In July of 2014, the SEC voted on whether or not to implement new rules with the intent of stabilizing financial markets. As many remember, the value of several money market funds crashed in 2008 at the peak of the financial crisis. Similar to other historic crashes, investors panicked, causing runs on banks and other financial investments such as money markets. As anticipated, the results of the vote were 3 to 2 in favor of implementing both a floating net asset value, liquidity fees and redemption gates.
What Is A Money Market Fund
Developed in the 1970s, money market funds allow investors to purchase a pool of securities that generally provide higher returns than interest-bearing bank accounts. Consisting of high-quality, short-term debt, the funds are traditionally very stable. The purpose of a money market fund is to maintain a value of $1.00, so when you invest $1.00, you receive $1.00 back on demand plus a small amount of interest earned.
Fractional increases and decreases occur, but generally the value does not move and investors consider the fund to be equal to cash. When a fund’s value deviates more than 0.5% from its $1.00 share price, the fund is allowed to re-price at its market value. At this time, an investor will not receive the entire $1.00 back – this is referred to as “breaking the buck”.
In 2008, at the height of the financial crisis, one money market fund “broke the buck” causing investors to pull their money out in mass. While penny moves may seem minor, money market funds are perceived as extremely safe and small declines strike fear. As a result, investors pulled out approximately 14% of their total assets – about $300 billion. This caused the U.S. Treasury to step in and provide a government guarantee and also prompted the SEC to evaluate the need for money market fund reform.
Floating Net Asset Value
As a result of the vote in July, prime institutional money market funds will be required to transact at a floating NAV, not at a $1.00 stable share price. This aalternative is designed to address the heightened incentive shareholders have to redeem shares in times of financial stress. The SEC also believes that this action would improve transparency of money market fund risk through more visible valuation.
Liquidity Fees and Redemption Gates
To further limit redemptions, if a money market fund’s level of weekly liquid assets were to fall below 15% of its total assets, the money market will have to impose a 2% liquidity fee on all redemptions. This fee can be avoided if the fund’s board of directors determines that such a fee is not in the best interest of the fund.
READERS: While you may not invest in prime institutional money market funds directly, the result of the regulation will still impact you. Large companies primarily invest their short-term in money market funds. The money is needed for operational purposes, so short, liquid investments are needed. If these companies incur greater accounting costs or are forced to look towards alternative investments with lower returns, the impact to consumers may be minor, but it will be felt.
What are your thoughts on the new MMF fund regulation?