If the $2.7 trillion money market fund business transitions to a “floating” net asset value and abandons the fixed $1 share value as some reports suggest, the move would have a huge impact on investors of all stripes.
Most long-term exchange traded fund investors maintain cash positions, often in money funds. ETF traders also keep powder dry in cash, so they could be affected as well.
One of the proposals being considered by the Securities and Exchange Commission is scrapping money funds’ $1 NAV and letting it float like other mutual funds, according to a recent Wall Street Journal article.
“As soon as you introduce a floating NAV, demand for the product is going to plummet,” said Mary Beth Fisher at BNP Paribas in a Reuters report. “You have no additional security by being in a money market fund.”
The money fund industry vows to fight the idea and other potential rules, including capital buffers for managers and restrictions on how quickly investors can pull 100% of their cash from money funds. [Money Market Rules May Boost Short-Duration ETFs]
Essentially, the floating NAV rule would allow money market funds to “break the buck,” or let the share price fall below $1. The 2008 financial crisis escalated to a new level after the oldest money market fund broke the buck following the collapse of Lehman Brothers.
The new rules “would make U.S. money market funds considerably less appealing to chief financial officers and treasurers investing corporate cash,” CFO.com reports. “The rules also cause yields on money funds to fall in an already low interest-rate environment.
Some experts say allowing the NAV of a money fund to rise and fall daily like other mutual funds could scare companies away from investing in money markets, according to the report.