Money Market Fund changes coming in 2016

[audreyh1]

Recently Fidelity has been posting some communications regarding changes coming to their money market fund line up to comply with new SEC rules that are coming in Oct 2016.

The gist is: certain funds will not have a stable $1 NAV, but rather be allowed to float to 4 decimal places. This is limited to institutional money market funds. Retail money market funds will not float the NAV, but will be allowed to impose liquidity restrictions - i.e. under certain circumstances they can impose early redemption fees and even suspend redemptions for up to 10 days.

If a money market fund uses only US treasuries or other US govt debt, then there are no liquidity restrictions, and the money market fund behaves like they do now.

Why is this happening? The financial crisis in 2008 revealed that money market funds could have serious liquidity issues and weren't nearly as "safe" as many investors assumed. This reform is a way to explicitly address those issues.

This year Fidelity is making some sweeping changes to comply with these rules. For example, Fidelity Cash Reserves will become a Fidelity government money market instead. Various merges, proxies, etc. are in the works this year to make all this happen. Other brokerages must have a migration plan they are starting to implement.

Here are some related Fidelity docs:

• Key Money Market Mutual Fund Regulations 2014: Overview of Final SEC Rules: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/MF_MMK_FinalSECrules.pdf
• Prepare for new money-fund rules — Three issues for investors to consider as regulations lead to a shake-up in the funds.: https://www.fidelity.com/insights/investing-ideas/new-money-fund-rules
• Update on money market fund regulations: What to expect as we begin to adjust our funds in response to new SEC regulations. https://www.fidelity.com/mutual-funds/news-analysis/money-market-funds-statement
• Money Market Reform Communication Series Comparing Stable and Floating Net Asset Value Money Market Mutual Funds: https://www.fidelity.com/bin-public...documents/MMF_Compare-stable-floating-nav.pdf

 

[gcgang]

Money market fund? they still have those? Uh, get back to me when the rates get back to 5%.


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[imoldernu]

Not sure I understand this...

As I read it, sounds as if the four decimal points versus the whole dollar will make values more transparent, and limit high leverage speculator manipulation of the market, providing more safety to the funds.

 

[calmloki]

.... Retail money market funds will not float the NAV, but will be allowed to impose liquidity restrictions - i.e. under certain circumstances they can impose early redemption fees and even suspend redemptions for up to 10 days....
Why is this happening? The financial crisis in 2008 revealed that money market funds could have serious liquidity issues and weren't nearly as "safe" as many investors assumed. This reform is a way to explicitly address those issues. ....

Chopping your statement like mad, but I do find it interesting when read in close time frame with various gold threads. Kind of like when the bell boy starts giving one stock tips it may be time to get out of the market.

 

[audreyh1]

It's definitely a move towards transparency. And for institutional investors that's how things will be unless they use a government or treasury MM fund.

But it is also an attempt to shield the retail investor from a floating NAV. Yet these new liquidity restrictions are imposed instead, and if we went through another financial crisis, like in 2008, there might be some unexpected delays for the retail investor if they are in a prime (commercial paper) or muni money market fund.

In my taxable brokerage accounts, a money market fund is used as the core account. So there isn't really a way to get away from having funds parked at least temporarily in a money market fund unless you reinvest all distributions.

 

[MichaelB]

Recently Fidelity has been posting some communications regarding changes coming to their money market fund line up to comply with new SEC rules that are coming in Oct 2016.
./.
Here are some related Fidelity docs:

• Key Money Market Mutual Fund Regulations 2014: Overview of Final SEC Rules: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/MF_MMK_FinalSECrules.pdf
• Update on money market fund regulations: What to expect as we begin to adjust our funds in response to new SEC regulations. https://www.fidelity.com/mutual-funds/news-analysis/money-market-funds-statement
• Money Market Reform Communication Series Comparing Stable and Floating Net Asset Value Money Market Mutual Funds: https://www.fidelity.com/bin-public...documents/MMF_Compare-stable-floating-nav.pdf

A most helpful post. Lots of us were probably unaware, I know I was. Thanks!

 

[audreyh1]

Chopping your statement like mad, but I do find it interesting when read in close time frame with various gold threads. Kind of like when the bell boy starts giving one stock tips it may be time to get out of the market.

I don't think it really means anything other that it will have taken 8 years to implement a solution!!! It's pretty sweeping though, so maybe it deserved the long study and consideration.

I was aware of the exposed risks from 2008, so for most of my cash I have moved well away from MM and into other vehicles. But I still can't get away from needing a core fund in my accounts.

I suspect there will be a lot more buzz about this in the future. But maybe not until next year when the "regular Joe" starts seeing merges or renaming or whatever on their statements.

 

[audreyh1]

A most helpful post. Lots of us were probably unaware, I know I was. Thanks!

The M* Fidelity thread gave me a heads up a couple of weeks ago with links to one of the articles, and I tracked down some of the other Fidelity articles. I've been studying the issue and deciding what action to take if any.

The FIRE forum has keep me well informed on several financial issues over the years so I like to return the favor when I can.

I did switch one of my core MMs from a muni MM to a government MM. It's not making any (taxable) money anyway. But I prefer the fixed NAV and no liquidity because I use it as a temporary holder for distributions, etc.

The other accounts are using Fidelity Cash Reserves and will be automatically converted to a government MM at some point. In the IRAs we don't use MM because all distributions are reinvested.

 

[audreyh1]

FWIW - this is going to increase the demand for short-term treasuries and govt debt. Downward pressure on short-term govt rates, IMO. But the effect will be to increase the spread - so short-term commercial paper and muni paper may see an increase in rates.

It depends on how many retail investors and institutional investors switch to government paper to maintain the fixed NAV and no liquidity restrictions.

But this may very well affect ultra-short bond funds.

This is all just speculation.

 

[pb4uski]

Money market fund? they still have those? ...

+1 Money market yields have been so pathetic that I ignore them and use online savings accounts instead.

 

[Independent]

.
The gist is: certain funds will not have a stable $1 NAV, but rather be allowed to float to 4 decimal places. This is limited to institutional money market funds. Retail money market funds will not float the NAV, but will be allowed to impose liquidity restrictions - i.e. under certain circumstances they can impose early redemption fees and even suspend redemptions for up to 10 days.

When this was first proposed, I thought the floating NAV was a good idea because it might remind investors that these are mutual funds, not bank accounts. I think retail investors could use that reminder a lot more than institutional investors.

 

[Options]

+1 Money market yields have been so pathetic that I ignore them and use online savings accounts instead.

Same here.

 

[mathjak107]

i hold the distinction of actually having a money market break the buck. i lost a few cents on the dollar. but it took months to get our money .

part of it was frozen and given back very slowly.

 

[audreyh1]

i hold the distinction of actually having a money market break the buck. i lost a few cents on the dollar. but it took months to get our money .

part of it was frozen and given back very slowly.

OMG! Wow!

 

[mathjak107]

yep , they were loaded up with lehman paper. it was called the reserve fund and was attached to our investment account as the money market .

we got back all but about 2% or so but i think it took a year to get it all out.

Money market breaks the buck, freezes redemptions - MarketWatch