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Comment Letter Fact Sheet
Requiring Money Market Funds to “Float” Their Value
ICI’s January 10, 2011 comment letter to the Securities and Exchange Commission strongly opposes proposals to eliminate the ability of money market funds to use the amortized cost method of valuation, forcing them to switch from a stable $1.00 net asset value (NAV) to floating NAVs. The possibility was one of the options considered by the President’s Working Group on Financial Markets (PWG) Report on “Money Market Fund Reform Options,” and underlies other proposals in the report.
Such a change would be unlikely to reduce systemic risk to any meaningful extent. Furthermore, ICI has deep concerns about the impact such a change would have on financial markets, both during a transition period and in afterward. Companion pages provide an overview of ICI’s letter, discuss ICI’s proposal for a private emergency liquidity facility for prime money market funds, and outline ICI’s concerns with other options in the PWG Report.
Floating NAVs would not prevent investor runs.
- Requiring funds to float their NAVs is unlikely to do much to alter investors’ views about whether money market funds are low-risk investments.
- Money market funds would continue to be exposed to interest rate and credit risk.
- The money market itself historically has been susceptible to liquidity pressures.
- Investors in floating NAV funds face the same incentives to run when markets are under severe stress as investors in stable NAV funds. For example, floating-value ultra-short bond funds experienced cumulative outflows of 15 percent of assets during a four-week period in early 2008; from mid-2007 to the end of 2008, assets in these funds fell by more than 60 percent.
- For more, see page 32 of the letter.
Investor demand for a stable NAV fund would remain.
- The Report acknowledges a very significant concern over whether investors would continue to use money market funds with a floating NAV. For a substantial number of investors, the answer is no.
- Many institutional investors that use money market funds would be unable to use a floating NAV fund, given legal or other constraints.
- Even investors who do not face such constraints may nevertheless be unwilling to invest in a floating NAV product, given the significant convenience in terms of tax, accounting, and recordkeeping of stable NAV products.
- A floating NAV also would reduce the value and convenience of money market funds to retail investors.
- A diverse range of investors in money market funds—businesses, governments, schools, retirement plans, consumer groups, and financial services firms—and groups representing these investors previously have expressed clear opposition to floating NAVs.
- Surveys of money market fund investors indicate clearly that most investors do not want and would not use a floating NAV product. A survey of institutional cash managers indicated that more than half (55 percent) would decrease substantially their use of money market funds if these funds are required to float their value. In another recent survey, two-thirds of retail money market fund investors expressed unfavorable reactions to floating NAVs; of those, 72 percent would reduce or eliminate their use of money market funds.
- For more, see page 35 of the letter.
Floating NAVs would not reduce—and very likely would increase—systemic risk.
- Requiring money market funds to float their NAVs would risk precipitating a vast outflow of assets from money market funds to other products.
- Corporate cash managers and other institutional investors would not view an undiversified holding in an uninsured or underinsured bank account as being equivalent to an investment in a diversified short-term fund.
- For institutional investors, substitute products include enhanced cash pools, offshore money funds, state and local government investment pools, and other vehicles that seek to maintain a stable unit price but are not regulated under the Investment Company Act.
- Such an exodus from money market funds would not reduce systemic risk, but simply transfer it elsewhere.
- For more, see page 39 of the letter.
Stable NAV meets investor needs while providing strong regulation
In sum, investors will continue to demand a stable NAV money market fund or money market fund-like product. And one way or another, financial markets will find a way to deliver it. Since 1983, money market funds have been governed very effectively by Rule 2a-7, a highly transparent and carefully crafted rule that helps to limit risks by requiring funds to hold very liquid, high quality, short-term securities.
For more information on regulatory developments on the reform of money market funds, please visit ICI's Money Market Funds Resource Center.