Money market funds may soon be allowed to have floating net asset values (NAVs) and also may be able to temporarily suspend redemptions in times of decreased liquidity, according to a regulatory proposal that follows deliberations since problems at money funds during the 2008 crash sparked regulators to address issues in a $2.6 trillion industry with huge importance to short-term finance in the economy.
The Securities and Exchange Commission's raising the possibility of money market funds having floating NAVs flies in the face of long-standing views about the sanctity of money-fund NAVs remaining at $1. Indeed, creating the possibility for such short-term cash equivalent vehicles to "break the buck" is likely to divide the industry. A 90-day comment period now follows the SEC's June 5 proposal.
The floating-NAV proposal centers on so-called prime funds that hold short-term commercial paper that carries a bit more risk and usually a higher yield than "government" funds that hold paper issued by the U.S. Treasury and other public entities. A money fund must not hold any security with remaining maturity of more than 397 days, and its dollar-weighted average life to maturity can't exceed 120 days.
Focusing on "prime" funds means a bit more than a third of the U.S. money-market fund industry, or $1 trillion in assets, could be affected. Much of the concern about prime funds relates to mass withdrawals to the tune of $300 billion by institutional investors in 2008 who feared some funds had exposure to Lehman Brothers debt following the investment bank's collapse in September of that year, the SEC said.
The problems began at the Reserve Primary Fund, and led the fund to "break the buck"-it priced its portfolio of securities at $0.97 a share on Sept. 16, 2008-and also triggered to redemptions at other prime money market funds, ultimately causing short-term credit markets to completely freeze, thus unleashing the worst of the financial crisis.
The Treasury Department helped slow the redemption crisis with a special program at the time, but the SEC has been keen on addressing issues with money-market fund redemptions and the breaking-the-buck issues ever since.
"The two alternatives are designed to address money market funds' susceptibility to heavy redemptions, improve their ability to manage and mitigate potential contagion from such redemptions, and increase the transparency of their risks, while preserving, as much as possible, the benefits of money market funds," the SEC proposal said.
The proposal-which, as noted, is subject to a 90-day public comment period before it can be fully implemented-will also be watched closely by ETF sponsors who have exploited the regulatory uncertainty surrounding money funds by launching products such as the $3 billion Pimco Enhanced Short Maturity Strategy Fund (NYSEArca:MINT) that can replace money market funds in a portfolio.
The SEC's floating-NAV proposal would make prime funds similar to MINT and MINT-like "money market proxies" in the sense that MINT doesn't have a fixed NAV. But MINT-like funds can own short-dated paper with longer maturities than a money market fund, which could raise their risk but also raises their yields, arguably making them more alluring to some investors.
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