In two months from now, on October 14, the Money Market Fund Reform Rules are going to be implemented in the US: institutional prime money market funds will be required to move away from the fixed $1 share price and adopt a floating NAV.

The new rules were adopted by the SEC in July 2014, after much debate, in response to calls to improve the transparency and resilience of money market funds after the 2008 financial crisis.

From October onwards, the NAV of institutional money market funds could fall below $1 if the credit quality of their portfolio deteriorates. In order to prevent a run on the fund when the NAV breaks to buck, the new rules allow a fund to impose a 1% redemption fee if weekly liquid assets fall below 10%, 2% below 30%, or impose a redemption gate. Liquid assets are defined as cash, US Treasuries, and paper with less than a week to maturity.

Retail money market funds and government money market funds are exempt from these new rules and continue to transact at a fixed $1 share price.

The industry has had two years to prepare and ‘regulatory guidance’ telegraphed well ahead of time. Some of the largest money market managers have been converting their institutional prime money market funds into government money market funds, invested exclusively in US government securities. More than $350bn has already been converted. As the October implementation date approaches, institutional and corporate investors are expected to further redeem from prime money market funds and invest in government funds. No one knows exactly how much. In anticipation, the money market funds have been increasing their liquidity buffer, by circa $25bio every month. Analysts estimate that 50% of their AUM is already in assets with maturity of a week or less, and the buffer is expected to increase to 70% by October or $550bn. Observers therefore expect the money market funds to seamlessly manage this massive flows of funds.

The borrowers funded by the prime money market funds are mainly non-American banks looking for US dollars. Until now, the short term unsecured funding from the money market funds has been a cheap source of US dollars for foreign banks without US deposits. With circa $900bn of money market funding going away, the banks have a number of options: pay higher rates to continue funding in the much narrower prime money market, to use the cross currency swap market to convert home based deposits into US dollars, or as a backstop, to use the FX swap lines provided by the central banks. There also have secured or longer term funding options of course, but more onerous. For the immediate transition period, the central banks stand ready to provide liquidity; and no one anticipates a liquidity disruption. On the long run, the changes will affect the US dollar business model of foreign banks, how they position themselves in terms of pricing and risk level.

From an alternative credit view point, these changes are occurring at the opposite end of the spectrum in the high grade liquid markets, for the banks to fund US government securities holdings and their traditional corporate lending business.  At face value these changes have nothing to do with the high yield, niche segments of alternative credit. However the sheer size involved in this money market reform makes it worth noting. If the flap of a butterfly can change the weather on the other side of the ocean, then a $2.7 trillion dollar whale, even if it flips very carefully, could cause some ripples.