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Reforming money markets – it’s about time
The New York Times has a nice piece on SEC musings on money market reform given the run on this $3.7 trillion market after Lehman Brothers’ spectacular failure. It’s about time considering how vulnerable these funds became to market excesses during the boom. But it doesn’t look like the proposed reforms go far enough considering that most people park their money there so they can get it out quickly if needed.
You’ll remember that that Reserve Primary fund, was slammed with withdrawals in September, causing it to “break the buck” when the value of a share fell below $1 – a huge no-no in the money market world.
The SEC’s answer is to force funds to keep a ready amount of cash or investments like U.S. Treasuries that can be readily converted into cash within 24 hours so they don’t freeze up if and when investors rush to pull out their money.
From the NYT:
Among the specific proposals, retail funds would be required to keep at least 5 percent of their assets in cash, Treasury securities or assets that could be converted into cash within one day, while at least 15 percent of assets would have to be readily convertible to cash within one week. Institutional money market funds would be held to a stricter standard.
Of course there are downsides.
While these moves would make the funds safer and improve their ability to handle withdrawals, it would inevitably result in lower yields for investors.
Also the SEC is proposing that money market funds be allowed to suspend redemptions if the net asset value falls below a $1. This idea I don’t like since it traps money in funds that are marketed to be cash-equivalents. If you’re comfortable with having your cash locked up, invest elsewhere, like a hedge fund. Also, the NYT story notes that the SEC is shying away from another crucial area that shook these funds well before Lehman.
The S.E.C. also did not take a position on whether there should be any restrictions on investments in asset-backed securities and what role the credit rating agencies should have in determining the safety of money-market investments. The commission floated the prospect of allowing funds to redeem investorsâ€™ shares with the underlying securities instead of cash. That would lessen the impact on other investors in the case of huge withdrawals .
First of all, I’m not sure money market funds should be in asset-backed securities at all after subprime exposure crept into the asset-backed commercial paper market causing the first run on that market in August 2007. And second, what investor in a money market fund wants underlying securities when they’re largely parking cash in money market funds so they can get it out quickly?