BlackRock, the fifth largest manager of money market mutual funds, recently published an article entitled, "The Case Against Floating the Net Asset Value," which argues strongly against the merits of abandoning a stable NAV and which urges "less distruptive solutions" for preventing future problems. The "ViewPoint: Money Market Mutual Funds" piece says, "In the wake of the financial crisis, much has been said about money market funds. Did they contribute to the problem or were they victims of the credit crunch? How are they important to our financial system going forward? What changes, if any, should be made to reduce risk while maintaining the integrity of the product? The SEC Money Market Reform rules, effective in May 2010, together with the Dodd-Frank Wall Street Reform and Consumer Protection Act, have already gone a long way toward addressing some of the issues, but additional proposals remain on the table. Among them is a recommendation that money market funds -- known and appreciated for their stable net asset value (NAV) -- assume a floating NAV structure. In this paper, we make the case that such a change would not simply alter the nature of a single investment vehicle, but would have far-reaching implications and negative consequences for the entire financial system."
BlackRock explains, "The Role of Money Market Funds," "Money market funds are extremely important to our economy, acting as credit intermediaries matching nearly $3 trillion of issuers and investors. The issuers of short-term debt instruments include the US government and its agencies, corporations (including banks), and state and local municipalities. The investor side is equally diverse and includes corporations, municipalities, pension plans, trust funds, hospitals, universities and individuals; all use money funds for some portion of their operating funds or as a component of a broader portfolio. Money market funds are attractive to investors specifically because they provide a stable NAV and daily access to funds, while also offering a competitive yield versus bank deposits and direct investments. Prior to the unprecedented credit crisis of 2008, money market funds had successfully provided this service to the financial markets since the early 1970s without ever requiring government intervention."
They continue, "The events of 2008, including the historic 'breaking of the buck' by the Reserve Primary Fund, exposed both idiosyncratic (fund-specific) and systemic (industry-wide) risks associated with money market funds, and gave rise to several reform measures designed to mitigate such risks. The changes enacted to Rule 2a-7 -- the rule governing money market funds -- include more conservative investment parameters related to credit quality, maturity and liquidity, as well as enhanced guidelines around transparency to investors. The recent Dodd-Frank Wall Street Reform and Consumer Protection Act has imposed further safeguards that touch nearly every part of the financial industry. As we move forward, the collective goal of the investment community and policymakers should be to manage risk while avoiding unintended negative consequences. The potential imposition of a floating NAV on money market funds is of particular concern."
The piece says, "The SEC, in recognition of the events of the past two years, is exploring whether more fundamental changes to the regulatory structure may be warranted to improve money market funds' ability to weather liquidity crises and other shocks to the short-term financial markets. While the SEC acknowledges that the stable NAV is a core feature of money market funds, some on the panel argue that a floating NAV would reflect a fund's true market value, allowing investors to see regular fluctuations in their investment and provide a clearer idea of the risks associated with a particular fund. Essentially, proponents argue that floating the NAV reduces the likelihood of a run on a fund because, in a crisis, the fund would redeem people at less than $1.00 per share, thereby reducing the incentive to leave and protecting the remaining shareholders. The idea of a floating NAV is among the most controversial of the recommendations related to money funds, and with good reason."
It continues, "BlackRock is among a diverse group of money market fund sponsors, industry organizations, individual and institutional investors and issuers that believe maintaining a stable NAV structure for money market funds is critical not only for liquidity markets, but for the broader financial and economic system. The vast majority of investors use money market funds specifically because of their $1.00 NAV feature. For many investors, floating the NAV negates the value of the product. A floating NAV fund generates taxable gains and losses..., creating a tax and accounting burden.... Perhaps most notably, floating the NAV does not solve the underlying issue of investors fleeing the funds and disrupting the cash markets and the broader financial system. In the event of a significant decline in NAV, both retail and institutional investors are likely to leave floating NAV funds -- and quickly."
BlackRock adds, "It is our opinion that retail clients strongly favor a stable NAV and will move a substantial percentage of assets out of money market funds if the NAV floats. Direct investors don't want tax consequences and seek the reliability of a stable NAV. Retail intermediaries feel a fiduciary duty to use stable NAV product for cash. In many cases, sweep systems cannot even handle fluctuating NAV.... Institutional clients, in our view, require a stable NAV and will move the majority of their assets to cash equivalents with a stable NAV if money market funds adopt a floating NAV. In many cases, investment guidelines require stable NAV, forcing the decision to move the assets."
Finally, the paper suggests "Recommendations for Today: Less Disruptive Solutions," saying, "Clearly, the financial and economic environment has changed substantially since 2008. New SEC rules are designed to mitigate risk in investor portfolios, addressing credit quality, maturity structure and providing liquidity buffers. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act creates a Financial Stability Oversight Council and establishes a framework for identifying and tackling potential problems in the financial system.... Given all of these changes, we believe policymakers should be careful to avoid unintended and potentially devastating consequences for the economy associated with sweeping changes. Instead, we recommend that emphasis be directed at incremental ideas, such as: Allow for rainy day reserves.... Enhance disclosure.... Foster multi-agency dialogue.... [and] Convene a symposium."
