Money Market Funds – what cost safety?
Tomorrow the SEC’s five member Commission is expected to vote on new changes to rules for money market funds (MMFs), but will the changes be safer or costlier? The two main changes will see ‘prime’ funds move to a floating NAV and boards permitted to impose redemption fees or even suspend redemptions on a temporary basis. This is all designed to make MMFs less susceptible to runs that could harm investors, but it has not been universally well-received by the Investment Company Institute (ICI), by large fund complexes or by a group of 20 United States senators.
There are concerns that the new changes will make MMFs less attractive vehicles for investors and will have a negative impact on states and municipalities. These groups rely heavily on municipal MMFs to provide access to low-cost borrowing, but if investors’ appetites for these funds are reduced then debt issuance costs could increase with projects for highways, schools, hospitals and power plants adversely affected.
No one can deny that less risk is better, but surely the question for the Commission to debate tomorrow is what is the true cost of these rule changes?
In a close vote, 3 – 2, the proposed amendments were passed by the Commission on July 23rd. Several senior SEC staff members heralded the changes as a giant step towards wringing out the systematic risk posed by these products. Only time will tell if this view is widely accepted but based on the fact that the new regs don’t come into effect for 2 years there’s plenty of opportunity for some healthy banter…