House Panel Backs Bill To Scrap Floating Prices For Money Funds

Ted

FYI: The House Financial Services Committee has advanced a bill that would eliminate some of the strictures placed on the $2.8 trillion money market mutual fund industry in the wake of the financial crisis.

The legislation, which was opposed by Fidelity Investments, Vanguard Group., BlackRock Inc. and other major asset managers, would repeal a 2014 requirement that the riskiest funds allow their share prices to float, rather than maintain a stable $1 value. The panel’s action clears the way for a House vote on the measure.
Regards,
Ted
https://www.bloomberg.com/news/articles/2018-01-18/house-panel-backs-bill-to-scrap-floating-prices-for-money-funds

msf

Here's a four page primer from Vanguard on the MMF rules, including background on why something like these rules is needed. It's dated 2014, before the rules became effective (late 2016).
https://personal.vanguard.com/pdf/VGMMR.pdf

The final paragraph begins: "We believe that these changes, along with the safeguards implemented in 2010, constitute a strong response to concerns that institutional money market funds may pose a risk to the financial system. While the majority of Vanguard money market fund shareholders won’t be affected by the new rules, some institutional
clients will be."

Remember that only institutional prime and muni MMFs float. Yours and mine don't.

hank

- Are we going to legislate oversight and regulation of the nation’s financial institutions?

- You don’t suppose this might than become a political football every election season?

- If Vanguard, Fidelity and BlackRock were to contribute more to the campaigns of these Congressional financial gurus, might it might alter their thinking?

-

I tend to agree with the “float”. If you need a stable value on your cash investments, there are other options like FDIC insured bank accounts or T-Bills. As msf says, the floating rate doesn’t apply to the funds marketed to small retail investors (most of us). However, SEC mandated reforms were implemented at the time which further restrict the type of investments the retail funds can make. Many (most?) became government-backed money market funds. These changes made the retail funds much less profitable. That was enough to convince me to move to TRBUX.

If you could go back and view the old FA board discussions for fall / winter of ‘07, you’d find a number of threads questioning whether money market funds were “too risky” for small retail investors (most of us) - quite the opposite of a climate where discussions about emerging markets, junk bonds, and various passive approaches to equities dominate.

msf

"However, SEC mandated reforms were implemented at the time which further restrict the type of investments the retail funds can make. Many (most?) became government-backed money market funds. These changes made the retail funds much less profitable."

Brokerages and mutual fund companies seem to have done their best to confuse matters. They certainly made it appear as though people were being forced to accept lower returns.

If you were already investing in a US Treasury fund (e.g. PRTXX) or a US government fund (T. Rowe Price did not have one), nothing changed. If you were invested in a prime fund (i.e. one that could invest in corporate paper and other non-US government securities), things may have changed.

Financial institutions were reluctant (perhaps prohibited, I'm not sure) to allow you to use a fund that could freeze redemptions as your core/transaction/checking account. So they had two choices - convert their "core" fund offerings from prime to government, or require you to pick a different fund (a government fund) as your core account. They went with door number 1.

TRP changed Prime Reserve to Government MM (PRRXX), Fidelity changed Cash Reserves to Government Cash Reserves (FDRXX), etc. But T. Rowe Price also did something else. It took its high minimum (higher yielding) retail prime fund, Summit Cash Reserves, lowered its min to $2500 (dropping the "Summit" high min part), and renamed it Cash Reserves (TSCXX). So one still had a prime fund available; arguably a better one than Prime Reserve.

Here's T. Rowe Price's description of the changes required and what it did:
https://www4.troweprice.com/mmr/content/dam/money-market/articles/MMF Reform_US_04-12-2016_Update_v2.pdf

TSCXX wasn't forced to change anything. Here are the portfolio compositions as given in the April 2014 and October 2017 reports.

   Security Type     2014    2017
Commercial Paper      53%     52%
Muni Obligations      28%     23%
Foreign CDs (USD)      7%      5%
Treasury Notes         6%      9%
Domestic CDs           5%      3%
US Treasury Bills      1%      4%
Other (net)            0%      4%