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Money Market Reform Kicks In

You may have missed it, but the Securities and Exchange Commission’s new regulations on money market funds went into effect last week.

More than two years ago, the SEC adopted rules designed to reduce the interest rate, credit and liquidity risk of money market portfolios. The biggest change emerging from those rules is that institutional funds are no longer able to use the historical stable net asset value (NAV) of $1 per share. Instead, they are required to use a “floating” NAV. The fund’s share price will be calculated at market value and rounded to $1 with share prices fluctuating daily, though government and retail funds will be allowed to retain the historical stable NAV of $1 per share.

Change, albeit slow if significant shifts, in money market holdings was anticipated, and indeed, assets of U.S. prime money market funds continued to drop in the week ahead of the official date for the changes, Oct. 14, according to Reuters. Money in institutional prime funds, which can invest in riskier securities in addition to government debt, declined by $57.84 billion to $165.49 billion in the week ended Oct. 11, and in the prior week, their assets fell by $122.30 billion, the largest single-week drop since Reserve Primary Fund’s share value fell below $1 — or “broke the buck” — shortly after Lehman's demise, according to Reuters.

Since October 2015, institutional investors and fund managers have shifted about $1 trillion of assets into government-only funds from prime funds.

Several of the recent excessive fee lawsuits, including those involving Chevron, Anthem, IBM, Anthem (again), and American Century, have also included charges that it was imprudent to offer a money market option, rather than one with stable value’s higher returns, though one court held that offering a money market optio “more than satisfied the plan fiduciaries’ duty of prudence.”

Of course, others have challenged the use of the less liquid (and typically more expensive) stable value choice.