Quick Take on Fixed Income
February 2016
Q: What are the upcoming SEC-mandated changes to money market funds, and what impact will they have?
A: In 2014, the Securities and Exchange Commission released new rules governing the operation of money market funds that will go into effect by October 2016. The biggest changes pertain to their liquidity and who can hold certain funds.
Money markets must designate their funds as either “retail” or “institutional.” Institutional money markets are required to have floating net asset values (NAVs). Retail money markets are not subject to this requirement and may seek to have a stable $1 NAV. Retail funds must be held by individuals and are not open to institutions, businesses and other organizations.
Both retail and institutional funds could be subject to liquidity fees or redemption gates once the new rules go into effect. These new tools are designed to prevent runs on the fund during periods of high stress. All prime and municipal money markets will be subject to the potential fees or gates. A prime fund is one that does not fit into the government or municipal category. Typical investments are corporate bonds and commercial paper. As an example, if prescribed liquidity levels fall below a certain threshold, the fund could impose a 2 percent liquidity fee on redemptions. The fund may also suspend redemptions for up to 10 days while markets settle.
U.S. Treasury and government funds are exempt from the floating NAV, liquidity fees and redemption gate requirements. Because of this, there will be no retail or institutional designation for these funds. The SEC requires that 99.5 percent of the funds be invested in cash, government securities or repurchase agreements that are fully collateralized. At this point, the designated “core” money markets at Schwab, Fidelity and TD Ameritrade will be U.S. Treasury/government funds.
With these new regulations, our approach remains consistent. We continue to recommend investing in U.S. Treasury or government money market funds. They offer the highest combination of safety and liquidity. As long as money market fund yields remain very low, there is no reason to denigrate credit quality or create potential illiquidity for minimal additional yield. Investors with larger money market fund balances may find it advantageous to determine whether there are better options based on their specific liquidity needs.
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