On Wednesday, the Securities and Exchange Commission proposed several reforms to money market funds. Changes to money market funds has been in the works since 2008 after the Reserve Primary Fund “broke the buck” at the height of the financial crisis.
The SEC published two proposals.
Under the first alternative, prime institutional money market funds would be required to transact at a floating net asset value (NAV), not at a $1.00 stable share price. The floating NAV alternative is designed primarily to address the share redemption in times of financial stress. It also is intended to improve the transparency of money market fund risks through more visible valuation and pricing methods.
Government and retail money market funds would be exempt and allowed to maintain a stable share price. A government money market fund would be defined as any money market fund that holds at least 80 percent of its assets in cash, government securities, or repurchase agreements collateralized with government securities. A retail money market fund would be defined as a money market fund that limits each shareholder’s redemptions to no more than $1 million per business day.
Under the second alternative, money market funds would continue to transact at a stable nav, but would be able to use liquidity fees and redemption gates in times of stress.
Personally, I think these are both terrible ideas. With the expiration of the Transaction Account Guarantee program, companies have had to take a closer look at where they park cash for both short term and long term needs. The Transaction Account Guarantee program provided a safe place, even though the account earned no interest. With the expiration of that program, accounts are only insured up to $250,000. Money market funds provide an easy place to park cash and get a diversification of risk.