WSJ on New Money Fund Rules
The Wall Street Journal continues its unofficial "Money Fund Week with the article, "5 Things Investors Should Know About New Rules on Money-Market Funds." It says, "Investors in money-market funds should prepare now for extensive new rules in mid-October that promise to fundamentally change the $2.7 trillion industry, fund managers and experts say. Under the new rules, prime institutional money-market funds -- those that invest in short-term corporate debt and cater to large investors -- and institutional municipal money-market funds must allow the value of their shares to fluctuate to reflect the current market price of their underlying holdings. Prime and retail municipal money-market funds aimed at individual investors will try to continue with a stable $1 net asset value, but they may impose redemption fees or other selling restrictions during times of crisis. Government money-market funds for institutional or individual investors will still attempt to maintain a $1 share price after the rules are in place, and they aren't required to impose redemption fees or suspend redemptions." The piece explains, "Here are five things individual money-market-fund investors should consider ahead of the Oct. 14 implementation: 1. Share Prices May Fluctuate <b:>`_. For many years, money-market funds have kept their share prices fixed at $1 regardless of what occurred in the market. Yet factors such as interest-rate changes and market and credit conditions can cause a fund's market-based net asset value to fluctuate above or below $1.... Investors have already pulled billions from prime funds and shifted much of that money into government money-market funds that will still attempt to maintain a $1 share price after the rule change. If the notion of a fluctuating net asset value is unsettling, investors who remain in institutional prime funds may want to move their money. But they should consider that, since April, money-market funds have been required to publish daily their per-share net asset values based on market prices. Those disclosures have shown that there has been little fluctuation from $1." The Journal quotes our Peter Crane, "It's like watching paint dry.... $0.9999 or $1.0001 is the most fluctuation you'll see." It adds, "It will take a disturbance, such as an interest-rate move by the Federal Reserve or a default or a major downgrade of a blue-chip borrower, to create a greater gap, he says. "These minuscule movements ... are not going to cause noticeable losses to investors." Among the other "5 Things to Know," the WSJ lists: "2. Your Money Could Be Locked Up During a Period of Stress; 3. Your Fund Could Still 'Break the Buck'; 4. Fund Directors Will Shoulder Weighty New Duties; and, 5. Fund Companies Now Rate Their Own Holdings." See also, CFO Journal's piece, "New Money-Fund Rules Test Need for Liquidity Versus Yield." It says, "Money-market managers find themselves at the mercy of corporate finance chiefs, who stand to pull hundreds of billions of dollars in cash out of funds within the next 10 weeks, disrupting short-term lending markets. The threat, spurred by regulations set to take effect Oct. 14, is rippling through the bank lending market and unsettling the $2.7 trillion money-market industry, according to fund managers."
