Money Market Reform

A money market fund is a mutual fund that invests in a variety of short-term debt securities (bonds), so there is little fluctuation in value and they can usually be liquidated easily. They are typically used as a place to put your short-term cash and with interest rates at all time lows the returns are minimal. Money market funds are boring for a reason so you might be wondering why I'd dedicate an article to them.

 

It turns out everything is boring until it isn't. Back in 2008 while you were watching your stock portfolio crumble during the financial crisis, something interesting happened in the money market world, and not in a good way. There was one particular money market fund that held 1.2% of its assets in Lehman Brothers debt. When Lehman Brothers declared bankruptcy, this debt was valued at zero. As a result, this money market fund "broke the buck", meaning the value dropped below $1. This caused a massive panic, especially among institutional investors who quickly moved to pull their cash out of this and other money market funds. This particular fund imposed a freeze on redemptions and the U.S. Treasury had to step in to guarantee a number of money market fund accounts to slow the wave of redemptions.

 

On October 14, 2016 the U.S. Securities and Exchange Commission (SEC) began enforcing some new regulations they adopted to help reduce the risk of these types of panic-induced runs on money market funds. There are two main aspects to these new regulations:

 

This might sound a bit scary but there's no reason to panic over the changes. The new regulations have forced banks to become much more conservative in their management of money market funds. They now must hold a greater amount of cash to cover redemptions on a regular basis. This alone will help keep things more stable should we go through another financial crisis. In 2008 over 90% of the redemptions came from institutions so the floating NAV on institutional funds should further help slow things down in a panic.

 

We are always evaluating the money market funds our clients hold either through Schwab or in their other investment accounts. If you would like to discuss the money market funds you currently hold or to consider other options let us know and we'd be happy to do so.