Subject: File No. S7-03-13
From: J. Huston McCulloch
Affiliation: Professor Emeritus, Ohio State University

September 13, 2013

Comment on SEC Release 33-9408, File # S7-03-13, Reforming Money Market Funds

I heartily approve of the SEC’s proposal to require prime institutional money market funds to use floating Net Asset Value (NAV) rather than “penny rounding” to evaluate shares.  These are Mutual Funds that should act like mutual funds.  Penny rounding merely destabilizes their deposit base with gaming by informed depositors, and creates inequities between depositors, whether or not the fund “breaks the buck”.  

However, there is no reason that government and retail funds should be exempted from such NAV valuation, as proposed in Alternative One.  Even short-term Treasury bills fluctuate in present value.  Ordinarily these fluctuations are very small, but an abrupt rise in rates of 400 basis points would make even 3-month T-bills lose 1% of their value.  A 10-year duration Treasury bond would lose 10% of its value on just a 100 basis point rise in its yield.  If a fund holds these assets, this risk should be equitably distributed over depositors, regardless of the size of their holdings. 

Present value fluctuations can be virtually eliminated in NAV money market mutual funds simply by holding very short-term (traditionally 20 days or less average maturity), very safe paper.  Of course in today’s artificially low interest rate environment, such a fund could not even cover a 50 basis point management fee, and hence would be dominated as an investment by a good mattress.  But that’s the breaks – if investors want a positive expected return in today’s Fed-depressed market, they will just have to move into riskier investments.  There is no reason they should not be bearing this risk in exchange for their higher expected return.  When the Fed returns rates to normal levels, the Money Market Mutual Fund industry will bounce back into action, even with NAV accounting. 

The “Liquidity Fees” and “redemption gates” proposed in Alternative 2 are a very bad idea.  These are made entirely unnecessary by NAV valuation. 

Thank you for the opportunity to comment on these proposed rules.

J. Huston McCulloch
Professor Emeritus, Economics and Finance
Ohio State University
Residing in New York City