Two thousand and fourteen has been a landmark year in the 43-year history of money market mutual funds with the passage of sweeping reforms by the Securities and Exchange Commission. In its 2014 Annual Report, the Investment Company Institute recapped all the changes that took place in 2014, which we covered in our Nov. 21 News, "ICI Annual Report Recaps Regulatory Debate; 80 Percent Stable NAV." As we look ahead to a new era for MMFs, we thought it would be a good time to take a look back at where we've been, thanks to a timeline featured in the ICI annual report under the heading, "Major Events in Money Market Fund History." Writes ICI, "Investors continue to embrace money market funds -- and have been rewarded with remarkable resilience, liquidity, and stability. Money market funds have long played a crucial economic role, providing an important vehicle for short-term financing and cash management in both the public and private sectors." We reprint ICI's timeline tracking the history of MMFs below, and also source their table of "Money Market Funds by the Numbers," which reviews a number of major statistics on money funds.
ICI's "Money Market Funds by the Numbers" include: "`$2.6 trillion -- Money market funds held nearly $2.6 trillion in assets in June 2014. That's nearly $740 billion (41 percent) more -- at average yields of 1 basis point for taxable funds -- than they held when average yields exceeded 6 percent in late 2000. $509.8 trillion -- More than half a quadrillion dollars have flowed in and out of money market funds since 1984 -- shortly after the SEC adopted Rule 2a-7 of the Investment Company Act of 1940 to enable the funds to maintain a stable net asset value per share. $517 billion -- Prime money market funds held more than half a trillion dollars in weekly liquid assets as of June 30, 2014 -- roughly 37 percent of total prime money market fund assets, or well above the 30 percent requirement established in the SEC's 2010 reforms. 79 percent -- As of June 2014, money market funds held $268 billion of tax-exempt securities -- nearly four-fifths of municipal short-term debt. State and local governments issue debt to finance roads, bridges, airports, water and sewage treatment facilities, hospitals, low income housing, and other public projects."
The Numbers continue: "50 million -- Nearly 50 million individual shareholders owned money market funds in June 2014. This translates into nearly 30 million U.S. households. 35 percent -- As of June 2014, taxable money market funds held $347 billion -- or more than one-third -- of the commercial paper that businesses use to finance payroll, inventory, and other short-term liabilities. 996 percent -- During the past two decades, money market fund assets have grown nearly elevenfold -- from $233.6 billion at year-end 1984 to $2.6 trillion in June 2014. $377 billion -- As of June 2014, taxable money market funds held $377 billion -- or 13 percent -- of short-term debt issued by the Treasury."
ICI's "Major Events in Money Market Fund History" timeline features: "OCTOBER 1971 -- The first money market fund (MMF), the Reserve Fund, opens to investors. JULY 1983 -- SEC Rule 2a-7 permits MMFs to use amortized cost valuation and/or penny rounding pricing to help maintain a stable NAV. MARCH 1986 -- The SEC adopts Rule 2a-7 amendments that impose additional requirements on the quality and diversification of demand features. FEBRUARY 1991 -- The SEC adopts Rule 2a-7 amendments that tighten credit standards for eligible investments by taxable MMFs, including addition of a diversification requirement. SEPTEMBER 1994 -- Community Bankers U.S. Government Money Market Fund liquidates and distributes assets at $0.96 per share, becoming the first MMF to "break a dollar."
It continues: MARCH 1996 -- Amendments to Rule 2a-7 tighten investment restrictions on tax-exempt MMFs and address the rule's application to asset-backed securities. SEPTEMBER 16, 2008 -- The Reserve Primary Fund, with $785 million invested in Lehman Brothers, becomes the second MMF to "break a dollar." Investors receive more than $0.99 per share. SEPTEMBER 19, 2008 -- Federal Reserve announces the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility for commercial paper. The AMLF ends February 1, 2010. SEPTEMBER 19, 2008 -- U.S. Treasury announces Temporary Guarantee Program, designed to restore to $1.00 the NAV of a participating MMF that breaks a dollar. Program expires after one year with $1.2 billion in fees paid by MMFs to the Treasury, but no claims paid by Treasury under the guarantee. OCTOBER 10, 2008 -- SEC staff sends a letter to ICI temporarily allowing MMFs to value some high-quality, short-term securities at amortized cost for shadow pricing under Rule 2a-7. NOVEMBER 24, 2008 -- Federal Reserve Bank of New York provides senior secured funding to a series of special-purpose vehicles that purchase high-quality money market instruments from U.S. MMFs. The facility is never used."
The Timeline also includes: JANUARY 14, 2009 -- MMF assets hit $3.92 trillion, their highest level ever. MARCH 2009 -- ICI issues Report of the Money Market Working Group. ICI's Board voluntarily adopts its wide-ranging recommendations for stronger MMF regulation. JUNE 2009 -- U.S. Treasury issues a white paper directing the SEC to move forward with plans to reduce the risk profile of individual MMFs and make the industry less susceptible to "runs." JANUARY 2010 -- The SEC adopts Rule 2a‑7 amendments that incorporate many of the Money Market Working Group's recommendations: tighter MMF liquidity requirements, stricter quality requirements, reduced maturity limits, and enhanced disclosure of portfolio holdings, among others. OCTOBER 2010 -- The President's Working Group on Financial Markets issues a report urging additional changes to MMFs. MAY–AUGUST 2011 -- Facing a possible federal government default on payments to bondholders, MMF managers adjust fund portfolios to mitigate risks. MAY–NOVEMBER 2011 -- U.S. prime MMFs continue their careful response to the worsening debt crisis in the eurozone, reducing their holdings of eurozone banks."
Finally, the timeline concludes: AUGUST 2012 -- The SEC announces that it will not proceed with a vote to solicit public comment on potential structural reforms of MMFs. SEPTEMBER 2012 -- Treasury Secretary Timothy Geithner urges members of the Financial Stability Oversight Council to recommend that the SEC proceed with MMF reform. NOVEMBER 2012 -- SEC study examines what caused redemptions of prime MMFs during the 2008 crisis, the efficacy of the 2010 reforms, and how MMFs would have performed in 2008 had the 2010 reforms been in place. NOVEMBER 2012 -- FSOC solicits public comment on three requirements for MMFs: a floating NAV, a NAV buffer of up to 1 percent of assets, or a risk-based NAV buffer of 3 percent. JUNE 2013 -- SEC proposes amendments to the rules that govern MMFs. The proposal generates more than 1,400 comment letters. SEPTEMBER 2013 -- European Commission proposes a new regulatory regime requiring EU MMFs to either maintain a capital buffer of at least 3 percent or float the NAV. These regulations remain pending. JULY 2014 -- The SEC adopts amendments to the rules that govern MMFs."
