Shapiro: Money Market Reform Options

November 8th, 2011
in econ_news

Schapiro Econintersect: Monday, November 7 – Today Mary Shapiro (pictured) revealed that the SEC (Securities and Exchange Commission) has boiled down its plan to propose fundamental reform to the operation of the nation’s money market funds. According to comments by Shapiro quoted in Securities Technology Monitor, there only two options left on the table:

  • Requiring that money market returns are reduced to provide a reserve “capital buffer;” or
  • Permitting the principal values (NAV - net asset value) to float day-to-day.

Follow up:

The money market fund industry has been operating with the mythology that the value of a dollar in a money market fund is as stable as in a cash checking or savings account.  Most of the time that stability is correct, but there have been occasions of financial stress when the “buck has been broken” and the fund sponsor has been required to add capital to restore the value of principal. There is one occasion cited where the “broken buck” remained and investors got less than full value from a money market fund. From Securities Technology Monitor:

The idea that a money market account is the same as "a liquid cash account" works “very well almost all the time," Schapiro said.

But the exception was in September 2008, when the nation’s oldest money market operation, the Reserve Primary Fund, famously “broke the buck.” The fund declared the value of its assets to be less than $1 a share, due to its holdings in Lehman Brothers assets. Those assets plunged in value, when the investment bank was forced to file for bankruptcy.

When that happened, $310 billion was pulled from money market funds, mostly by larg institutions, in less than a week.

Shapiro said the SEC “will share the proposal very soon.” She said that both of the options are receiving serious consideration.

Source: Securities Technology Monitor

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