New Money Market Fund Rules, a Boon for Ultra-Short-Term ETFs | ETF Trends

With the Securities and Exchange Commission adopting new reform rules for the $2.6 trillion money market fund market, large institutional investors could turn to easy-to-use, ultra-short-duration bond exchange traded fund as a suitable alternative.

The SEC is implementing new rules to deter runs in money market funds, similar to what happened during the height of the 2008 financial crisis, according to a SEC press release.

“Today’s reforms fundamentally change the way that money market funds operate,” SEC Chair Mary Jo White said in the press release. “They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system.”

Specifically, the new rules require institutional prime money market funds to float their net asset value, which will allow the daily share price of the funds to fluctuate along with change sin the market-based value of fund assets, essentially breaking the so-called buck, or constant share price of $1.00, that many have come to expect.

Additionally, money market fund boards can impose fees or so-called gates during periods of distress. If a fund’s level of weekly liquid assets dips below 30% of total assets under management, the fund could impose a liquidity fee of up to 2% on all redemptions.

The final rules provide a two-year transition period to allow funds and investors to adjust for the changes. Funds targeted at retail investors will be exempt from the floating share price, but the rules affect institutional funds, except those that only hold federal government securities.

Critics have argued that customers could pull their money out of these money market funds after seeing their balance fluctuate under the new floating rates and move into other funds, separate accounts or high-yield fixed-income options, Financial Times reports.