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Initial Reaction to Recent Money Market Reform

The Securities and Exchange Commission’s recent money market reform officially went into effect on October 14th. As a result, money market fund managers were required to comply with certain regulatory changes, including:

  • Prime funds are now subject to liquidity fees and redemption gates (dependent on their weekly liquidity levels),
  • Institutional prime funds will now transact at a floating net asset value (NAV), whereas previously they sought a stable per share $1 NAV (however, both government and retail prime funds will continue to transact at a stable per share NAV), and
  • Government funds are now required to hold at least 99.5% of their portfolios in government securities (up from 80% previously), making them more secure investments.

Prime versus Government Money Market Fund Assets and 1-Month London Interbank Offered Rate (LIBOR), based on U.S. Dollar

In anticipation of large outflows from prime funds into government funds (due in part to the former’s newly enacted redemption gates and floating NAVs), prime money market fund managers had been shortening their portfolios’ weighted average maturities to bolster liquidity. These outflows did indeed occur, increasing dramatically, as the effective date drew nearer (Figure 1).

Resulting from the shortened weighted average maturities of the prime funds, and a decrease in demand for corporate paper, among other factors, LIBOR spiked up significantly (Figure 2).

We will continue to monitor the asset class, but for the moment, money market fund managers are taking a wait-and-see approach.