Money Market ETF

Money market funds are back in the spotlight with some managers recently announcing increased disclosure, including releasing the value of money funds on a daily basis. I still think this story isn’t getting the press it deserves.

With $2.7 trillion in assets under management, or twice the size of the exchange traded fund universe, a good chunk of wealth is in the cross-hairs as regulators consider reforms to prevent a potential run on money market funds. The nation’s oldest money fund was forced to “break the buck” during the financial crisis because it owned Lehman Brothers debt.

There has been talk the SEC could require money market funds to move to a “floating” net asset value, or NAV. This would be a sea change. Money market funds are yielding about zero, but at least investors have the peace of mind that they can’t lose money.

Regulators want to reform the money market fund business, but oppose a strong lobby with deep pockets. The fund industry is not in favor of a floating NAV and would rather keep the implied government backstop for money market funds in place.

Yet who is going to tell grandma her money market fund may not be safe if the business moves to a floating NAV?

The Financial Stability Oversight Council is considering various options for U.S. money market fund reforms, including a floating net asset value, which would allow money funds to  shift away from $1; a capital buffer of up to 1% of the fund’s value, along with a delay on redemptions; or a buffer of up to 3%, reports William Fry for Lexology.

With a floating NAV, money markets would be impaired in a rising rate environment. Moreover, any added regulations and restrictions would further weigh on their returns.

Reform talks stalled after the SEC did not receive majority vote to proceed. With SEC Commissioner Elisse Walter, a supporter of Chairman Schapiro’s proposed money market fund reforms, to step in as SEC Chairman, the SEC may not abandon the reforms.