Buck Hunting

The SEC is proposing new rules to govern money market funds. Among them are restricting withdrawals, requiring fund sponsors to have equity in their funds, and no longer allowing the funds to have a fixed price and daily interest. Instead, the funds will have a floating net asset value like other mutual funds.

The SEC’s aim is to avoid another fund “breaking the buck” during a financial crisis, as the Reserve Primary fund did in 2008. This led to a run on the institutional money market fund system, which in turn threatened the finances of companies like John Deere, Kellogg, and GE, all of which depend on money market funds for short-term liquidity.

There’s no question that money market funds are a major feature of the financial landscape. There are $2.7 trillion in money fund assets, down from almost $4 trillion in 2008, but still a large sum. They’re used as sweep accounts, allowing investors daily access to an interest-bearing asset. They’re limited as to what kinds of credit risk they can take and how long the securities they buy can be. Indeed, rules regarding interest rate risk and credit risk were tightened about two years ago.

But the SEC wants to go further, focusing on their “working capital” proposal. While only two money funds have ever broken the buck, a lot more have been bailed out by a corporate parent, typically by having the parent buy troubled securities from the fund at par. Bank of America, Citi, Morgan Stanley and many others did this during the panic. Reserve Primary didn’t have a corporate sugar-daddy.

But these rules will destroy the industry. Adding costs and increasing investor risk in an asset class that already produces a negative real return is a decision that will put a lot of funds out of business. The ones that remain will be controlled by the big banks. And systemic risk will be worse.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-09T16:38:13+00:00 February 8th, 2012|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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