Money Market Funds: Secure and Transparent
The popularity and widespread use of money market funds is based on a fundamental principle—these funds’ objective of maintaining a stable $1.00 net asset value (NAV). For investors, who purchase and redeem millions of dollars in money market fund shares every day, the stable $1.00 NAV provides convenience and simplicity in accounting, recordkeeping, and tax treatment of cash balances.
Money market funds can only offer the stable $1.00 NAV if they adhere to strict Securities and Exchange Commission (SEC) regulations governing the credit quality, liquidity, diversification, and maturity of their portfolios. These regulations are designed to limit credit, interest rate, and liquidity risks to help ensure that money market funds can redeem investor funds at the stable $1.00 NAV.
Adhering to these strict regulations, money market funds have delivered security, convenience, and historically superior yields for investors for decades. In fact, investors have bought and sold some $330 trillion in money market fund shares since the adoption of money market fund regulations in 1983.
Money Market Funds Help Fuel the Economy
Investments in money market funds provide short-term financing for businesses, banks, and governments at all levels-vital funding for all sectors of the U.S. economy. Consider how the more than $2.5 trillion in assets managed by more than 650 money market funds affect:
- Jobs – Money market funds hold more than one-third of the commercial paper that businesses issue to finance payrolls and inventories.
- Communities – Money market funds hold more than half of the short-term debt that finances state and local governments for public projects such as roads, bridges, airports, water and sewage treatment facilities, hospitals, and low-income housing.
- Individuals – Money market funds hold a significant share of the asset-backed commercial paper that finances credit card, home equity, and auto loans.
- Government – Money market funds hold one dollar out of every eight in short-term paper issued by the Treasury.
- Retail investors – Money market funds have long provided a convenient and low-cost means for households and individuals to obtain access to higher-yielding money market instruments. For retail investors, money market funds have paid at least $225 billion more in returns than competing bank products since 1985.
- Institutions – For businesses, colleges and universities, nonprofit organizations, government agencies, and financial institutions, money market funds are a preferred vehicle for cash management.
Money Market Funds Are Now More Resilient Than Ever
Following the financial turmoil of 2008, the SEC and the money market fund industry worked toward a common goal-to make money market funds more resilient under extreme market conditions. The result was the adoption in early 2010 of enhanced SEC regulations in a number of key areas:
- Credit quality – The amended regulations reduce credit risk by raising credit standards for securities held by money market funds.
- Maturity – The amendments reduce interest rate and credit-spread risk by shortening the weighted average maturity of money market funds’ portfolios and introducing a new maturity measure, weighted average life.
- Liquidity – The amended regulations for the first time impose explicit liquidity requirements, mandating funds to hold specific, minimum amounts of securities they could convert to cash in one business day or five business days. Funds also must adopt “know your investor” procedures to help them anticipate the potential for heavy redemptions and adjust their liquidity accordingly. Prime money market funds* today have collectively at least $160 billion available to meet redemptions on any given day and $490 billion available to meet redemptions within five business days.
- Disclosure – The amendments require money market funds to report their holdings more frequently, so regulators and investors can better understand funds’ portfolios.
Taken together, these amendments increase money market funds’ resilience in adverse markets.
* Prime money market funds are taxable funds that invest in high-quality commercial paper as well as Treasury and government securities.