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June 7, 2013

US money market funds: bucking up; Floating share price would be an admission that the funds are not risk-free

“It used to be so simple. Put a dollar in a money market fund and get a buck back. But come the financial crisis the Reserve Primary fund “breaks the buck” and investors stampede out of money market funds. Suddenly the veil is lifted on the risks to savings vehicles once seen as synonymous with cash.

Hence, regulators have been trying ever since to reform these funds, which hold nearly $3tn in the US alone. This week, the Securities and Exchange Commission proposed two alternatives. One would require “prime” funds that invest mostly in corporate securities and target institutions to redeem and sell shares based on current, market-based or “floating” net asset values. (Retail and government debt money market funds did not see big outflows in the crisis.) Or any fund that would not buy primarily government debt would have to charge redemption fees in times of extreme withdrawals and even freeze redemptions. The SEC, after a comment period, could also adopt a combination of the two.”


Read the full Financial Times editorial here



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