What does this mean?
It means that they will have the ability to freeze your funds in "heretofore assumed safest and most liquid of investment options: Money Market funds, which account for nearly 40% of all investment company assets."
The next time there is a market crash, and you try to withdraw what you thought was "absolutely" safe money, a back office person will get back to you saying, "Sorry - your money is now frozen. Bank runs have become illegal." This is precisely the regulation now proposed by the administration. In essence, the entire US capital market is now a hedge fund, where even presumably the safest investment tranche can be locked out from within your control when the ubiquitous "extraordinary circumstances" arise.
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Last year, during the awful September crisis, a large Money Market fund (a Lehman fund, I think.) was forced by market conditions to "break the buck." (The Net Asset Value of the fund fell below $1.00.) The problem at that time was that, to raise cash, the T-bills underlying the fund, and other funds, were dumped on the markets, and, like anything else, the price fell.
ReplyDeleteThere was nothing wrong with the underlying assets. Held to maturity, they paid in full. Had the fund been able to wait 90 days to redeem shares, the NAV would have recovered to $1.00.
Thus, the proposed regulation.
BUT, one of the main selling points is the liquidity, no?
ReplyDeleteLiquidity and low risk.
This changes the entire character of the investment.
To be honest, I'm stunned that redemption clauses like a 90-day waiting period aren't already in the fine print of most prospectuses. You simply can't guarantee both a $1.00NAV, and perfect liquidity. (And if a broker or registered rep led you to believe otherwise, they were behaving unethically.) If redemptions are heavy, and the fund must sell some of its portfolio to meet those redemptions, there just isn't any way to guarantee that the securities sold will be sold at par.
ReplyDeleteIn the ordinary case, it's not a problem, but, in markets as volatile as last fall's, even T-bills can drop in price, on the open market, and an investor selling into a down market would lose money. (If held to maturity, no problem.) Low risk? Sure. How often do calamities like last fall come along? But that's not "no risk."
The nature of the investment hasn't changed. Our awareness of the investment, and its risks, is what has changed.
From the SEC bulletin:
ReplyDelete"The amendments would: Tighten the risk-limiting conditions of rule 2a–7 by, among other things, requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reducing the weighted average maturity of portfolio holdings, and limiting funds to investing in the highest quality portfolio securities; require money market funds to report their portfolio holdings monthly to the Commission; and permit a money market fund that has ‘‘broken the buck’’ (i.e., re-priced its securities below $1.00 per share) to suspend redemptions to allow for the orderly liquidation of fund assets. In addition, the Commission is seeking comment on other potential changes in our regulation of money market funds, including whether money market funds should, like other types of mutual funds, effect shareholder transactions at the market-based net asset value, i.e., whether they should have ‘‘floating’’ rather than stabilized net asset values. The proposed amendments are designed to make money market funds more resilient to certain short-term market risks, and to provide greater protections for investors in a money market fund. "
"The nature of the investment hasn't changed. Our awareness of the investment, and its risks, is what has changed.
ReplyDelete...to suspend redemptions to allow for the orderly liquidation of fund assets"
Before they could not FREEZE your funds and under this they would be able to. That is CHANGE, especially if you need the $ now.
Deposits in MMMF's are not insured. They are subject to market volitility. The proposed rule is not for the protection of the fund managers. It is for the protection of the fund investors.
ReplyDeleteIf the fund's NAV drops below $1.00, the investors have lost capital.
Redemptions while the fund is below $1.00 NAV "lock in" those losses, and fund investors will lose money.
By halting redemptions until the underlying T-bills mature, the investors funds would be preserved.
The rule is a tradeoff of capital preservation for liquidity.
Okay, now THIS is a good discussion! Thanks kimber45 and Maria.
ReplyDelete"The proposed rule is not for the protection of the fund managers. It is for the protection of the fund investors."
ReplyDeleteYes and no. Not great for fund managers if people pull out their funds, no?
This proposed reg does not keep anyone from withdrawing funds from their Money Market account. What it does do is give the fund time to liquidate assets in an "orderly fashion," to raise the cash, to cover extraordinary redemptions.
ReplyDeleteIf the fund NAV is below $1.00 when fund investors make redemptions, they lose money, if the fund has to sell securities at a loss to meet redemptions.
By giving the fund time to honor withdrawals, it makes it possible for T-bills and commercial paper to mature, and be liquidated for their full value.
You can have perfect liquidity, or you can have safety, in an interest bearing account. You can't have both.
Even the passbook savings accounts at banks have 90-days to give you your cash, if they feel that they need time.