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A money market fund (also called a money market mutual fund) is an open-ended
mutual fund A mutual fund is an open-end professionally managed investment fund that pools money from many investors to purchase securities. Mutual funds are "the largest proportion of equity of U.S. corporations." Mutual fund investors may be retail or inst ...
that invests in short-term debt
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any form ...
such as US Treasury bills and
commercial paper Commercial paper, in the global financial market, is an unsecured promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a legal term of art that is used for any formally ex ...
. Money market funds are managed with the goal of maintaining a highly stable asset value through liquid investments, while paying income to investors in the form of dividends. Although they are not insured against loss, actual losses have been quite rare in practice. Regulated in the United States under the
Investment Company Act of 1940The Investment Company Act of 1940 (commonly referred to as the '40 Act) is an act of Congress An Act of Congress is a statute enacted by United States Congress, Congress. Acts can affect only individual entities (called private laws), or the gener ...
, and in Europe under Regulation 2017/1131, money market funds are important providers of
liquidityLiquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liqui ...

liquidity
to financial intermediaries.


Explanation

Money market funds seek to limit exposure to losses due to
credit px, Domestic credit to private sector in 2005 Credit (from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, kn ...
,
market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *Market (1965 film), ''Market'' (1965 ...
, and
liquidityLiquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liqui ...
risks. Money market funds in the
United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., federal di ...

United States
are regulated by the
Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is a large independent agencies of the United States government, independent agency of the United States federal government that was created following the Great Depression, stock market crash in ...
(SEC) under the
Investment Company Act of 1940The Investment Company Act of 1940 (commonly referred to as the '40 Act) is an act of Congress An Act of Congress is a statute enacted by United States Congress, Congress. Acts can affect only individual entities (called private laws), or the gener ...
. Rule 2a-7 of the act restricts the quality, maturity and diversity of investments by money market funds. Under this act, a money fund mainly buys the highest rated
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
, which matures in under 13 months. The portfolio must maintain a weighted average maturity (WAM) of 60 days or less and not invest more than 5% in any one issuer, except for
government securities Government debt, also known as public interest, public debt, national debt and sovereign debt, is the total amount of debt owed at a point in time by a government or state to lenders. Government debt can be owed to lenders within the country (also ...
and
repurchase agreement A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in Government debt, government securities. The dealer sells the underlying security to investors and, by agreement bet ...
s.
Securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any form ...
in which money markets may invest include
commercial paper Commercial paper, in the global financial market, is an unsecured promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a legal term of art that is used for any formally ex ...
,
repurchase agreement A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in Government debt, government securities. The dealer sells the underlying security to investors and, by agreement bet ...
s, short-term bonds and other money funds. Money market securities must be highly liquid and of the highest quality.


History

In 1971, Bruce R. Bent and Henry B. R. Brown established the first money market fund. It was named the Reserve Fund and was offered to investors who were interested in preserving their cash and earning a small rate of return. Several more funds were shortly set up and the market grew significantly over the next few years. Money market funds are credited with popularizing mutual funds in general, which until that time, were not widely utilized. Money market funds in the United States created a solution to the limitations of
Regulation QRegulation Q ( 12 CFRbr>217 is a Federal Reserve The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the ena ...
, which at the time prohibited demand deposit accounts from paying interest and capped the rate of interest on other types of bank accounts at 5.25%. Thus, money market funds were created as a substitute for bank accounts. In the 1990s, bank interest rates in
Japan , image_flag = Flag of Japan.svg , alt_flag = Centered deep red circle on a white rectangle , image_coat = Imperial Seal of Japan.svg , alt_coat = Golden circle subdiv ...
were near zero for an extended period of time. To search for higher yields from these low rates in bank deposits, investors used money market funds for short-term deposits instead. However, several money market funds fell off short of their stable value in 2001 due to the bankruptcy of Enron, in which several Japanese funds had invested, and investors fled into government-insured bank accounts. Since then the total value of money markets have remained low. Money market funds in Europe have always had much lower levels of investments capital than in the United States or Japan. Regulations in the have always encouraged investors to use banks rather than money market funds for short-term deposits.


Breaking the buck

Money market funds seek a stable
net asset value Net asset value (NAV) is the value of an entity's asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to p ...
(NAV) per share (which is generally $1.00 in the United States); they aim to never lose money. The $1.00 is maintained through the declaration of dividends to shareholders, typically daily, at an amount equal to the fund's net income. If a fund's NAV drops below $1.00, it is said that the fund "broke the buck". For SEC registered money funds, maintaining the $1.00 flat NAV is usually accomplished under a provision under Rule 2a-7 of the 40 Act that allows a fund to value its investments at amortized cost rather than market value, provided that certain conditions are maintained. One such condition involves a side-test calculation of the NAV that uses the market value of the fund's investments. The fund's published, amortized value may not exceed this market value by more than 1/2 cent per share, a comparison that is generally made weekly. If the variance does exceed $0.005 per share, the fund could be considered to have broken the buck, and regulators may force it into liquidation. Buck breaking has rarely happened. Up to the
2008 financial crisis 8 (eight) is the natural number In mathematics, the natural numbers are those used for counting (as in "there are ''six'' coins on the table") and total order, ordering (as in "this is the ''third'' largest city in the country"). In common ...
, only three money funds had broken the buck in the 37-year history of money funds. It is important to note that, while money market funds are typically managed in a fairly safe manner, there would have been many more failures over this period if the companies offering the money market funds had not stepped in when necessary to support their fund (by way of infusing capital to reimburse security losses) and avoid having the funds break the buck. This was done because the expected cost to the business from allowing the fund value to drop—in lost customers and reputation—was greater than the amount needed to bail it out. The first money market mutual fund to break the buck was First Multifund for Daily Income (FMDI) in 1978, liquidating and restating NAV at 94 cents per share. An argument has been made that FMDI was not technically a money market fund as at the time of liquidation the average maturity of securities in its portfolio exceeded two years. However, prospective investors were informed that FMDI would invest "solely in Short-Term (30-90 days) MONEY MARKET obligations". Furthermore, the rule restricting which the maturities which money market funds are permitted to invest in, Rule 2a-7 of the Investment Company Act of 1940, was not promulgated until 1983. Prior to the adoption of this rule, a mutual fund had to do little other than present itself as a money market fund, which FMDI did. Seeking higher yield, FMDI had purchased increasingly longer maturity securities, and rising interest rates negatively impacted the value of its portfolio. In order to meet increasing redemptions, the fund was forced to sell a certificate of deposit at a 3% loss, triggering a restatement of its NAV and the first instance of a money market fund "breaking the buck". The Community Bankers US Government Fund broke the buck in 1994, paying investors 96 cents per share. This was only the second failure in the then 23-year history of money funds and there were no further failures for 14 years. The fund had invested a large percentage of its assets into adjustable rate securities. As interest rates increased, these floating rate securities lost value. This fund was an
institutional money fund A money market fund (also called a money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as Treasury bill, US Treasury bills and commercial paper. Money market funds are managed with the goal of main ...
, not a retail money fund, thus individuals were not directly affected. No further failures occurred until September 2008, a month that saw tumultuous events for money funds. However, as noted above, other failures were only averted by infusions of capital from the fund sponsors.


September 2008

Money market funds increasingly became important to the wholesale money market leading up to the crisis. Their purchases of asset-backed securities and large-scale funding of foreign banks' short-term US-denominated debt put the funds in a pivotal position in the marketplace. The week of September 15, 2008, to September 19, 2008, was very turbulent for money funds and a key part of financial markets seizing up.


Events

On Monday, September 15, 2008, Lehman Brothers Holdings Inc. filed for
bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debto ...
. On Tuesday, September 16, 2008, The Reserve Primary Fund broke the buck when its shares fell to 97 cents after writing off debt issued by Lehman Brothers. Continuing investor anxiety as a result of the Lehman Brothers bankruptcy and other pending financial troubles caused significant redemptions from money funds in general, as investors redeemed their holdings and funds were forced to liquidate assets or impose limits on redemptions. Through Wednesday, September 17, 2008, prime institutional funds saw substantial redemptions. Retail funds saw net inflows of $4 billion, for a net capital outflow from all funds of $169 billion to $3.4 trillion (5%). In response, on Friday, September 19, 2008, the
US Department of the Treasury The Department of the Treasury (USDT) is the national treasury A treasury is either *A government department related to finance and taxation, a Finance minister, finance ministry. *A place or location where treasure, such as currency or preciou ...
announced an optional program to "insure the holdings of any publicly offered eligible money market mutual fund—both retail and institutional—that pays a fee to participate in the program". The insurance guaranteed that if a covered fund had broken the buck, it would have been restored to $1 NAV. The program was similar to the
FDIC The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that provide deposit insurance to depositors in U.S. depository institutions, the other being the National Credit Union Administration, which regulates and insures credit u ...
, in that it insured deposit-like holdings and sought to prevent runs on the bank. The guarantee was backed by assets of the Treasury Department's
Exchange Stabilization FundThe Exchange Stabilization Fund (ESF) is an emergency reserve fund of the United States Treasury Department The Department of the Treasury (USDT) is the national treasury of the federal government of the United States The federal governm ...
, up to a maximum of $50 billion. This program only covered assets invested in funds before September 19, 2008, and those who sold equities, for example, during the subsequent market crash and parked their assets in money funds, were at risk. The program immediately stabilized the system and stanched the outflows, but drew criticism from banking organizations, including the
Independent Community Bankers of AmericaThe Independent Community Bankers of America (ICBA) is the primary trade group A trade association, also known as an industry trade group, business association, sector association or industry body, is an organization founded and funded by business ...
and
American Bankers Association The American Bankers Association (ABA) offers training, certification, news, research, advocacy, and community for bankers and members of the financial services in America. ABA is a Washington, D.C.-based trade association A trade association, al ...
, who expected funds to drain out of bank deposits and into newly insured money funds, as these latter would combine higher yields with insurance. The guarantee program ended on September 18, 2009, with no losses and generated $1.2 billion in revenue from the participation fees.


Analysis

The crisis, which eventually became the catalyst for the
Emergency Economic Stabilization Act of 2008 Emergency slides are deployed after the crash landing of British Airways Flight 38 An emergency is a situation that poses an immediate risk to health Health is a state of physical, mental and social well-being Well-being, also known ...
, almost developed into a run on money funds: the redemptions caused a drop in demand for
commercial paper Commercial paper, in the global financial market, is an unsecured promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a legal term of art that is used for any formally ex ...
, preventing companies from rolling over their short-term debt, potentially causing an acute
liquidity crisisIn financial economics Financial economics is the branch of economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribut ...
: if companies cannot issue new debt to repay maturing debt, and do not have cash on hand to pay it back, they will
default Default may refer to: Law * Default (law), the failure to do something required by law ** Default (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It ...
on their obligations, and may have to file for
bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debto ...
. Thus there was concern that the run could cause extensive bankruptcies, a
debt deflationDebt deflation is a theory that recession In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand sho ...
spiral, and serious damage to the
real economyThe real economy concerns the production, purchase and flow of goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economi ...
, as in the
Great Depression The Great Depression was a severe worldwide economic depression that took place mostly during the 1930s, beginning Great Depression in the United States, in the United States. The timing of the Great Depression varied around the world; in mos ...
. The drop in demand resulted in a "buyers strike", as money funds could not (because of redemptions) or would not (because of fear of redemptions) buy commercial paper, driving yields up dramatically: from around 2% the previous week to 8%, and funds put their money in Treasuries, driving their yields close to 0%. This is a bank run in the sense that there is a mismatch in maturities, and thus a money fund is a "virtual bank": the assets of money funds, while short term, nonetheless typically have maturities of several months, while investors can request redemption at any time, without waiting for obligations to come due. Thus if there is a sudden demand for redemptions, the assets may be liquidated in a
fire sale A fire sale is the sale of goods at extremely discounted prices. The term originated in reference to the sale of goods at a heavy discount due to fire damage. It may or may not be defined as a closeout, the final sale of goods to zero inventory ...
, depressing their sale price. An earlier crisis occurred in 2007–2008, where the demand for
asset-backed commercial paper Asset-backed commercial paper (ABCP) is a form of commercial paper that is collateralized by other financial assets. Institutional investors usually purchase such instruments in order to diversify their assets and generate short-term gains. St ...
dropped, causing the collapse of some
structured investment vehicle A structured investment vehicle (SIV) is a non-bank financial institution established to earn a credit spread between the longer-term assets held in its portfolio and the shorter-term liabilities it issues. They are simple credit spread lenders, ...
s. As a result of the events, the Reserve Fund liquidated, paying shareholders 99.1 cents per share.


Statistics

The
Investment Company Institute The Investment Company Institute (ICI) is a global association of regulated funds, including mutual fund A mutual fund is an open-end professionally managed investment fund that pools money from many investors to purchase securities. Mutual fund ...
reports statistics on money funds weekly as part of its mutual fund statistics, as part of its industry statistics, including total assets and net flows, both for institutional and retail funds. It also provides annual reports in the ICI Fact Book. At the end of 2011, there were 632 money market funds in operation,2012 INVESTMENT COMPANY FACT BOOK
Tables 37-39, Pages 170-172. Note: Data for funds that invest primarily in other mutual funds were excluded from the series.
with total
asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
s of nearly US$2.7 trillion. Of this $2.7 trillion, retail money market funds had $940 billion in Assets Under Management (AUM). Institutional funds had $1.75 trillion under management.


Types and size of money funds

In the United States, the fund industry and its largest trade organization, the Investment Company Institute, generally categorize money funds into the type of investment strategy: Prime, Treasury or Tax-exempt as well as distribution channel/investor: Institutional or Retail.


Prime money fund

A fund that invests generally in variable-rate debt and commercial paper of corporations and securities of the US government and agencies. Can be considered of any money fund that is not a Treasury or Tax-exempt fund.


Government and Treasury money funds

A Government money fund (as of the SEC's July 24, 2014 rule release) is one that invests at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements that are "collateralized fully" (i.e., collateralized by cash or government securities). A Treasury fund is a type of government money fund that invests in US Treasury Bills, Bonds and Notes.


Tax-exempt money fund

The fund invests primarily in obligations of state and local jurisdictions ("municipal securities") generally exempt from US Federal Income Tax (and to some extent state income taxes).


Institutional money fund

Institutional money funds are high minimum investment, low expense share classes that are marketed to corporations, governments, or fiduciaries. They are often set up so that money is swept to them overnight from a company's main operating accounts. Large national chains often have many accounts with banks all across the country, but electronically pull a majority of funds on deposit with them to a concentrated money market fund.


Retail money fund

Retail money funds are offered primarily to individuals. Retail money market funds hold roughly 33% of all money market fund assets. Fund yields are typically somewhat higher than bank
savings account A savings account is a bank account at a retail banking, retail bank. Common features include a limited number of withdrawals, a lack of cheque and linked debit card facilities, limited transfer options, and the inability to be overdrawn. Tradit ...
s, but of course these are different products with differing risks (e.g., money fund accounts are not insured and are not deposit accounts). Since Retail funds generally have higher servicing needs and thus expenses than Institutional funds, their yields are generally lower than Institutional funds. SEC rule amendments released July 24, 2014, have 'improved' the definition of a Retail money fund to be one that has policies and procedures reasonably designed to limit its shareholders to natural persons.


Money fund sizes

Recent total net assets for the US Fund industry are as follows: total net assets $2.6 trillion: $1.4 trillion in Prime money funds, $907 billion in Treasury money funds, $257 billion in Tax-exempt. Total Institutional assets outweigh Retail by roughly 2:1. The largest institutional money fund is the
JPMorgan JPMorgan Chase & Co. is an American investment bank and financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, i ...

JPMorgan
Prime Money Market Fund, with over US$100 billion in assets. Among the largest companies offering institutional money funds are
BlackRock BlackRock, Inc. is an American multinational investment management corporation based in New York City New York City (NYC), often simply called New York, is the List of United States cities by population, most populous city in the Unite ...
, Western Asset,
Federated Investors Federated Hermes is an investment manager headquartered in Pittsburgh Pittsburgh ( ) is a city in the state of Pennsylvania in the United States and the county seat of Allegheny County, Pennsylvania, Allegheny County. An estimated population ...
, Bank of America, Dreyfus, AIM and
Evergreen In botany Botany, also called , plant biology or phytology, is the science of plant life and a branch of biology. A botanist, plant scientist or phytologist is a scientist who specialises in this field. The term "botany" comes from the Anci ...
(
Wachovia Wachovia was a diversified financial services company based in Charlotte, North Carolina. Before its acquisition by Wells Fargo and Company in 2008, Wachovia was the fourth-largest bank holding company in the United States, based on total assets ...
). The largest money market mutual fund is Vanguard Federal Money Market Fund (Nasdaq:VMFXX), with assets exceeding US$120 billion. The largest retail money fund providers include:
Fidelity Fidelity is the quality of faithfulness or loyalty. Its original meaning regarded duty A duty (from "due" meaning "that which is owing"; fro, deu, did, past participle of ''devoir''; la, debere, debitum, whence "debt") is a commitment or ex ...
,
Vanguard The vanguard (also called the advance guard) is the leading part of an advancing military formation Military organization or military organisation is the structuring of the armed forces of a state so as to offer such military capability as a ...
, and Schwab.


Similar investments


Money market accounts

Banks in the United States offer savings and money market ''deposit accounts'', but these should not be confused with money ''mutual funds''. These bank accounts offer higher yields than traditional
passbook A passbook or bankbook is a paper book used to record bank or building society transactions on a deposit account. Traditionally, a passbook is used for accounts with a low transaction volume, such as savings accounts. A bank teller or post ...
savings account A savings account is a bank account at a retail banking, retail bank. Common features include a limited number of withdrawals, a lack of cheque and linked debit card facilities, limited transfer options, and the inability to be overdrawn. Tradit ...
s, but often with higher minimum balance requirements and limited transactions. A money market account may refer to a money market mutual fund, a bank money market deposit account (MMDA) or a brokerage sweep free credit balance.


Ultrashort bond funds

Ultrashort bond funds are mutual funds, similar to money market funds, that, as the name implies, invest in bonds with extremely short maturities. Unlike money market funds, however, there are no restrictions on the quality of the investments they hold. Instead, ultrashort bond funds typically invest in riskier securities in order to increase their return. Since these high-risk securities can experience large swings in price or even default, ultrashort bond funds, unlike money market funds, do not seek to maintain a stable $1.00 NAV and may lose money or dip below the $1.00 mark in the short term. Finally, because they invest in lower quality securities, ultrashort bond funds are more susceptible to adverse market conditions such as those brought on by the
financial crisis of 2007–2010 Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricatu ...
.


Enhanced cash funds

Enhanced cash funds are
bond fund A bond fund or debt fund is a fund that invests in bonds, or other debt securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument Finance is the study of financial institutions, fin ...
s similar to money market funds, in that they aim to provide liquidity and principal preservation, but which: * Invest in a wider variety of assets, and do not meet the restrictions of SEC Rule 2a-7; * Aim for higher returns; * Have less liquidity; * Do not aim as strongly for stable NAV. Enhanced cash funds will typically invest some of their portfolio in the same assets as money market funds, but others in riskier, higher yielding, less liquid assets such as: * Lower-rated bonds; * Longer maturity; * Foreign currency–denominated debt; *
Asset-backed commercial paper Asset-backed commercial paper (ABCP) is a form of commercial paper that is collateralized by other financial assets. Institutional investors usually purchase such instruments in order to diversify their assets and generate short-term gains. St ...
(ABCP); *
Mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an Financial instrument, 'instrument') which is secured by a mortgage loan, mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a ...
(MBSs); *
Structured investment vehicle A structured investment vehicle (SIV) is a non-bank financial institution established to earn a credit spread between the longer-term assets held in its portfolio and the shorter-term liabilities it issues. They are simple credit spread lenders, ...
s (SIVs). In general, the NAV will stay close to $1, but is expected to fluctuate above and below, and will break the buck more often. Different managers place different emphases on risk versus return in enhanced cash – some consider preservation of principal as paramount, and thus take few risks, while others see these as more bond-like, and an opportunity to increase yield without necessarily preserving principal. These are typically available only to institutional investors, not retail investors. The purpose of enhanced cash funds is not to replace money markets, but to fit in the continuum between cash and bonds – to provide a higher yielding investment for more permanent cash. That is, within one's
asset allocation Asset allocation is the implementation of an investment strategyIn finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of ...

asset allocation
, one has a continuum between cash and long-term investments: * Cash – most liquid and least risky, but low yielding; * Money markets / cash equivalents; * Enhanced cash; * Long-term bonds and other non-cash long-term investments – least liquid and most risky, but highest yielding. Enhanced cash funds were developed due to low spreads in traditional cash equivalents. There are also funds which are billed as "money market funds", but are not 2a-7 funds (do not meet the requirements of the rule). In addition to 2a-7 eligible securities, these funds invest in
Eurodollar Eurodollars are time deposit A time deposit or term deposit (in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located i ...
s and repos (
repurchase agreement A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in Government debt, government securities. The dealer sells the underlying security to investors and, by agreement bet ...
s), which are similarly liquid and stable to 2a-7 eligible securities, but are not allowed under the regulations.


Systemic risk and global regulatory reform


US regulatory reform

A deconstruction of the September 2008 events around money market funds, and the resulting fear, panic, contagion, classic
bank run A bank run (also known as a run on the bank) occurs when many clients withdraw their money from a bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneou ...
, emergency need for substantial external propping up, etc. revealed that the US regulatory system covering the basic extension of credit has had substantial flaws that in hindsight date back at least two decades. It has long been understood that regulation around the extension of credit requires substantial levels of integrity throughout the system. To the extent regulation can help insure that base levels of integrity persist throughout the chain, from borrower to lender, and it curtails the overall extension of credit to reasonable levels, episodic financial crisis may be averted. In the 1970s, money market funds began disintermediating banks from their classic interposition between savers and borrowers. The funds provided a more direct link, with less overhead. Large banks are regulated by the
Federal Reserve Board The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve, Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping i ...
and the
Office of the Comptroller of the Currency The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury that was established by the National Currency Act of 1863 and serves to charter A charter is the grant of author ...
. Notably, the Fed is itself owned by the large ''private'' banks, and controls the overall supply of money in the United States. The OCC is housed within the Treasury Department, which in turn manages the issuance and maintenance of the multi-trillion dollar debt of the US government. The overall debt is of course connected to ongoing federal government spending vs. actual ongoing tax receipts. Unquestionably, the private banking industry, bank regulation, the national debt, and ongoing governmental spending politics are substantially interconnected. Interest rates incurred on the national debt is subject to rate setting by the Fed, and inflation (all else being equal) allows today's fixed debt obligation to be paid off in ever cheaper to obtain dollars. The third major bank regulator, designed to swiftly remove failing banks is the
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance Deposit insurance or deposit protection is a measure implemented in many countries to protect bank depositors, in full or in part, from losse ...
, a bailout fund and resolution authority that can eliminate banks that are failing, with minimum disruption to the banking industry itself. They also help ensure depositors continue to do business with banks after such failures by insuring their deposits. From the outset, money market funds fell under the jurisdiction of the SEC as they appeared to be more like ''investments'' (most similar to traditional stocks and bonds) vs. ''deposits and loans'' (cash and ''cash equivalents'' the domain of the bankers). Although money market funds are quite close to and are often accounted for as ''cash equivalents'' their main regulator, the SEC, has zero mandate to control the supply of money, limit the overall extension of credit, mitigate against boom and bust cycles, etc. The SEC's focus remains on adequate disclosure of risk, and honesty and integrity in financial reporting and trading markets. After adequate disclosure, the SEC adopts a hands off, ''let the buyer beware'' attitude. To many retail investors, money market funds are confusingly similar to traditional bank demand deposits. Virtually all large money market funds offer check writing, ACH transfers, wiring of funds, associated debit and credit cards, detailed monthly statements of all cash transactions, copies of canceled checks, etc. This makes it appear that ''cash'' is actually in the individual's account. With net asset values reported flat at $1.00, despite the market value variance of the actual underlying assets, an impression of rock solid stability is maintained. To help maintain this impression, money market fund managers frequently forgo being reimbursed legitimate fund expenses, or cut their management fee, on an ad hoc and informal basis, to maintain that solid appearance of stability. To illustrate the various blending and blurring of functions between classic banking and investing activities at money market funds, a simplified example will help. Imagine only retail "depositors" on one end, and S&P 500 corporations borrowing through the commercial paper market on the other. The depositors assume: * Extremely short duration (60 days or less) * Extremely broad diversification (hundreds, if not thousands of positions) * Very high grade investments. After 10–20 years of stability the "depositors" here assume safety, and move all cash to money markets, enjoying the higher interest rates. On the borrowing end, after 10–20 years, the S&P 500 corporations become extremely accustomed to obtaining funds via these money markets, which are very stable. Initially, perhaps they only borrowed in these markets for a highly seasonal cash needs, being a net borrower for only say 90 days per year. They would borrow here as they experienced their deepest cash needs over an operating cycle to temporarily finance short-term build ups in inventory and receivables. Or, they moved to this funding market from a former bank revolving line of credit, that was guaranteed to be available to them as they needed it, but had to be cleaned up to a zero balance for at least 60 days out of the year. In these situations the corporations had sufficient other equity and debt financing for all of their regular capital needs. They were however dependent on these sources to be available to them, as needed, on an immediate daily basis. Over time, money market fund "depositors" felt more and more secure, and not really at risk. Likewise, on the other end, corporations saw the attractive interest rates and incredibly easy ability to constantly roll over short term commercial paper. Using rollovers they then funded longer and longer term obligations via the money markets. This expands credit. It's also over time clearly ''long-term borrowing'' on one end, funded by an ''on-demand'' depositor on the other, with some substantial obfuscation as to what is ultimately going on in between. In the wake of the crisis two solutions have been proposed. One, repeatedly supported over the long term by the GAO and others is to consolidate the US financial industry regulators. A step along this line has been the creation of the
Financial Stability Oversight Council The Financial Stability Oversight Council (FSOC) is a United States federal government The federal government of the United States (U.S. federal government) is the national government of the United States The United States of Amer ...
to address
systemic risk In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availab ...
issues that have in the past, as amply illustrated by the money market fund crisis above, fallen neatly between the cracks of the standing isolated financial regulators. Proposals to merge the SEC and CFTC have also been made. A second solution, more focused on money market funds directly, is to re-regulate them to address the common misunderstandings, and to ensure that money market "depositors", who enjoy greater interest rates, thoroughly understand the actual risk they are undertaking. These risks include substantial interconnectedness between and among money market participants, and various other substantial
systemic risk In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availab ...
s factors. One solution is to report to money market "depositors" the actual, floating net asset value. This disclosure has come under strong opposition by
Fidelity Investments Fidelity Investments Inc., commonly referred to as Fidelity, earlier as Fidelity Management & Research or FMR, is an American multinational financial services Financial services are the Service (economics), economic services provided by the fi ...
,
The Vanguard Group The Vanguard Group, Inc. is an American registered investment advisorA registered investment adviser (RIA) is a firm that is an investment adviser in the United States The United States of America (USA), commonly known as the United Stat ...
,
BlackRock BlackRock, Inc. is an American multinational investment management corporation based in New York City New York City (NYC), often simply called New York, is the List of United States cities by population, most populous city in the Unite ...
, the
US Chamber of Commerce The United States Chamber of Commerce (USCC) is a business-oriented American American(s) may refer to: * American, something of, from, or related to the United States of America, commonly known as the United States The United States of ...
as well as others. The SEC would normally be the regulator to address the risks to investors taken by money market funds, however to date the SEC has been internally politically gridlocked. The SEC is controlled by five commissioners, no more than three of which may be the same political party. They are also strongly enmeshed with the current mutual fund industry, and are largely divorced from traditional banking industry regulation. As such, the SEC is not concerned over overall credit extension, money supply, or bringing
shadow banking The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial bank A commercial bank is a financial institution which accepts deposits from the public and give ...
under the regulatory umbrella of effective credit regulation. As the SEC was gridlocked, the Financial Stability Oversight Council promulgated its own suggested money market reforms and threatens to move forward if the SEC doesn't button it up with an acceptable solution of their own on a timely basis. The SEC has argued vociferously that this is "their area" and FSOC should back off and let them handle it, a viewpoint shared by four former SEC Chairmen Roderick Hills, David Ruder, Richard Breeden, and
Harvey Pitt Harvey L. Pitt (born February 28, 1945) is an American lawyer who served as the 26th chairman of the U.S. Securities and Exchange Commission (SEC), from 2001 to 2003. History Pitt graduated from Stuyvesant High School in 1961. He graduated from ...
, and two former commissioners Roel Campos and .


US Reform: SEC Rule Amendments released July 24, 2014

The Securities and Exchange Commission (SEC) issued final rules that are designed to address money funds’ susceptibility to heavy redemptions in times of stress, improve their ability to manage and mitigate potential contagion from such redemptions, and increase the transparency of their risks, while preserving, as much as possible, their benefits. There are several key components: Floating NAV required of institutional non-government money funds The SEC is removing the valuation exemption that permitted these funds (whose investors historically have made the heaviest redemptions in times of stress) to maintain a stable NAV, i.e., they will have to transact sales and redemptions as a market value-based or "floating" NAV, rounded to the fourth decimal place (e.g., $1.0000). Fees and gates The SEC is giving money fund boards of directors the discretion whether to impose a liquidity fee if a fund's weekly liquidity level falls below the required regulatory threshold, and/or to suspend redemptions temporarily, i.e., to "gate" funds, under the same circumstances. These amendments will require all non-government money funds to impose a liquidity fee if the fund's weekly liquidity level falls below a designated threshold, unless the fund's board determines that imposing such a fee is not in the best interests of the fund. Other provisions In addition, the SEC is adopting amendments designed to make money market funds more resilient by increasing the diversification of their portfolios, enhancing their
stress testing Stress testing (sometimes called torture testing) is a form of deliberately intense or thorough testing used to determine the stability of a given system, critical infrastructure or entity. It involves testing beyond normal operational capacity, oft ...
, and improving transparency by requiring money market funds to report additional information to the SEC and to investors. Additionally, stress testing will be required and a key focus will be placed on the funds ability to maintain weekly liquid assets of at least 10%. Finally, the amendments require investment advisers to certain large unregistered liquidity funds, which can have many of the same economic features as money market funds, to provide additional information about those funds to the SEC.


EU regulatory reform

In parallel with the US Reform, the EU completed drafting of a similar regulation for the money market fund product. On June 30, 2017, Regulation (EU) 2017/1131 for money market funds was published in the Official Journal of the European Union, introducing new rules for MMFs domiciled, managed or marketed in the European Union. This entered into effect in March 2019. The regulation introduces four new categories of fund structures for MMFs: * Public Debt Constant Net Asset Value (CNAV) MMFs are short-term MMFs. Funds must invest 99.5% in government assets. Units in the fund are purchased or redeemed at a constant price rounded to the nearest percentage point. * Low Volatility Net Asset Value (LVNAV) MMFs are short-term MMFs. Funds around are purchased or redeemed at a constant price so long as the value of the underlying assets do not deviate by more than 0.2% (20bit/s) from par (i.e. 1.00). * Short Term Variable NAV – Short-term Variable Net Asset Value (VNAV) MMFs are primarily invested in money market instruments, deposits and other MMFs. Funds are subject to looser liquidity rules than Public Debt CNAV and LVNAV funds. Units in the funds are purchased or redeemed at a variable price calculated to the equivalent of at least four significant figures (e.g. 10,000.00). * Standard Variable NAV VNAV– Standard MMFs must be VNAV funds. Funds are primarily invested in money market instruments, deposits and other short-term assets. Funds are subject to looser liquidity rules than Public Debt CNAV and LVNAV funds AND may invest in assets of much longer maturity. Units in the funds are purchased or redeemed at a variable price calculated to the equivalent of at least four significant figures (e.g. 10,000.00). Although the starting products were similar, there are now considerable differences between US and EU MMFs. Whilst EU MMF investors mostly moved to successor fund types, investors in US MMFs undertook a huge and persisting switch from Prime into Government MMF. The EU MMF Regulation does not make any reference to either fund or portfolio external credit rating requirements. Throughout the transition EU MMFs overwhelmingly retained their existing ratings, and the credit rating agencies have confirmed their commitment to the MMF-specific rating criteria they each maintain. A major difference in scope is that, on a like-for-like basis, US MMFs may be compared only to EU short-term MMFs.


See also

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Stock fund A stock fund, or equity fund, is a investment scheme, fund that invests in stocks, also called Security_(finance)#Equity , equity securities. Stock funds can be contrasted with bond funds and money funds. Fund assets are typically mainly in stock ...
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Bond fund A bond fund or debt fund is a fund that invests in bonds, or other debt securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument Finance is the study of financial institutions, fin ...
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Income fund An income fund is a Investment fund, fund whose goal is to provide an income from investments. It is usually organized through a Trust (business), trust or partnership, rather than a corporation, to obtain more efficient flow through tax consequence ...
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Target date fund A target date fund (TDF) – also known as a lifecycle, dynamic-risk or age-based fund – is a collective investment scheme, often a mutual fund or a collective trust fund, designed to provide a simple investment solution through a portfolio whos ...
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Money market The money market is a component of the economy which provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As short-term securities became a commodity In economics Economics ...
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Money supply In macroeconomics, the money supply (or money stock) refers to the total volume of money held by the public at a particular point in time in an economy. There are several ways to define "money", but standard measures usually include Circulati ...
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Sweep account A sweep account is an account set up at a bank or other financial institution where the funds are automatically managed between a primary cash account and secondary investment accounts. Function A sweep account combines two or more accounts at a ...
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Stable value fundA stable value fund is a type of investment available in 401(k) plans and other defined contribution plans as well as some 529 plan, 529 or 529 plan, tuition assistance plans. Stable value funds are often made available in these plans under a name ...
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Shadow banking system The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations. The phrase "shadow banking" contains the pejorative ...


References


External links


ICI Fact BookDefinition of a Money Market Fund and Difference Between Money Market Account
*Joan Ohlbaum Swirsky,
The Guide to Rule 2a-7: A Map Through the Maze for the Money Market Professional
'(3d ed. 2017)
How to invest in the money market
{{DEFAULTSORT:Money Market Fund Mutual funds Subprime mortgage crisis Money markets