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What Really Happens when a Fund Breaks the Buck?

Institutional Money Market Funds Association

Money market funds have received significant press attention in recent months. This is primarily the result of a single incident in September 2008, but one which happens so infrequently that it sent reverberations throughout the financial sector globally. That incident was when a money market fund managed by The Reserve Management Corporation “broke the buck”.

It is important here to quantify exactly what happens when a fund breaks the buck.

A money market fund is designed to provide security of capital and liquidity. The fund seeks to maintain a constant net asset value (i.e. $1, €1 or £1), allowing the investor to have instant access to the investment and with no loss of capital. The funds achieve this by using amortised cost accounting, which permits a straight-line extrapolation of the asset price from its purchase to its maturity. Regular comparison of the amortised cost with the mark-to-market cost of the assets and the portfolio is conducted to determine whether there is any discrepancy between those two values, and to take action if any material discrepancy arises.

Whilst maintaining a constant value, the funds are permitted to have a variance of plus or minus 50 basis points from the par value, i.e. the value of an individual share can move within the range 0.9950 to 1.0050. Should any situation arise in which the value of a share moves outside this range, the fund is said to have broken the buck and the constant net asset value is lost. This can therefore be considered as the point at which the share price, calculated to two decimal places, varies from the par value.