US money market reforms: the gain isn’t worth the pain – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Financial Times

Next month the new rules of the Securities and Exchange Commission (SEC) will become effective for money market funds (MM funds).

Most importantly, MM funds with any assets from institutional shareholders – e.g., corporations, pension plans and insurance companies – will no longer maintain a constant net asset value per share of $1. Instead, the net asset value of institutional MM funds will fluctuate on a daily basis – for example, 99.8 cents per share on one day, and $1.01 per share on the next.

The new SEC rules apply to institutional MM funds investing in short-term debt of cities and states – called “municipal” MM funds. The new rules also apply to institutional MM funds investing primarily in short-term debt of banks and top-rated companies – called “prime” MM funds.

However, the new rules do not apply to institutional “government “ funds — investing almost all their assets in short-term debt issued by the US Treasury or federal agencies, loans backed by such debt or cash.

The prospect of these SEC rules has already led to billions of institutional assets moving out of municipal MM funds and prime MM funds into government MM funds.

As a result, the interest rates on the short-term borrowings (90 days or less ) of most banks, top rated companies, state and city governments have risen sharply. Will these hikes in borrowing costs be outweighed by the putative benefits of these rules – reducing the potential for systemic risk from institutional MM funds?

Read the full post at Financial Times

Robert Pozen is a Senior Lecturer at the MIT Sloan School of Management and a Senior Fellow at the Brookings Institution.

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