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Creating Money Market Resilience in Extreme Market Conditions

by Hugh Briscoe, Executive Director, Goldman Sachs Asset Management

Background

Since stable Net Asset Value (NAV) Money Market Funds (MMFs) were first introduced into the United States and Europe, they have been generally considered as safe investments, and most recently as a ‘safe haven’ in the face of volatile markets, offering security and liquidity as well as a competitive yield. As other investment classes suffered throughout 2007-2008, MMFs proved to be resilient; for example, from the time that the sub-prime mortgage crisis first came to the attention of the market in July 2007, until the collapse of Lehman Bros in September 2008, MMF Assets Under Management (AUM) worldwide grew by $800bn. However, even the MMF industry took a hit in the third quarter of 2008 largely due to significant outflows in September when the Lehman Brothers collapse spooked institutional investors. Nevertheless, Goldman Sachs Asset Management (GSAM) was able to face the significant redemption pressures experienced, along with many of its peers.

The Case for Regulation

The situation has improved considerably since November 2008, with the result that overall MMF assets grew in Europe in 2008. However, the difficulties experienced by a small number of MMFs in Europe and the United States, perhaps best illustrated by the suspension of redemptions by the Reserve Primary Fund in the United States, have raised concerns about the risk characteristics of MMFs. Although stable NAV MMFs, both in Europe and in the United States, already adhere to strict investment guidelines, the industry has recently proposed a series of recommendations that aim to strengthen the resilience of MMFs in a crisis, and to ensure fair treatment of investors. In Europe EFAMA and IMMFA have agreed to work on a pan-European definition of money market funds.

ICI Money Market Fund Working Group Recommendations

Advised by senior individuals from many of the most respected money market fund managers, including GSAM, the report produced by the Money Market Fund Working Group (MMWG) to the Investment Company Institute (ICI) (“ICI Report”) in the United States argues for the implementation of regulatory and operational reforms intended to make MMFs even safer for investors.

Investor Confusion. “Money market fund” terminology is often used to describe funds which do not satisfy either SEC or IMMFA risk-limiting requirements, which can be confusing for investors. Some investors may have been under the impression that MMFs carry no investment risk whatsoever. Consequently, the MMWG now recommends a general revision of risk disclosures and regular disclosure of fund holdings.