An October 2008 Top Drawer Ink article (The History of Money Market Fund Accounts) ended with these words: How will the funds evolve from here? That’s a tale for future financial market historians.
The future is here, and so is the answer to what’s changed since those dark days of 2008 when the Reserve Primary Fund “broke the buck”, a term meaning its market value fell below $1 per share. At that time, to calm investors, the US Treasury stepped in with a limited guaranty of government backing.
The guaranty was available to “eligible” money market funds—those that had not broken the buck before September 19, 2008. Each fund had to apply for the coverage and pay a fee. If your fund participated, the Treasury’s program, which began September 20, 2008, was assurance you’d get all your money back for the shares you purchased prior to September 19. The program ran one year, ending in September 2009.
Now, as before, money market funds are no longer guaranteed. What’s changed are the rules under which they operate. For example, in February 2010, the Securities and Exchange Commission began requiring funds to increase liquidity to better meet demands for withdrawals. In addition, the funds had to increase the credit quality of assets, shorten the term to maturity of those assets and conduct “stress tests.”
Starting in December 2010, funds must also report the actual market value of their holdings to the SEC on a monthly basis. You can track this “shadow” net asset value to learn what assets your fund is holding, and how far the value of those assets varies from the $1 share price.
Will these moves, and others that may be forthcoming from the Financial Stability Oversight Council under the Dodd-Franklin Act, prevent a future “break the buck” moment? That’s still not clear. And, since the future continues to arrive on a daily basis, this tale will no doubt be continued.