MMF Reforms Risk Missing the Point

Money market funds are once again in the cross hairs of regulators in the US and Europe following a brief liquidity crunch in March 2020. Sebastian Ramos, Executive Vice President, Global Trading and Products, ICD, discusses the risks that over-zealous reforms could pose to the popular short-term investment instruments.

During the global financial crisis of 2008, the original money market fund (MMF) – the Reserve Primary Fund – ‘broke the buck’. As a result of its net asset value (NAV) falling below $1 for the first time, after the crisis both US and European regulators moved to amend the rules for MMFs.

This process had two stages in the US. The first targeted the underlying cause of the crisis by focusing on quality of portfolio, duration and portfolio transparency. The second focused on firming up an approach to liquidity and implemented the floating net asset value (NAV) for MMFs in the US.

In Europe the approach was similar but not as strict as in the US. As Ramos explains: “Rather than imposing a floating or variable NAV, a low volatility NAV [LVNAV] was introduced.” This tightens the spread at which a fund will have to reprice itself and start floating. “Historically, the funds had used penny-rounding with the fund having to reprice itself if there were a 50 basis point deviation of market value compared with the amortised cost value.”

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