Moody's: Floating NAV Doesn't Help
The Financial Times reports, "All Money Market Funds are Created Equal, Says Moody's." It says, "Flexibly priced money market funds are just as prone to runs in times of crisis as fixed price ones, analysis from Moody's suggests. This potentially undermines the rationale of a push by industry regulators to clamp down on fixed-price vehicles. Regulators on both sides of the Atlantic fear the money market fund industry's preferred constant net asset value structure -- whereby funds are priced at a flat $1 or E1 a share unless in extremis -- creates a potential systemic risk as investors have an incentive to rush to sell during a crisis in order to be repaid at par. The US has already decreed that much of its $2.6tn money market sector will have to switch to variable NAV status -- where unit prices immediately move to reflect market prices -- from 2016. The EU is working on similar proposals. But analysis by Moody's, the rating agency, suggests this upheaval will achieve little. "We believe that at times of crisis, redemptions will occur regardless of a fund's structure," said Vanessa Robert, a senior credit officer at Moody's." In other news, The New York Times wrote on April 11, "Money Funds Remain Haunted by Fears of 'Breaking the Buck'." It says, "Of all the regulatory concerns about the fund industry, the most persistent worries are perhaps those focused on money market mutual funds, which now hold more than $2.6 trillion in assets. That may be because there has already been a money-market fund crisis. In 2008, the share price of one fund fell below a dollar, "breaking the buck," in Wall Street jargon. That set off a panic among some institutional investors and required the government to create a temporary insurance program. The memory of that episode still haunts regulators. Most of the official focus is on prime money funds, which take on slightly more risk to provide slightly higher returns. "Prime money market funds with a fixed net asset value remain vulnerable to investor runs if there is a fall in the market value of their assets," the Federal Reserve said in its monetary report in February. But many of the people who manage these funds say they are puzzled by the continuing regulatory concern. For one thing, they say, the kinds of securities held by money market funds -- high-quality, low-risk, short-term notes -- would be considered a haven for investors during a crisis, providing enough demand to support liquid trading. Moreover, money market funds now operate under more stringent post-crisis regulatory rules: Money funds must take less credit risk and maintain more substantial cash cushions to cover redemptions than they did before the crisis. New regulations that go into effect next year will impose even more safety rules on money funds, which will be divided into institutional and retail categories.... "What I wonder is, why do regulators have so little confidence in the changes they have put in place to address these liquidity issues in money funds?" said Joseph K. Lynagh, who heads the cash management team at T. Rowe Price.... "Everything I see suggests the industry is more robust than it's ever been." That may well be. But investors may still want to remember that while the pre-crisis money fund risks may have declined, regulatory worries have not."
