Should Money Market Funds Be Able to Break the Buck?

Posted by: Lauren Young on June 25

Should money market funds be allowed to “break the buck”?

The Securities and Exchange Commission unveiled its money market fund recommendations yesterday. If there is any controversy to be found, it is the whether the net asset value of a money market fund, currently pegged to $1, would be allowed to float. The reason why this is an issue is that money market funds came under intense scrutiny when the Reserve Fund “broke the buck” last fall-the value of a share fell below $1. Breaking the buck is the financial equivalent of wearing white before Memorial Day. You just don’t do it.

Overall, however, the fund industry was relieved. “The big news is that there are no earth-shattering new recommendations here,” says Peter Crane, president of Crane Data and publisher of the Money Fund Intelligence newsletter.

As expected, the SEC’s proposals include:

* A requirement that money market funds have certain minimum percentages of their assets in cash or securities that can be converted to cash for redememptions.

* Shortening the weighted average maturity limits for money market fund portfolios from 90 days to 60 days.

* Limiting money market funds to invest in the highest quality securities.

* Banning illiquid securities in money market fund portfolios, which can currently make up 10% of a fund.

(The SEC is accepting comment on these recommendations for the next 60 days.)

Back to the floating NAV: For the record, I haven’t spoken to anyone who thinks a floating NAV is a good idea. Charley Ellis, who is a consultant to large institutional investors, is in favor of keeping a stable NAV. “Most of the money invested in market funds are at outfits like Vanguard, T. Rowe Price, and Fidelity,” he says. “They are doing a really good job.” Ellis is a director at Vanguard.

Vanguard also says the $1 stable net asset value is an integral feature of the money market fund product. “A floating net asset value would not be well-received by investors accustomed to the safety and stability of money market funds,” says Vanguard spokesman John Woerth.

The proposals, if adapted, could ultimately lead to slightly lower yields for money market funds, but, overall, Crane is pleased with the SEC’s recommendations. “I’m definitely happy,” Crane said. (Then again, he was talking to BusinessWeek from a cruise ship in the Caribbean.)

Reuters writer Agnes Crane says the proposed reforms don’t “go far enough considering that most people park their money (in money market funds) so they can get it out quickly if needed.”

What do you think of the proposals? Should money market funds be allowed to break the buck?

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