In July 2014, the U.S. Securities and Exchange Commission (SEC) issued new rules that included additional regulations of money market mutual funds. Those rules are scheduled to implement on October 14, 2016.
Even investors who remember the announcement of the ruling back in 2014 likely don’t recall all of the details and what it means for their investments. The implementation date is approaching and it’s time to familiarize yourself with the details and what it means for you and your investments.
Why Was the Money Market Reform Developed?
The SEC adopted new amendments to address the risks of investor runs in money market funds and preserve the benefits of the funds. During the height of the 2008 financial crisis, a large fund manager, Reserve Primary Fund, had to reduce the net asset value (NAV) of its money market fund below $1 because it experienced huge losses due to failed short-term loans issued by Lehman Brothers.
Because it was the first time this had happened, institutional investors panicked, spurred many redemptions, and, as a result, the fund lost a huge chunk of its assets within one day. It eventually halted operations and started liquidating. In 2014, the SEC issued new rules to prevent such an event from happening again.
What are the Biggest Components of the Money Market Reform?
Perhaps the biggest change is that money market funds are now required to move from a fixed $1 share price to a floating NAV. Additionally, certain funds can enforce liquidity fees and temporarily suspend withdrawals in certain circumstances. There are now three categories of money market funds established — retail, government, and institutional — and there are restrictions on who can invest in retail money market funds.
Will This Impact My Investments?
The biggest rule change is the floating NAV, which may not have a big impact on those investing in retail money market funds. Retail prime and municipal funds can continue maintaining a stable NAV and constant price of $1, however, they must limit the beneficial ownership to individual investors. Government funds can also maintain a stable NAV and constant price of $1, but don’t have to restrict ownership or differentiate between retail and institutional fund types.
However, these funds may have to initiate redemption triggers for charging a liquidity fee or halting redemptions. Some large fund groups are working to limit the chances of a redemption trigger or avoid it by changing their funds into a government money market fund.
On the other hand, institutional investors will be affected and they’ll be forced to choose between securing a higher yield or higher risk. If they choose to invest in government money markets, they must accept a lower yield. If they want higher yields, they’ll have to consider other options.
What Steps Should I Take Next?
This reform is an opportunity to re-evaluate your short-term goals. Have you recently reviewed your cash management strategy? Now is the time to look at your money market holdings and see how they match up with your short-term investment needs.
You may consider moving some of your cash allocation into higher yielding short-term fixed income options, but you’ll need to weigh the additional risks of floating NAVs, longer durations, and securities that aren’t as liquid as money market securities. You should also evaluate how the fees and gates impact you. If you needed to access all of your cash assets, how comfortable would you be if there was a delay or value reduction?
If you need help determining how to balance these factors or consider which money market fund options are most appropriate for you based on your goals, contact me for a portfolio review. We can discuss this reform and whether or not you need to make changes to your investments. To schedule an appointment, call me at (626) 529-8347 or email [email protected].
Ricky Biel, CRPC® is a wealth manager with Haydel, Biel & Associates, an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with cutting edge financial technologies that make it easier than ever to accomplish your goals. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at [email protected].