetical illustration of the impact of basis point movements in a fund’s NAV and how this will impact the shareholder’s value.

impact of basis point movements

 

You could lose money by investing in a money market fund. Because the share price of the fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below required minimums because of market conditions or other factors.

An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund’s sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.

The Dreyfus Corporation, a subsidiary of BNY Mellon, is the fund’s investment adviser. BNY Mellon is the corporate brand for The Bank of New York Mellon Corporation. MBSC Securities Corporation is a registered broker-dealer, a member of FINRA and a wholly-owned subsidiary of Dreyfus. BNY Mellon Investment Management is one of the world’s leading asset management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management services and global distribution companies.

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