Comments on: Money market funds, risk, and cash http://blogs.reuters.com/felix-salmon/2009/09/03/money-market-funds-risk-and-cash/ A slice of lime in the soda Thu, 23 May 2013 07:30:35 +0000 hourly 1 http://wordpress.org/?v=3.4.2 By: csissoko http://blogs.reuters.com/felix-salmon/2009/09/03/money-market-funds-risk-and-cash/comment-page-1/#comment-6277 csissoko Thu, 03 Sep 2009 17:10:50 +0000 http://blogs.reuters.com/felix-salmon/2009/09/03/money-market-funds-risk-and-cash/#comment-6277 I don't see why money funds were ever permitted to pretend to be something they are not. If they are an investment product such that investors can lose money, then it should be illegal for them to pretend that they have a NAV of $1. The value of an investment fund is what it is -- it's simply illogical to try to bound an investment fund below by some fixed value. On the other hand, if money funds want to have a NAV of $1, then they are clearly not investment funds. They are making an implicit promise to account holders to return their funds. It is only possible for a money fund to support this promise if it has reserves/capital set aside in case losses exceed the NAV (as was demonstrated by the fund bailouts of 2008). The ICI wants to continue to have it's cake and eat it too. Regulators need to recognize that they have allowed the development of a financial product with investments that are inconsistent with the marketing of the product. This situation would be okay if there were money fund failures every one or two years -- so the reality of the investment fund attribute of money funds was brought home to investors on a regular basis. In the absence of such market feedback, regulators need to rationalize the money fund market by demanding truth in advertising: If you want to have a fixed NAV, you have to maintain reserves to support your target NAV. I don’t see why money funds were ever permitted to pretend to be something they are not. If they are an investment product such that investors can lose money, then it should be illegal for them to pretend that they have a NAV of $1. The value of an investment fund is what it is — it’s simply illogical to try to bound an investment fund below by some fixed value.

On the other hand, if money funds want to have a NAV of $1, then they are clearly not investment funds. They are making an implicit promise to account holders to return their funds. It is only possible for a money fund to support this promise if it has reserves/capital set aside in case losses exceed the NAV (as was demonstrated by the fund bailouts of 2008).

The ICI wants to continue to have it’s cake and eat it too. Regulators need to recognize that they have allowed the development of a financial product with investments that are inconsistent with the marketing of the product. This situation would be okay if there were money fund failures every one or two years — so the reality of the investment fund attribute of money funds was brought home to investors on a regular basis. In the absence of such market feedback, regulators need to rationalize the money fund market by demanding truth in advertising: If you want to have a fixed NAV, you have to maintain reserves to support your target NAV.

]]> By: Paul http://blogs.reuters.com/felix-salmon/2009/09/03/money-market-funds-risk-and-cash/comment-page-1/#comment-6276 Paul Thu, 03 Sep 2009 17:06:41 +0000 http://blogs.reuters.com/felix-salmon/2009/09/03/money-market-funds-risk-and-cash/#comment-6276 With extermently rare exceptions, the value of a floating NAV mmf would not vary throughout the day. The NAV would (could) change once a day -- at the end of the trading day. See Investment Company Act rule 22c-1. With extermently rare exceptions, the value of a floating NAV mmf would not vary throughout the day. The NAV would (could) change once a day — at the end of the trading day. See Investment Company Act rule 22c-1.

]]> By: foosion http://blogs.reuters.com/felix-salmon/2009/09/03/money-market-funds-risk-and-cash/comment-page-1/#comment-6270 foosion Thu, 03 Sep 2009 16:07:28 +0000 http://blogs.reuters.com/felix-salmon/2009/09/03/money-market-funds-risk-and-cash/#comment-6270 Taxes can be a problem. If you hold a MM in a taxable account, there are tax consequences if purchase and sales prices are different, which can create real record keeping costs. Taxes can be a problem. If you hold a MM in a taxable account, there are tax consequences if purchase and sales prices are different, which can create real record keeping costs.

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