Although changes to money market funds since 2010 have made them more transparent and stable, SEC Chairman Mary Schapiro told CNBC that there are structural weaknesses still to be addressed.
Actions taken in 2010, Schapiro told “Power Lunch,” bolstered the resiliency of money market funds and are helping them to weather the European sovereign debt crisis. “They’re more liquid, they’re more capable of meeting redemptions, there’s more transparency about money market fund holdings, and they stress-test their portfolios,” Schapiro said.
There’s still more work to be done. Schapiro said the 2010 changes have not addressed whether money market funds could still “break the buck” following a sudden and significant credit event or whether there’s a potential for a subsequent run. During the 2008 crisis, the Reserve Primary Fund famously broke the buck with net asset value falling below $1.
Schapiro has put forward two proposals to increase stability — either switch to calculating a floating net asset value or restrict redemptions. Since money market funds are investment products, the assets in their portfolio do not always have a stable $1 net asset value (NAV), Schapiro said. “While your price as an investor is $1 and when you redeem your shares you get $1 in normal circumstances, the value of the fund may actually be something less than $1,” Schapiro explained. A floating NAV would simply recognize this fact.
That may not be palatable some investors like state and local governments that value having a stable product for cash management. The alternative is a capital buffer that would absorb the day-to-day fluctuations in money market fund assets coupled with some restrictions on redemptions, Schapiro said. This proposal would mean that earlier redeeming shareholders like fast-moving institutional investors would share in the losses with retail and other investors.