The buck stops here

Money markets were rocked in 2008 when the Reserve Primary Fund committed the unthinkable by ‘breaking the buck’ because of its links to Lehman Brothers. This served as a wake-up call and in 2010 the SEC implemented amendments to the 2a-7 regulations which safeguard these types of investments. But many in the industry said they didn’t go far enough and on June 5th 2013 the SEC outlined additional proposals for increasing the stability of money market products. These included the introduction of a floating net asset value (NAV) instead of the standard $1, the introduction of a new redemption fee or a combination of the two.

Although the floating NAV has been a ‘hot potato’ for the regulators, the redemption fee can have a disruptive impact on a firm’s operations because of its variable application. It is triggered only when a fund’s liquidity drops below a certain level. If the fund dips below the 15% weekly liquid asset threshold, which is an existing part of the 2a-7 regulations, the fund can introduce a redemption fee. This rewards those shareholders who stay put and imposes a penalty on those who cut and run. The hope is that this will be a stabilizing force when circumstances require ‘cooler heads’ to weather difficult times.

Already struggling with the intricacies of the current regulations, these new proposals will put even greater pressure on firms to make swift and accurate calculations alongside the portfolio management process, for fear of missing a breach of the redemption trigger. For some it will mean more timely testing, while for others it will require an entire procedural review. Either scenario will be yet another acid test of the flexibility of the firm’s compliance systems.

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