Financial Firms Start to Raise Curtains on Money Funds
Two major banks and the country's largest asset manager took steps to make their money market mutual funds more transparent to investors.
Goldman Sachs, JPMorgan and BlackRock announced they will publish, on a daily basis, the previous day's closing net asset value, or NAV, of several of their money market funds. While the NAV, or share price, of these funds might fluctuate, the funds will continue to buy and redeem shares for investors at the industry standard $1 a share price.
The firms' move is seen as a way to get ahead of regulators, who despite setbacks, continue to push for reforms to this $2.7 trillion dollar industry.
"From a PR (public relations) move it is genius," said Pete Crane, president of Crane Data, which tracks the money market fund industry. "They are combating the myth regulators are spreading that the NAV is a fiction."
Crane said once investors get to see how little a money market's NAV fluctuates, they will reject what he sees as the false perception that many of these funds are being run with a $0.99 NAV, with parent companies putting in the needed capital to maintain the dollar a share price.
Long seen as an alternative to bank savings accounts, money market mutual funds are not backed by the FDIC, and do not guarantee the dollar a share price. There has, however, been an implicit guarantee by fund managers to maintain the dollar a share price even as the underlying value of the fund moves up or down.
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This implicit guarantee has been broken a few times in the industry's history, most recently during the financial crisis in 2008 when a money market fund, Reserve Primary Fund, "broke the buck" or redeemed shares for less than a dollar a share.
Seen as systemically important, there have been efforts to reform the money market fund industry in the wake of the crisis. Among the reforms was a rule requiring money funds to publish once a month a fund's NAV from the last 30 days.
More recently, an effort led by SEC Chairman Mary Schapiro to propose other reforms failed. That proposal included allowing the NAV to float or fluctuate, or mandating money funds put aside capital to assure the dollar a share price in times of crisis.
The money fund industry has opposed these reforms maintaining that requiring the funds to set aside capital would hurt the industry's profitability and cut the yield paid to investors. The industry also opposes allowing the NAV to float, fearing it would result in investors pulling money out of what have been traditionally safe investments.
The Investment Company Institute, which represents the mutual fund industry, declined comment.
Goldman Sachs began disclosing the NAV of its U.S based Commercial Paper Money Market Funds on Wednesday and will disclose the NAV for Government and Municipal Funds next week. While Goldman said the primary reason it decided to publish the NAVs was because of its clients, who should benefit from the greater transparency, it also tipped its hat to regulators.
"It is our belief that this level of transparency will also benefit the ongoing dialogue around potential regulatory changes to money market funds," James McNamara, Goldman's managing director and president of Goldman Sachs Mutual Funds said in a statement.
In the wake of the SEC's failure to propose new reforms to the money market industry, the Financial Stability Oversight Council has taken up the cause. Public comments about its proposals to reform money markets are due on January 18th.
"You get JPMorgan and Goldman Sachs doing it, you're going to have a lot of other companies doing it too," Crane said when asked if other firms would follow the banks lead.
But one lawyer formerly at the SEC, who asked not to be identified, sees some problems in more transparency.
"Do investors overreact to small changes in shadow pricing, which could lead to a run and create systemic risk," he said.
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JPMorgan is betting investors will not overreact. It will begin publishing the NAVs of its JPMorgan Prime Money Market Fund, JPMorgan Liquid Assets Money Market Fund and JPMorgan Current Yield Money Market on Jan. 14. In a statement it said the daily disclosure of the funds NAV "will help investors better understand how day to day market movements or events can affect the value of the funds' portfolios."
In a statement BlackRock said it was "a long-time advocate of improved transparency for money market fund investors." The firm will start reporting the daily NAV for all of its U.S. money market funds by Jan.16.
One industry expert who declined to be identified said the funds typically move within ten basis points of the dollar a share value. In times of great stress, they have moved more, though he declined to be specific. Regulators want to make sure investors are aware of these risks so in the event of another crisis, they do not start a run on these funds and further disrupt the financial system.
Some proponents of reform maintain allowing the NAV to float would eliminate this risk altogether because investors would not expect to redeem their money market shares at a dollar each. JPM and Goldman said their decisions to publish the NAVs were not first steps to eventually having an explicit, rather than implicit guarantee of the dollar a share price, though the former SEC lawyer said it might be in the back of their minds.
He said both these banks have the assets to support the funds or maintain that dollar a share price if there is a crisis.
"It's not so risky for them," he said. "But if there's pressure placed on the rest of the industry to do this, including fund groups with smaller sponsors, that could cause problems."
What he means is that smaller funds would not have the money to guarantee the share price. This might cause a run on their funds as investors seek a safer place to park their money.
—By CNBC's Mary Thompson; Follow her on Twitter: @MThompsonCNBC