NICSA 2012: What If Money Market Funds Go Away?
February 17, 2012
MIAMI-What happens if the money market mutual fund industry just goes away?
The Securities and Exchange Commission is about to announce its plan for reforming money market funds, nearly four years after the oldest such fund famously "broke the buck" during the credit crisis of 2008.
The SEC plan for shoring up the funds is likely to include two fundamental reforms. The first is allowing the net asset value - where a fund keeps $1 of assets on hand for every $1 of investor money it holds - to float, in a narrow band, as asset value changes. The second is expected to be capital buffers, which will be put aside by market participants for a rainy day, to prevent a run on the funds, such as occurred in 2008.
"You're talking about a real sea change in the money market industry,'' said James P. Palermo, CEO of Global Client Management as well as Vice Chairman of BNY Mellon, the large asset servicing firm at NICSA's 30th Annual Conference and Expo.
Approximately $2.7 trillion is held in money market mutual funds, according to the Investment Company Institute. Banks can absorb this amount, should some unforeseen event or series of events lead to their collapse, Palermo said.
BNY Mellon calculates that the largest 20 commercial banks in fact could absorb $5.8 trillion, if need be.
That indicates such funds are safer than people realize. But Michael J. Niedermeyer, chief executive officer of the Asset Management Group at Wells Fargo & Company said that "even if the banks could absorb'' that much of a hit, that doesn't mean that makes financial sense.
It's hard to see where banks could absorb $5.8 trillion on their balance sheets and not have a radical impact on the cost and availability of loans to businesses. The availability of commercial paper, he said, would be constrained.
The critical promise of money market funds long has been the $1 rule. That made it possible for fund operators to compete with banks for cash that would otherwise be held in checking or savings accounts.
Taking away that promise raises the possibility that investors would flee the funds. But Michael W. Roberge, president and chief investment officer at MFS Investment Management, said that wouldn't necessarily be bad.
The net asset value would "float so little'' that it won't matter to the retail investor, he said.
And retail investors do not dominate money market fund investing. As of the start of February, $926.5 billion was held in retail money market mutual funds, according to ICI statistics. By comparison, $1.7 trillion was held by institutions.
That money should go into bank accounts, Roberge argued. Deposits have some federal guarantees and otherwise should be held directly by banks, any way.
Indeed, the SEC "should celebrate that the Reserve Primary fund broke the buck" in 2008, when the value of Lehman Brothers assets it held fell dramatically, said Niedermeyer.
That made it clear that the values of assets in money market funds do change, he said. And investors of all types are better off knowing that and acting accordingly.
If it's clear that the values of assets fluctuate and the SEC allows the net asset value to float, investors can make clearer comparisons between funds. And opt to buy into funds based on whether the sponsor will back the assets up, in the event of a run, or not, Niedermeyer said.