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breaking the buck and MM funds
Old 05-22-2016, 12:16 PM   #1
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breaking the buck and MM funds

What's behind Vanguard's forcing everyone to switch settlement funds to their Federal Money Market fund? I'd like to think that fund is less likely to fall below the $1/share value but wonder if VG has other reasons.
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Old 05-22-2016, 12:20 PM   #2
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You can settle in cash instead. To me this is better since MM only pay about 0.001% right now. Why even risk breaking the buck for less interest than you can get turning in a aluminum can at the recycler?
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Old 05-22-2016, 12:38 PM   #3
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You can settle in cash instead. To me this is better since MM only pay about 0.001% right now. Why even risk breaking the buck for less interest than you can get turning in a aluminum can at the recycler?
I did not know this. Is it something Vanguard itself offers, or are you talking about transferring funds between VG and a standard bank account?
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Old 05-22-2016, 04:45 PM   #4
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My mm broke the buck in 2008 and we all lost some money.
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Old 05-22-2016, 04:54 PM   #5
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What's behind Vanguard's forcing everyone to switch settlement funds to their Federal Money Market fund? I'd like to think that fund is less likely to fall below the $1/share value but wonder if VG has other reasons.
It is an offshoot of the 2008 crisis. Because the federal money market fund only invests in federal securities it is never supposed to hold securities that would lead to breaking the buck. Consider that the reserve money market fund got bit by holding Lehman debt, and had to write it to zero on the bankruptcy. (Actually several others had losses but the holding company made them up in particular Wachovia money market funds).

The thought is that if the treasury market goes haywire currency will also be worthless because both are treasury obligations (well currency is technically mostly a federal reserve obligation but the difference is very small)
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Old 05-22-2016, 11:30 PM   #6
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What's behind Vanguard's forcing everyone to switch settlement funds to their Federal Money Market fund? I'd like to think that fund is less likely to fall below the $1/share value but wonder if VG has other reasons.
There has been a significant change in how MM funds work, mandated by the SEC, after 2008 exposed some severe vulnerabilities.

If you want a MM fund that does not break the buck, it has to be backed by US govt guaranteed short-term paper. And that is only available to the retail investor. So all brokerages had to realign their offerings and move clients around.
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Old 05-22-2016, 11:32 PM   #7
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I did not know this. Is it something Vanguard itself offers, or are you talking about transferring funds between VG and a standard bank account?
Some brokerages offer bank sweeps which give FDIC protection.
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Old 05-22-2016, 11:56 PM   #8
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I never hit upgrade, I wonder what's going to happen if I never hit upgrade.
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Old 05-23-2016, 03:20 AM   #9
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the rules spell that out .if times require it , you can be prevented from taking out money and the dollar value can float and go below 1 dollar .
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Old 05-23-2016, 05:05 AM   #10
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My wife's 403B has a "money market" option that is was recently returning about -0.15% after expenses.
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Old 05-23-2016, 06:24 AM   #11
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the rules spell that out .if times require it , you can be prevented from taking out money and the dollar value can float and go below 1 dollar .
Only certain types of MM funds are required to float or have redemption restrictions. The NAVs of these types of MM funds always float now, to four decimal places. But an individual investor can choose a government backed MM fund that does not float nor has redemption restrictions.

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The SEC’s new rules permit some money market mutual funds to limit redemptions under certain conditions. In particular, if a fund’s weekly liquid assets were to fall below 30%, the board of directors
of a prime (general purpose) fund or a municipal fund may either charge a liquidity fee of up to 2% on shareholder redemptions or impose a halt on all shareholder redemptions (known as a “gate”) for no lon- ger than 10 days. Additionally, if weekly liquid assets were to fall below 10%, a prime or municipal fund must impose a liquidity fee of 1%, unless the fund’s board determines that such a fee is not in the fund’s best interests. These liquidity fee and redemption gate requirements apply to both retail and institutional funds. Government and U.S. Treasury money market mutual funds will not be subject to liquidity fees or redemption gates.
https://www.fidelity.com/bin-public/...strictions.pdf

https://www.fidelity.com/mutual-fund...unds-statement
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Old 05-23-2016, 07:15 AM   #12
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those are the fund types i was referring to . only the approved gov't money market funds are outside those rules
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Old 05-23-2016, 07:22 AM   #13
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I have funds in the Prime Money Market fund at Vanguard. Is that the one you're speaking about? I didn't realize that there is the possibility of losing money in that account. It is not an insignificant amount at the moment. I'm wondering if I should transfer it out (I guess only the non-IRA funds) to an FDIC insured bank until I'm ready to do something with it?

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Old 05-23-2016, 07:27 AM   #14
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This shouldn't be a surprise, I received a letter from Vanguard telling me about this impending change months ago.

From the Vanguard website:
"
The settlement fund
Beginning later in 2016, Vanguard Federal Money Market Fund will be the only money market fund you can use to settle brokerage trades.
Vanguard Brokerage selected this fund for retail accounts because it's open to all investors and won't have fees and gates.
Also, after considering factors such as yield, fees, investment objectives, risks, and current market conditions, Vanguard Brokerage believes it's the most appropriate alternative to current money market settlement funds.
Note: If you have a brokerage account, Vanguard Brokerage will change your settlement fund to the Federal Money Market Fund later this summer. It will have a zero balance until you add money to it or sales proceeds sweep into it. We can't move money from your existing settlement fund into the Federal Money Market Fund without your authorization."

The new SEC rules are designed that many funds can "break the buck" and/or institute redemption holds and fees to insure the stability of the funds in times of financial crisis.

See: https://investor.vanguard.com/mutual...market-reform/
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Old 05-24-2016, 08:22 AM   #15
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I have funds in the Prime Money Market fund at Vanguard. Is that the one you're speaking about? I didn't realize that there is the possibility of losing money in that account. It is not an insignificant amount at the moment. I'm wondering if I should transfer it out (I guess only the non-IRA funds) to an FDIC insured bank until I'm ready to do something with it?

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I would not worry if I were you. There is a video/transcript on this subject on Vanguard's website narrated by the managers of Vanguard's fixed income group.....Justin Schwartz and David Glocke.

It boils down to this. New SEC regulations ( Oct. 2016) dictate that if a MM fund's liquidity falls below 10% .... a fund must impose a 1-2% fee on any withdrawals. If a MM fund's liquidity falls below 30%.... the board of director's of Vanguard may impose these fees.

Vanguard's MM fund manager's have decided to add a 10% buffer so that the Prime MM fund will have liquidity of 40%. Think about it. With $136 billion in assets this adds close to $14 billion in liquidity if there are any excessive withdrawals over a short period of time.

In addition the board of directors may elect to impose a "gate" i.e. suspend withdrawals for a period of 10 days. So you might have to wait 10 days for your money. Not a big deal. Plus the MM NAV for retail investors will remain at $1. And the gov't MM funds may voluntarily adopt the above gates and fees.

I also have a large amount in Vaguard's Prime MM fund that I am planning on investing in the future. It is my "dry powder."
I would not move money into a bank FDIC account out of fear of the impending changes to MM funds. Banks are required to abide by the liquidity coverage ratio rule requiring them to maintain sufficient liquidity. This rule requires banks to maintain liquid assets that equal or exceed 100% of their total anticipated expenses for a 30 day period. The key word is anticipated. If withdrawals start to spike your withdrawals will be frozen for who knows how long. Your local bank might have only a few hundred million in liquidity. And your bank might fail and it may be months before FDIC insurance will kick in. I doubt the Vanguard Prime MM fund will fail.

So relax. This too shall pass.
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Old 05-24-2016, 08:45 AM   #16
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In all recent failures up till now the bank reopened the next morning at least to pay and take deposits. This is the way the FDIC works, ideally it sells the deposits and loans to a new banking group or in other cases opens a wind down bank until it can sell things off. Only if you are above the insured limit has there been a wait for access to ones money.
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Old 05-24-2016, 07:12 PM   #17
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I have funds in the Prime Money Market fund at Vanguard. Is that the one you're speaking about? I didn't realize that there is the possibility of losing money in that account. It is not an insignificant amount at the moment. I'm wondering if I should transfer it out (I guess only the non-IRA funds) to an FDIC insured bank until I'm ready to do something with it?

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You don't have to transfer out. You can just switch to one the Federal money market fund (whatever they call it), if you don't want to worry about a floating NAV or some kind of redemption delay or penalty in times of crisis.

Me - I moved most of my cash out of money market funds many years ago, because I knew they could be vulnerable in a crisis, and they have been paying about 0% anyway. I use FDIC insured high yield savings accounts. It only takes a day to transfer funds into and out of my (non-IRA) brokerage. I don't hold cash in my IRAs.
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Old 05-24-2016, 07:16 PM   #18
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I would not move money into a bank FDIC account out of fear of the impending changes to MM funds. Banks are required to abide by the liquidity coverage ratio rule requiring them to maintain sufficient liquidity. This rule requires banks to maintain liquid assets that equal or exceed 100% of their total anticipated expenses for a 30 day period. The key word is anticipated. If withdrawals start to spike your withdrawals will be frozen for who knows how long. Your local bank might have only a few hundred million in liquidity. And your bank might fail and it may be months before FDIC insurance will kick in. I doubt the Vanguard Prime MM fund will fail.

So relax. This too shall pass.
I'm a little confused by your post. The MM funds referred to by the OP and Debinov are mutual fund money market funds, not accounts held in a bank. Different rules, no FDIC protection for brokerage MM funds. Nothing to do with bank liquidity.

Some banks do call their checking or savings account money market accounts (not funds). Different beast, although the terminology can be confusing.
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Old 05-25-2016, 03:55 AM   #19
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we lost about 2% in the prime reserve money market . they were loaded with Lehman paper . not only did we lose money but we were locked out for months good thing i had a tiny amount in it and did not need it for bills like some folks . .
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Old 05-25-2016, 06:04 AM   #20
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I used to be annoyed when I was forcibly switched into a "bank sweep" yielding just about nothing. But with MM fund rates at basically zero, I'd just as soon have the bank sweep's FDIC insurance and no chance of breaking the buck than whatever tiny additional interest I'd get off the MM fund where there's a chance to break the buck. Sad but true in a relentless War on Savers that realistically shows little, if any, sign of relenting.
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