For the Love of Money By: Gabriel PotterMBA, AIFA® 2015.10.07

Money Market reform is coming next year and several businesses are already adjusting to the new legal requirements.  Our lead consultants, Sean and Tom, have let me know that there is still some lingering confusion about what’s going on.  Hopefully, this blog post will clarify some of your questions.

As a review, there are basically two types of money market funds:  those that invest in US government paper exclusively and Prime funds which can hold other types of bonds (commercial paper, repos, and municipals) which generally provide more return for investors.  During the financial crisis of 2008, some money market funds were invested in short term loans to large banks that collapsed in the wake of the housing market crash.  These funds broke the key safety requirement of money market funds:  the key mandate not to lose money.  After some funds “broke the buck” (i.e. their Net Asset Value fell below $1.00), the SEC responded with a variety of short term and long term regulations to stabilize the system.

One key regulation, which becomes fully implemented on October 14th 2016, requires money market funds to do one of two things:

GOVERNMENT FUNDS

  • The money market fund has to invest fully and explicitly in US Treasury or US Government backed bonds

OR

PRIME & MUNICIPAL FUNDS

  • Fees:  The money market fund may pose liquidity fees (as much as 2%) as liquid assets fall based on redemptions
  • Gates:  The money market fund can suspend redemptions for up to 10 days if liquid assets fall.
  • Floating NAV:  Institutional money market funds also lose the stable NAV of $1.00; instead, the NAV will float based upon the underlying fund holdings, just like other equity and bond mutual funds which may lose value.

Naturally, money market funds are used as liquid cash equivalents for many investors, institutional and retail alike.  When you look at the onerous new requirements for Prime and Municipal money market funds, the liquidity and safety features for these funds is seriously threatened.  As a result, some investment managers are currently shutting down Prime funds completely and converting their mandates to Government based money market funds.

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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