Aurum Wealth Management Blog

money market

Show Me the Money Markets Reform

In July 2014, the SEC passed new rules and regulations around money markets that were to be phased in by October 2016.  The main objective of the reforms was to create greater stability within money market funds.

Here are how investors were impacted:

  • There is a new distinction between retail (where humans are the beneficial owners) and institutional money market funds (where an entity is the beneficial owner).
  • Retail prime, municipal, and all government money market funds will have a constant Net Asset Value (of $1.00).  Institutional prime and municipal money market funds will have a floating Net Asset Value.  This means the price will float around $1.00, depending on the value of the securities.
  • Retail and institutional money market funds will have tools to curb heavy redemptions, including liquidity fees and redemption gates.  Government money market funds are permitted, but not required to impose these fees or gates. [1]

When the regulations came out, a grey area for categorizing retail versus institutional was the retirement plan space, mainly 401(k) plans.  Because the end owner of the funds are individuals, these were deemed to be retail.

Investors prepared for the changes, as we see below, with assets flowing into government money markets and away from prime funds.

In considering money markets funds to select (especially in the era of 0% interest rates), let’s go back to basics for any investment.  First, “What is my expected return?”  That answer is easy, the yield.  Next ask, “What is the risk?”  With government funds, the risk of default is essentially zero while issuance by others (such as corporations or other governments) is above that zero percent.  So an investor should expect a higher yield from a prime fund than a government fund.  Unfortunately, the higher yield is marginal at best.  In most cases, it is a few basis points and sometimes the yield is not higher at all.  In our opinion, the small difference in yield is not enough compensation to take on the credit risk.

What is the bottom line?  Know what you own.  For accounts holding cash, where is it actually invested?  A government money market?  If not, why?  Is it a retail fund?  If not, why?

For us, the preference is spending our risk budget investing in stocks, bonds, or alternatives strategies – not on money markets to eke out a little extra yield.

The area money market funds swim in has been acting different lately.  LIBOR rose slowly and big asset flows occurred (as shown above).  Among all of the other happenings this fall, keep one eye on this.


This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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