These funds attempt to maintain a net asset value (NAV) of $1/share, only the yield goes up and down. As a result, these funds have relatively low-risks compared to other mutual funds and pay dividends that generally reflect short-term interest rates. Therefore, MMMFs provide investors with a safe place to invest easily accessible cash-equivalent assets, usually for a year or less. MMMFs are important providers of liquidity to financial intermediaries (an institution that acts as a middleman between investors and those raising funds) and play an important role in our economy.
Money markets are able to stay constant because they do not invest in products that produce capital gains or losses. Should the NAV fall below $1/share, it is said to have “broke the buck.” Prior to September, 2008, investor losses in money markets were almost unheard of. However, that changed when Lehman Brothers Holdings Inc. filed for bankruptcy. On Tuesday, September 16, 2008, Reserve Primary Fund, broke the buck when its shares fell to 97 cents, after writing off debt issued by Lehman. There was concern that investor anxiety triggered by this incident would cause a run on money market funds. In response, the Department of Treasury established the Exchange Stabilization fund. The purpose of the fund is to insure the holdings of covered money market funds, so if they were to break the buck, they will be restored to $1 NAV.
To mitigate the risks to MMMFs, in 2010, the Securities and Exchange Commission (SEC) made significant changes to Rule 2a-7, which among other things, established stricter quality and liquidity requirements, as well as shortened average maturities. The SEC, following Commissioner Schapiro’s speech at the SIFMA Annual Conference, has been exploring further reform initiatives. These include a floating NAV or a combination of capital requirements plus redemption restrictions.
