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What You Need to Know About the Money Market Fund Reform


You may have heard of money market fund reform, which is due to be fully implemented by October 14, 2016. Here's a little bit background of this new regulation. In 2008, the Reserve Primary Fund, suffered collateral damage from Lehman Brother's collapse and had to reduce the net asset value (NAV) of its money market fund to below $1, so-called "breaking the buck."

It was a big deal because generally speaking, the net asset value (NAV) of a money market fund remains at $1. When it drops below, it means that the returns on the fund investment do not cover its operating expenses. Since money market funds are usually considered risk-free investments, breaking a buck is relatively uncommon.

Thus when the Reserve Primary Fund broke the buck, it caused a panic among institutional investors. Worrying about the Reserve Primary Fund's solvency, investors began making mass redemption. Soon, the Reserve Primary Fund had to suspend its operation.

Since then, regulators have been working on reforming the Money Market Funds sector. New rules came out early this year and implementation is due by this month.

The new regulation mainly targets institutional investors, i.e. pension funds, 401(k) managers, and insurance companies. Here are some highlights you should know:

  1. Retail money market funds:

  • will maintain a stable $1.00 share price.

  • during times of extreme volatility, may be required to temporarily prevent investors from making withdrawals or to impose fees for investors who redeem shares.

  • in order to be considered a retail fund, the fund must have policies and procedures reasonably designed to limit beneficial ownership to natural persons, including individuals who invest through brokerage accounts, 401(k)s, college savings plans and trusts.

2. Institutional prime and municipal money market funds:

  • will move from a stable $1.00 price per share to a floating net asset value

  • during times of extreme volatility, are required to temporarily prevent investors from making withdrawals or to impose fees for investors who redeem shares.

3.. U.S. government money market funds:

  • can be offered to both retail and institution investors.

  • will maintain a stable $1.00 share price.

  • during times of extreme volatility, are permitted but not required to temporarily prevent investors from making withdrawals or to impose fees for investors who redeem shares.

  • In order to be considered a government fund, a money market fund is required to invest at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements that are collateralized solely by government securities.

As you can see, the new regulation heavily favor government money market funds. Many fund groups, such as Fidelity, have already converted their As a retail investor, if you have held primary money market funds in the past, you probably have noticed that your advisers have moved your investment to a government money market fund.

While the new regulation has good intentions, many investment professionals, including myself, have serious doubts in the regulation's ability to prevent another crisis such as the one caused by the Reserve Primary Fund. When the next economic crisis hits, investors, both retail and institutional, will still react by trying to redeem their money from their investment all at the same time. The redemption restrictions that the new regulation put in place may cause more panic rather than calming the market.

#moneymarketfund #regulation #investment

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