In 2008 the financial world was rocked when the Reserve Primary Fund broke the buck. Money market funds, such as one issued by the Reserve Primary Fund seek to maintain a net asset value (NAV) of $1.00. This is to keep their funds stable and safe. But when Lehman Brothers failed, they had to write off a lot of bad debt, and the NAV of their fund dropped to $.97 and their money market fund became one three in history to drop below one dollar in net asset value. Since this happened, the Securities and Exchange Commission (SEC) has been searching for ways to make MMF’s safer. They do not want to see another crisis like what happened 4 years ago, and have recently announced their plan on how to make money market funds safer.
Chairman of the SEC, Mary Schapiro recently announced the new impending rules for money market funds. There are only two, but they have created quite the buzz in the financial world. First, the funds would no longer have to maintain their $1.00 NAV status. They would be able to fluctuate up and down, and breaking the buck would no longer become an issue. At the same time, there would be a minimum balance at risk for anyone who had money in the MMF. This minimum balance would not be able to be withdrawn unless a 30 day waiting period was followed. The reasoning behind the two new rules is the SEC wants the share price of the MMF to accurately reflect share price reality, and when it does drop the 30 day waiting period would reduce the number of investors fleeing from the fund. The idea is that after being required to wait 30 days many people would see that they were panicking and instead leave their money in the fund.
In theory these ideas make sense. They should, in the long run, help the MMF’s become safer places for the risk-averse investor to put money. But when the NAV price of the fund can start to fluctuate, it starts to look like a more risky investment. This could end up driving investors away from the funds. The same is true with limiting access to their money. One of the perks of using a money market fund is the fact that they are liquid, when access becomes limited people will look for other options.
The goal of these new rules is to make the money market funds safer. What many critics believe is that all that will happen is these funds will become obsolete. After all, MMF’s are already subject to investment risk (they are not backed by the FDIC). If people suddenly are having to take some risk, they may simply move their money to a money market account, where they will get a guarantee from the government that their account will never lose value.
The SEC is constantly adjusting their rules and making the financial world a safer place. But sometimes it comes at a cost that many do not want to pay. They are trying to make money market funds safer places to store money. In the end they may cause these already low interest rate products to lower their interest rates even further. Or worse, they could disappear completely.
This article was first published on http://moneyprime.com.