US to reform money market funds

Lloyd Richards contributed to the writing of this blog post.

On 23 July the US Securities and Exchange Commission approved new rules on money market funds.  The rules are designed to prevent a run on investments as seen in 2008, but has been met with opposition from business groups.  The rules come into force immediately but firms have two years to comply.

Money market funds invest in short dated securities to generate a return above cash.  They also historically have offered full immediate liquidity akin to holding cash, and many insurers have held these in their cash bucket.  The main changes made by the commission force these funds to use a floating share price instead of the current fixed price and introduce rules on temporary suspensions to prevent investors from being able to withdraw en-mass in periods of extreme stress.

From an issuer perspective this makes the funds much safer but, to the customer, the potential investment losses and loss of liquidity could be problematic.  Institutions holding such funds should consider if continuing to hold them makes sense given their liquidity and market risk appetite.