Should Money Market Funds Be Able to Break the Buck?

Posted by: Lauren Young on June 25, 2009

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?

Reader Comments

Mamat Rohimat, S.E., M.M.

June 26, 2009 6:02 AM

I think, money market fund should be allowed to break the buck!It should be fluctuated based on its underlying assets reflecting increasing or decreasing Net Assets Values (NAV).


Mamat Rohimat, S.E., M.M.
Founder The Great Investor
http://www.thegreatinvestor.com

John Blair

June 26, 2009 10:03 AM

Hold to a fixed $1.00, otherwise too many games will be played. If someone wants to offer a short time fund whose value can fluctuate, let them but keep it away from money market funds.

Morris Armstrong

June 30, 2009 3:18 PM

Once you decide to hold something at a steady level the exepectations and the obligations almost match. Even though since the inception of money market funds thay have always had the caveat that they could fluctuate in value and that the managers would attempt to maintain a one dollar lprice per share. That is so ingrained into people that even a two cent decline causes massive panic and perhaps unfairly.

This is a prime example of disclosure not really being effective because history and expectations are simply geared toward stability.

Breaking the buck may teach people that risk has some relationship to return and that things which are guaranteed should have the lowest returns.

Denise Hubbard

June 30, 2009 8:58 PM

The SEC may be finally doing something proactive. Just read SEC requested a copy of STOCK SHOCK--new movie (Madoff makes an appearance) about market manipulation. http://seekingalpha.com/article/143172-stock-shock-a-wake-up-call-on-the-market-as-a-whole

Doug

June 30, 2009 9:41 PM

If it is going to break a buck, put it in a different class and call it something different

Doug

June 30, 2009 9:41 PM

If it is going to break a buck, put it in a different class and call it something different

Carl Disalvatore

July 9, 2009 8:34 AM

We have a free enterprise system, don't we? If people want an insured investment put your money in FDIC insured CD's. There is more return in MMF's so there is more risk. The MMF's that perform poorly will go out of business. Let's get mack to basics.

Asset

July 10, 2009 5:03 AM

I agree with comment #1 by Mamat Rohimat, S.E., M.M.

From:ASSET

KEN

July 10, 2009 3:25 PM

I LIKE THE IDEA OF DEPENDABILITY. A STABLE MMF GIVES ME THAT , EVEN THO
THEY AREN'T CURRENTLY PAYING MUCH. AND
THEY ARE A NICE PLACE TO PARK YOUR CASH
PENDING IN INVESTING OPPORTUNITY...LET'S
NOT BREAK THE "BUCK"

MichaelRoger

July 14, 2009 12:35 AM

The inception of money market funds thay have always had the caveat that they could fluctuate in value and that the managers would attempt to maintain a one dollar lprice per share.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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