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A $500 Billion Stampede In Money Markets Even Before New Rules Hit

TedTed
in Fund Discussions
FYI: (This is a follow-up article) ( Click On Article title At Top Of Google Search)
The last big post-Lehman regulatory change is reverberating across the financial system, potentially squeezing short-term lending for businesses and local governments.

The rules haven’t taken effect yet but are already upending the $2.7 trillion money-market industry, causing nearly $500 billion to move into, out of and among these funds, which are used by investors to stash their cash and by borrowers for short-term liquidity.
Regards,
Ted
https://www.google.com/#q=A+$500+Billion+Stampede+in+Money+Markets+Even+Before+New+Rules+Hit++WSJ

Comments

  • msf
    Another writer who can't communicate the new rules:

    " The new rules are focusing on so-called prime funds that invest in short-term corporate debt, typically with maturities of a few days to a year. Other types of funds invest in short-term municipal and government debt."

    No. The new rules have two foci:

    - "institutional prime money market funds (including institutional municipal money market funds)" (quote is from SEC)

    - retail non-government funds (including muni funds)

    There's no material distinction in the rules between corporate and muni.

    One dividing line is between government and everything else. Government MMFs can be owned by institutions, have fixed NAV, and no new redemption rules. (Minor tweaking in what defines a government MMF, as I recall.)

    The other dividing line is between retail and institutional. Retail MMFs can have fixed NAV so long as they may impose redemption fees/waiting periods in times of stress. (Apparently these fees are "too arcane delve into".) Institutional non-government funds must have floating NAVs.
  • Mona
    msf,

    On the retail level, do you see a lot of migration from Vanguard Prime Money Market and their muni money markets to Vanguard Federal Money Market (settlement fund)?

    Mona
  • msf
    That's a multi-part question.

    - Will Vanguard move brokerage settlement account money from Prime to Federal? I would have been stunned if Vanguard wasn't going to do this. I just called them and verified. Except for a few special cases (don't know what those are) all settlement accounts will be forcibly moved to VMFXX.

    - Will investors in mutual fund accounts (as opposed to brokerage accounts) voluntarily move from Prime to Federal? Honestly, I don't have a clue.

    Past experience (e.g. notices about having to make a cost basis election) shows that many people ignore changes in the rules if they're not required to do anything. So it is quite possible that they'll just "let it ride".

    On the other hand, people also tend to get spooked. (Consider that the Treasury offered MMFs insurance after Reserve Fund Primary broke a buck, because it was afraid of a mass exodus.) So telling people that they may not have immediate access to their cash could start a stampede to Federal.

    I haven't even mentioned rational investors who will weigh their need for liquidity against the differences in yield between the funds, and between a MMF and a bank account, etc.

    If I had to guess, I'd go with stampede (exit Prime). But your guess is as good as mine.
  • ynot
    my understanding is that there will be the automatic switch to federal MM,
    but there is nothing stopping you from transferring your money into prime MM
    and continuing to use prime if you wish. the federal is for settlement only,
    you needn't leave your cash there.
  • Derf
    From VG:
    Your settlement fund is changing—what you'll need to do
    Later this summer, Vanguard Brokerage will change your settlement fund to Vanguard Federal Money Market Fund. Your new settlement fund will have a zero balance until you add money to it or sales proceeds sweep into it. The assets in your former settlement fund will remain invested in that fund (as a holding in your brokerage account). You can, however, move assets from your former settlement fund into your new settlement fund—and you should consider doing so to be sure you have enough in your new settlement fund to pay for any buy orders you place.

    We'll be making the changes over several weeks, so if you have more than one brokerage account, you may see one account's settlement fund change earlier than another account's. All settlement funds should be changed by the end of September. You'll receive a confirmation after the change to your settlement fund has been made.
    ( hope this helps) Derf
  • msf
    Source of that info was email from Vanguard.

    Interesting that Vanguard is not moving the cash from the prime account to the new Federal MMF settlement account.

    Does Vanguard let you make trades in a cash (non-margin) account if you don't have cash in the settlement account at the time of the trade? If it doesn't, and if you keep your cash in VMMXX, you'll need an extra day to trade. You sell VMMXX first (settles in a day), and then make the trade the next business day.

    Fidelity operates differently. It will draw from position (non-settlement) MMFs for trades once the cash in the settlement account is depleted. No one day lag. The downside is that if the position MMF has a redemption fee in place, you'll automatically get charged that redemption fee. At least that's the way I understand things. I believe Fidelity is still working through all of this.
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