Three big-name mutual fund shops, including
Meanwhile, a co-founder of
"We think there will be some shrinkage, but we don't think it would eliminate the product,"
The company, which had opposed the idea, published a report Friday outlining how regulators could make a floating net- asset value, or NAV, acceptable to investors and managers.
The fund industry’s leading trade group, the
Meaning: Change is coming soon. Because it is already late.
Her point of reference:
That action two years ago meant adopting regulations making the mix of investments money market funds can hold less risky. But now comes the proposal, widely expected and foreshadowed by Schapiro herself, that money market funds should routinely “break the buck.” That is to say, the value of the shares in a money market fund should be allowed to float. That they can strive to fix themselves at a dollar a share at the end of every day. But they would not be required to.
That, Schapiro says, will be more realistic. Investors should know that the value of assets in such funds do in fact fluctuate and their values have to reflect “a sudden deterioration in the quality of holdings,’’ should that occur.
“The fact is investors have been given a false sense of security by money market fund sponsor support and the one-time Treasury guarantee,’’ in 2008 that shared up the industry against the run itt experienced, she said. But “funds remain vulnerable to the reality that a single money market fund breaking of the buck could trigger a broad and destabilizing run.”
Unlike 2008, there will be no
“Today, the money-market fund industry and, by extension, the short-term credit market, is working without a net,’’ she said.
As an alternative, the
“It’s hard to miss the hue and cry being raised by the industry against either of these approaches,’’ she said.
But not all parts of the fund industry are screaming.
The net asset value would “float so little’’ that it wouldn’t matter to the retail investor, he said.
And retail investors do not dominate money market fund investing. As of the start of February,
That money should go into bank accounts, any way, Roberge argued. Deposits have some federal guarantees and otherwise should be held directly by banks, any way.
That would make it clear that the values of assets in money market funds do change, he said. And investors of all types are better off knowing that and acting accordingly.
If it’s clear that the values of assets fluctuate and the
In its book, a stable net asset value, where the value of a share of a money market fund is always
To wit, in ICI’s book:
• Tax events are avoided. If money market funds had a floating net asset value, it points out, all share sales would become events that have to be reported to the
• Accounting is simple. Money market funds that keep shares at a stable value of
With a floating NAV, companies and other organizations would have to:
• Regularly “mark to market’’ the value of their money market fund shares;
• Track the costs of their shares; and
• Determine how to match purchases and redemptions for purposes of calculating gains and losses for accounting and tax purposes.
Features can be rich, with the existing rules, ICI maintains. Without a stable net asset value, broker-dealers could not offer their retail investors a range of features including:
• ATM access;
• Check writing;
• Clearing house and other wire transfers; and
• Same-day settlement on shares redeemed via wire transfers.
A floating net asset value “will undermine the core features of money market funds that investors seek—stability, liquidity, and convenience,’’ contends ICI’s chief executive
Individual investors who write checks on their money market funds want to know that their shares are worth
Institutional investors would face the same problems. Moreover, many institutional investors are required to put their cash in stable-value accounts. They would avoid funds with floating values, he maintains.
And capital buffers?
.”The cost of building or paying for capital buffers would come from investors’ yields—yields that have been near zero for more than 30 months,’’ he said.
That, too, would be, if not a killer, at least a non-starter.
“Indeed, corporations are allowed to carry these funds as cash equivalent investments without having to track and report on the daily fluctuations in the value of their portfolio.,’’ according to a white paper by Institutional Cash Distributors, a firm which offers offshore money funds to corporations domiciled in
That means, ICD says, that money in money market funds could and would move outside
In comment letters to the President’s Working Group Report on Money Market Fund Reform, Fidelity, State Street and Federated fund executives said that the past reforms accomplished a lot in reducing risk and increasing transparency amongst mutual funds, and that these changes will greatly reduce any temptations amongst shareholders to bolt from the funds.
They warned further changes could undermine whatever gains the original amendments made in restoring shareholder trust.
“Contrary to recent comments by some that mutual funds are living on borrowed time, we strongly believe that additional regulation of money market funds is neither necessary nor desirable,” wrote
A capital reserve, Hawke wrote further, might not impact mutual fund yields on a day-to-day basis, but its presence would inevitably decrease yield from time-to-time.
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