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Wednesday
Nov162011

SEC proposes further reforms on money market funds 

The SEC is proposing to tighten regulations governing money market funds. Money market funds are traditionally a safe investment vehicle holding almost exclusively shorter-term, high quality bonds. They tend to offer higher returns than bank deposits and have experienced little failure. The regulator requires money market managers to maintain their funds above 1USD per share in net asset value.

The 2008 financial crisis was a watershed moment highlighting the potential dangers of money market funds.  Reserve Primary Fund, once a major money market fund, had invested USD785 million in Lehman Brothers and was unable to maintain the formula of 1USD NAV per share. This led to widespread redemption by risk-averse investors, and the fund later required government help to get through the crisis.

The new measures which the SEC is proposing will eliminate the taken-for-granted expectation of stability in money market funds. The SEC is considering implementing a floating NAV that moves away from the pre-established 1USD mark which may reflect the risk level more realistically. The industry is opposed to the new measures saying they will eliminate the appeal of money market funds.

Reuters’ report on SEC money market reforms can be found here.

Financial Times report highlighting history and industry view of money market reforms can be found here

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