June 29, 2013
The primary proposal for money market fund (MMF) reform is to turn MMFs into short-term bond funds with taxable implications, by requiring floating NAVs. This is not in the best interests of investors, and will likely lead to a decimation of the existing MMF business.
The purpose of money funds is as a place to park cash without notable principal risk - though all investors are given and must read the prospectuses of MMFs, which have always clearly stated that there are potential risks. The requirements put in place in the last few years to limit duration and reduce the type and risk of holdings in MMFs have come a long way to addressing concerns. The history of MMFs has been positive, not negative. The Reserve Fund that 'broke the buck' in 2008 was an outlier, and the majority of money funds had no problems. Those that did were covered by fund sponsors. RF held commercial Lehman paper and SIVs, and was plagued by questionable management.
So what is the problem? It seems as if this push is coming from those with motives to see MMF money go anywhere but MMFs - into riskier assets - with a strong lobby from other ETF and mutual fund asset managers, and a push from Treasury/Federal Reserve regulators. The MMF industry did not need or get a bailout in 2008 - the bailout went to large banks, AIG and Fannie Mae/Freddie Mac. Blaming MMFs then, and now, is a red herring.
Floating NAVs for MMFs should be an option, not a requirement. If a liquidity bank of capital is needed to back up the funds, it should originate from the industry with a value proposition to shareholders in the funds. There is a place for MMFs as a cash park, and the industry should address building capital buffer funds if that is the issue. Investors keeping their money in MMFs have a reason for doing so - to manipulate that intent is counter to free market principles.