When the Securities and Exchange Commission proposed a new rule for money market funds in the summer of 2014, then-Chair Mary Jo White said the reform would “reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system.”
And that is exactly what the new rule has accomplished so far, according to an analysis by the Federal Reserve Bank of New York.
Under the new rule, prime institutional money market funds, which invest in short-term corporate debt, and institutional municipal money market funds can no longer maintain a constant $1 per share price. They must let the share price fluctuate to reflect the market price of their underlying holdings.
Prime and retail municipal money market funds for retail investors can try to maintain a stable $1 net asset value but have the option of imposing fees or restrictions on redemptions during times of crisis.
And government money market funds, defined as investing a minimal 99.5% of assets in government securities, collateralized repurchase agreements or cash, can continue to maintain a stable $1 a share price.
As a result of the new rule, prime and municipal money market funds lost $1.12 trillion in assets and government money market funds gained $1.032 between January and November 2016. By November, government market money funds had captured just over 76% of the market, almost double the 40.5% share they held in January 2016.
Money had apparently shifted ahead of the rule taking effect.
“Since the new regulations have resulted in a very large shift of assets into relatively safe government funds, the SEC’s reforms have made runs on money market funds less likely and the industry itself more resilient,” according to the New York Fed report.
It noted that during the financial crisis, no government money fund experienced a run in assets because those funds invest in safer assets than prime money market funds. (The Reserve Primary Fund broke its $1 share price during the financial crisis due to exposure to Lehman Brothers debt securities.)
The new regulations didn’t reduce demand for money market assets overall. Money market assets totaled $2.975 trillion in November, little changed from $3.064 trillion in January, but demand for the relatively higher yielding government agency money market funds – as opposed to Treasury funds – rose.
Agency market market funds captured just over 55% of total money market assets in November, up from just over 24% in January. “Investors moved to the segment of the government MMF industry that is closer (in terms of yield) to the prime and muni segment,” according to the New York Fed report.
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