Money Market UpdateSubmitted by Karstens Investments on October 29th, 2015
By Mark E. Johnson, AIFA®
In the wake of a major money market fund breaking the buck in 2008, the U.S. Securities and Exchange Commission (SEC) has issued new rules regarding the operations of money market funds. These rules will be rolled out by money market providers over the next two years, but must be implemented by October 14, 2016. The SEC’s reasoning for establishing these new regulations is to limit or stop the fear driven redemption of money market funds in times of economic stress.
The rules outline two different types of account holders:
1. Institutional accounts – accounts used for business activity, defined benefit plans, endowments, and foundations are a few examples.
2. Retail accounts – accounts that are titled to an actual person or can be attributable to actual people such as an omnibus account for a 401(k) or 403(b) plan.
The regulations define three different asset-based types of money market:
1. Prime money market funds – funds that invest primarily in corporate short-term debt.
2. Municipal money market funds – funds that invest primarily in municipal short-term instruments or debt.
3. Government or Treasury money market funds – funds that invest primarily in government short-term securities.
The rules require institutional Prime and Municipal money market providers to use a floating net asset value (NAV) for Institutional accounts instead of the historically stable $1.00 par value. Money market providers will still use the $1.00 par value for Retail Prime and Municipal accounts.
At the discretion of the Institutional and Retail money market providers, during times of low liquidity, redemption gates and liquidity fees may be imposed. Redemption gates are periods of time when an account holder cannot withdraw monies from the fund, but these periods are limited to a maximum of 10 days in a 90 day time frame. Liquidity fees may be imposed that can range from zero percent to 2 percent if the Board of Directors for the money market fund believe it is in the best interest of the shareholders invested in the fund. These new rules do not apply to Government or Treasury money market funds for either institutional or retail accounts.
We will be monitoring developments with our current money market providers and will advise on any appropriate course of action in the future as it relates to these new rules. Money market providers will have much work to do in the next two years segmenting accounts and deciding on the application of the new rules in the operations of their funds. •