After a slew of bank failures rattled the global economy, the Reserve Primary Fund, a money market fund, “broke the buck” in September 2008 sending its net asset value spiraling to 97 cents per share.
Since then the Security and Exchange Commission has turned its attention to money market funds. Last month, the SEC approved rules that would require money market funds to maintain minimum levels of liquidity.
At the Investment Company Institute’s Mutual Funds and Investment Management Conference in Phoenix this week, Paul Schott Stevens, the organization’s president and chief executive officer, said the SEC has already put in place protections for money market funds, such as granting the boards of these funds the power to stop the flow of redemptions and liquidate a troubled fund.
Stevens said that the ICI is on board with the SEC to make money market funds even more secure and is open to reform. But, he emphasized, the ICI is strongly opposed to doing away with a steady net asset value, which is usually $1 per share, and is a fundamental feature of money market funds.
“Make no mistake: forcing these funds to “float” their NAV will destroy money market funds as we know them,” Stevens said at the conference Monday. “It will penalize individual investors and exact a high price in the American economy. But it will not–repeat, not–reduce risks to the financial system. By any measure, it is a bad idea.”
Stevens said that mutual funds that float their NAV are not immune to redemption pressure.
“That’s clear from the record of floating-value ultra-short bond funds–they lost half of their assets in the course of 2008,” he said. “Clearly, the experience of these other funds demonstrates that a fluctuating per-share value would not eliminate the possibility of wholesale redemptions from money market funds during a future crisis.”
After the ICI issued its Money Market Working Group report in March 2009, the organization began exploring the idea of installing emergency liquidity facilities, which Stevens said is moving forward quickly. The facility would be a state-chartered bank or trust company, organized and capitalized by the prime money market fund industry, would be managed and governed in accordance with applicable banking laws.
Currently, Stevens said, assets in these funds stand at $1.8 trillion. The SEC’s new liquidity requirements will soon require money market funds to have a minimum cushion of $540 billion in assets that are liquid within seven days, of which $180 billion must be redeemable on any given day.
Stevens said he can’t say when or if a liquidity facility will be launched, but the ICI's executive committee supports establishing the facility if industry participants and regulators can agree on a working model.