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Industry Reacts to Proposed Changes to Money Market Funds

By Edited Nov 13, 2013 0 0

With regards to US money market funds, the Securities and Exchange Commission has proposed to make money market funds drop their artificial $1 per share value and to instead let the value of each unit float to reflect the true value of the fund. However, this has raised significant objections in the money market industry. Many fund managers have objected to this, lobbied Congress to try to stop any changes, plus one company, Federated Investors Inc. is now threatening a lawsuit. 

The fixed $1 per share price of money market instruments is one of the main ways that they attract investors, as this gives a sense of stability and comfort to those who put money in the funds. With a fixed share price, investors would get the impression that they would get back $1 for each $1 that they've invested, plus receive some interest. This would be similar to the way a bank deposit would work. However, the issue is that Money Market Funds are not as stable as banks and investments made in them are not guaranteed against loss. There have been cases where the underlying value of the securities held in a fund would mean that it is no longer worth the $1 per share price. When investors hear news of this, they rush to withdraw their money from the fund, which could have an effect of depressing the value of the fund even further. 

Some investors are also concerned about how a floating share price would affect them, especially with regards to tax implications. If an investor sells shares in a fund that has a floating price and it has grown to higher than $1 per share, this means that they would normally be subject to capital gains taxes. For individual investors who rarely do any transactions, this would simply result in a bit of extra paper work and expense. However, there are many companies which hold assets in money market funds and make transactions on a daily basis. For these, subjecting them to capital gains taxes would result in much bigger hassles. Therefore, there are proposals in place to make some changes to tax rules affecting money market funds. 

Some experts in the financial field have also proposed that money market funds could operate on a two tier system. Certain funds, such as those which invest in low risk securities like short term treasury bonds could be exempt from the requirement of having a floating share price. It is worth noting that these funds are already known to carry very little risk as opposed to those which are backed by commercial paper, however they also have much lower yields. 

For now, the issue of requiring a floating share price is still up to debate and any such significant change would mean that it has to be approved by a vote at the SEC.

With regards to US money market funds, the Securities and Exchange Commission has proposed to make money market funds drop their artificial $1 per share value and to instead let the value of each unit float to reflect the true value of the fund. However, this has raised significant objections in the money market industry. Many fund managers have objected to this, lobbied Congress to try to stop any changes, plus one company, Federated Investors Inc. is now threatening a lawsuit. 

The fixed $1 per share price of money market instruments is one of the main ways that they attract investors, as this gives a sense of stability and comfort to those who put money in the funds. With a fixed share price, investors would get the impression that they would get back $1 for each $1 that they've invested, plus receive some interest. This would be similar to the way a bank deposit would work. However, the issue is that Money Market Funds are not as stable as banks and investments made in them are not guaranteed against loss. There have been cases where the underlying value of the securities held in a fund would mean that it is no longer worth the $1 per share price. When investors hear news of this, they rush to withdraw their money from the fund, which could have an effect of depressing the value of the fund even further. 

Some investors are also concerned about how a floating share price would affect them, especially with regards to tax implications. If an investor sells shares in a fund that has a floating price and it has grown to higher than $1 per share, this means that they would normally be subject to capital gains taxes. For individual investors who rarely do any transactions, this would simply result in a bit of extra paper work and expense. However, there are many companies which hold assets in money market funds and make transactions on a daily basis. For these, subjecting them to capital gains taxes would result in much bigger hassles. Therefore, there are proposals in place to make some changes to tax rules affecting money market funds. 

Some experts in the financial field have also proposed that money market funds could operate on a two tier system. Certain funds, such as those which invest in low risk securities like short term treasury bonds could be exempt from the requirement of having a floating share price. It is worth noting that these funds are already known to carry very little risk as opposed to those which are backed by commercial paper, however they also have much lower yields. 

For now, the issue of requiring a floating share price is still up to debate and any such significant change would mean that it has to be approved by a vote at the SEC.

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