Money Market Fund Reform Explained

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Money Market Fund

Money Market Funds

Money Market Fund Reform Explained

Brian Mathews Nov 22, 2016

On October 14, 2016, money market funds went through a drastic reform that affected many investors and fund companies.
Money market funds are traditionally used as a form of short-term alternative to cash. Currently, there is over $2.9 trillion in money market funds investing for retail and institutional customers. Money market funds used to be priced at $1.00 per share and investors were under the assumption there was little to no fluctuation in share price.

Why Is There Reform?

The primary cause for this massive reform is due to the New York–based Reserve Primary Fund. In 2008, during the middle of the financial crisis, the Reserve Primary Fund was forced to reduce its net asset value (NAV) to below $1.00 per share. This was because the fund was heavily invested in short-term loans that were issued by the now bankrupt Lehman Brothers. This event was the first time a money market fund fell below $1.00 a share and investors began massive redemptions. The fund lost two-thirds of its assets within a day and had to suspend operations just to further the liquidation process.

Since then, the Securities and Exchange Commission (SEC) began to implement several changes to the money market fund model to prevent future catastrophes like the Reserve Primary Fund. The first set of changes occurred in March 2010 and was designed to reduce the interest rate, credit and liquidity risks associated with money market funds. As of October 14, the SEC now requires all money market funds to comply with the new regulations. Check out’s guide to money market funds.

What Are the Changes?

The biggest change is that both institutional and municipal money market funds must move from a stable $1.00 price per share to a floating net asset value based on the underlying investments on a daily basis. It is important for investors to understand that there is fluctuation risk to the fund and it should not be considered the same as holding cash. There are currently prime funds that work with a floating rate feature already and with the fluctuation risk come higher yields for investors.

This change affects non-natural person entities like businesses, defined benefit plans, defined contribution plans and endowments. However, the retail money market and retail municipal money market funds are not subject to the floating NAV pricing and will remain at the stable $1.00 per share price.

Another change for both institutional and retail funds is the redemption fee and suspension. If a fund’s weekly liquid assets fall below 30% of its total assets, the board may impose a liquidity fee of 2%. It can also suspend redemptions for up to 10 business days in a 90-day period. If a fund’s weekly liquid assets fall below 10% in a week, the fund is required to impose a 1% redemption fee. Our article on the SEC & New Liquidity Management Rules explains how the new rules have the potential to enhance liquidity.

Additional changes with this reform are specific diversification requirements for the funds as well as website disclosure requirements. These website disclosures show investors the daily and weekly liquid assets, net inflows/outflows, market-based NAVs and imposition of fees. Each fund is also required to report certain obligations, like if a fee is imposed or a portfolio defaults. The SEC also requires periodic stress testing of each fund’s ability to maintain weekly assets of at least 10% and minimize principle volatility.

The only types of funds that are not affected by this new reform are government funds. These funds are made up of at least 99.5% of total assets in cash, U.S. government securities or repurchase agreements of U.S. government securities. Government money market funds are not subject to the floating rate NAV or the liquidity fee and suspension requirements.

Below is a list of five government money market funds that were not affected by the recent reform. Click on the ticker names to get more data on the funds.

Ticker Name AUM (Billions) Expense Ratio
SPAXX Fidelity® Government MMkt $70.90 0.42%
VMFXX Vanguard Federal Money Market Investor $48.50 0.10%
AFPXX Invesco Short Term Inv Gov&Agcy Instl $23.70 0.13%
GOIXX Federated Government Obligs Instl $68.10 0.34%
GVIXX Wells Fargo Government MMkt Inst $73.80 0.22%

Pros and Cons of the Reform

The most obvious benefit to the reform is to help educate investors on what is considered a safe, stable cash alternative. In 2008, anyone who invested in the Reserve Primary Fund thought that fund’s NAV would never hit below $1.00 a share. Due to the fund’s poor investment selection and the failure of Lehman Brothers, the money market fund failed it primary purpose. With the new reform laws in place, the SEC hopes that any fund deemed to have a stable $1.00 share price as a money market fund will never do the same.

However, since the reform affects many different funds, it limits the options for investors in this space. U.S. government money market funds have seen a massive increase in demand for this exact reason. Investors use money market funds for a cash alternative and expect zero fluctuation to their original principal investment. With the massive inflow of capital, the yields on U.S. government money market funds have declined.

Prime and institutional funds that are now tied to a floating NAV simply have been seen the opposite, with a massive outflow of funds. Many fund companies have also closed funds to avoid having to conform to the new regulations. The funds that did convert to the floating rate NAV have seen yield rise. However, investors simply do not see the risk-reward payoff. Investors seeking higher yields could easily go to a fixed income fund and still have fluctuation of their principal. The asset class is simply not built to have a fluctuation dollar amount and investors use it knowing that the $1.00 put in will always stay stable.

To learn more about money market funds, check out our money market funds page.

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