More than half of the 23 U.S. primary dealers expect certain types of short-term borrowing costs to rise after new rules on money market funds go into effect next week, according to a Federal Reserve survey released on Thursday.
The $2.7 trillion money fund industry has been responding to the final phase of money fund regulations from the Security and Exchange Commission set for Oct. 14.
Key aspects of the new rules for prime money funds include allowing for share prices to float, and fees and limits on redemption during periods of market turbulence. Some corporate treasurers and institutional investors have told SEC in filings that they don't like these new rules.
In the past year, prime money funds for large institutions have converted about $1 trillion of assets into government-only funds in a move to be exempt on SEC rules on share price, redemption and fees.
Primary dealers, or the top 23 Wall Street firms that do business with the Fed, sell commercial paper and other short-term debt to prime money funds to raise cash to fund their trades and operations.
As a result of the shrinkage of prime money funds, this group of investors in commercial paper (CP) and certificate of deposits issued by primary dealers has diminished, driving up their short-term borrowing costs while their long-term borrowing costs have remained near historic lows.
Over the past year, two-fifths of dealers told the Fed they scaled back their use of CP and a quarter of them said they reduced issuance of CDs, the Fed said in its senior credit officer opinion survey in September.
A "small net fraction" of them said they have used more repurchase agreements (repo) backed by U.S. Treasury and agency bonds as a source of funding, the central bank said.
A quarter of the primary dealers expect interest rates on repos "to ease somewhat" due to rising demand from money funds the rest of the year, while more than half of dealers expected they would pay higher interest rates on CP and CDs to entice money funds and other investors for the remainder of the year, the Fed survey showed.
(Reporting by Richard Leong; Editing by Diane Craft)