Yesterday, the SEC announced new rules for US money market funds, which in the aggregate hold $2.6 trillion in investors’ money. Of that amount, two-thirds is in funds catering to institutions and high net worth individuals; one-third is in funds serving the mass market.
Why the need for new rules?
–today’s aggregate money market assets are large enough to be a risk to the overall financial system if something goes badly wrong, and
–the funds are typically sold as being just like bank deposits, only with higher yields. However, like most Wall Street claims that “x is just like y, only better,” it’s not really true. The differences only become important in times of market stress, when normally sane people do crazy things, and when “yes, but…” is a sign for panic to begin. So there’s a chance that “badly wrong” can happen.
The differences? …bank deposits are backed by government insurance that insulates depositors from investment mistakes a bank may make. Also, the Fed stands ready to rush boatloads of cash to a bank if withdrawals exceed the money a bank happens to have on hand. Money market funds have neither.
Yet many holders are unaware that it’s possible for a money market fund’s net asset value to fall below the customary $1.00 per share, or that a fund might be overwhelmed by redemptions and forced to sell assets at bargain-basement prices to meet them.
Fixing this potential vulnerability has two parts:
–giving the finds the ability to halt or postpone redemptions during financial emergencies, and
–requiring funds to have floating net asset values, not the simple $1.00 a share. This would mean marking each security to market every day. …which would likely require hiring a third-party to price securities that didn’t trade on a given day.
The first of these would avoid the government having to step in the case of a run on a fund. The second should reinforce that money market funds aren’t bank deposits.
the new rules
Of source, the organizations that sell money market funds have been strongly opposed to anything that would ruin their “just like…, but better…” sales pitch. Their lobbying has blocked action for years.
So it should be no surprise that yesterday’s SEC action was a compromise measure:
–all funds will be able to postpone redemptions in time of emergency, but
–only funds that cater to big-money investors will have to maintain a variable NAV.
Personally, I don’t understand why money market funds that serve ordinary investors should be exempt from having to calculate a true daily NAV. You’d think that this is the group that most needs to understand that the (remote) possibility of loss is one of the tradeoffs for getting a higher yield. Arguably, sophisticated investors already know. But the financial lobby is incredibly powerful in Washington, and this may have been the price for getting anything at all done.