Money Market funds
funds that invest in short-term debt and other instruments.
see also: money market and shadow banking market
Table of Contents:
Market size:
$4 trillion money-market fund industry
Money funds that invest in corporate debt held $1.84 trillion as of Jan. 20, still less than the $1.97 trillion they held when Reserve Primary collapsed, according to IMoneyNet, also of Westborough, Massachusetts. Total money fund assets have risen since then by 11 percent to $3.82 trillion. JPMorgan Asset Management alone oversees about $1.1 trillion for its clients, including $500 billion in money-market assets, Staley said.
Risk:
Jan. 30 (Bloomberg) -- James “Jes” Staley, head of JPMorgan Chase & Co.’s investment unit, said the $4 trillion money-market fund industry is the “greatest systemic risk” to the financial system that hasn’t been adequately addressed.
Regulation
Legal Requirements:
Money-market funds regulated by Rule 2a-7 of the Investment Company Act of 1940 strive never to fall below a $1 NAV, preserving investors’ principal while paying interest. Fund investments are restricted to highly rated securities maturing in 13 months or less and don’t have to be marked to market value every day.
New...regulation coming?
proposed regulatory changes for the money-market fund industry from the Group of Thirty, an independent policy organization whose members include Treasury Secretary Timothy Geithner and Lawrence Summers, head of the White House’s National Economic Council.
The recommendations, if adopted by regulators, would force money funds to choose between accepting banking-industry controls or giving up accounting rules that help them maintain a stable $1-a-share net asset value, or NAV, which make them the safest investment after bank accounts and Treasury bonds.
But, the concern is if " If we get rid of the current model, what would substitute for it?”
“The two new products put together could have less appeal than current money-market funds, causing the assets they invest in to lose value,” said Swirsky, author of the book “The Guide to Rule 2a-7: A Map Through the Maze for the Money Market Professional.”
Credit Crisis 07-09:
collapse of the $63 billion Reserve Primary Fund in September. Reserve Primary became only the second money fund to drop below $1 a share, or break the buck, because of losses on debt issued by bankrupt Lehman Brothers Holdings Inc. Reserve Primary’s fall triggered an industrywide run on money-market funds that invest in corporate debt. That, in turn, froze the global commercial-paper market, cutting off a source of short-term capital for thousands of companies.
this turned the financial credit crisis into a globla economic crisis
But,before that... In the beginning, they did surprisingly well during the credit crisis of 2007-08 as scared investors have flocked to them as a safe haven. Historically, however, these funds have been the unexciting area of asset management. Before the credit crisis, they were the ones that bought up most of the short-term debt that propped up structured finance. It was their sudden withdrawl that caused the freezing of the asset-backed commercial paper industry in early 2008 (ABCP). Much of the credit crisis can be blamed on the reluctance of money market funds to pickup and lack of desire to hold banks debt.
Money market funds have been taking market share away from banks for years, as banks have been less and less willing to hold deposits during the securitization boom (where banks were making more money).
In recent years, even though the % returns on these funds has fallen to nearly 3% per year, the amount of money (volume) has flooded into these funds topping $3.5 trillion dollars in 2008).
Corporate cash managment in money market funds:
Most of this recent rise in volume has come from institutional money, with over30% of corporate Americas short term assets being allocated to money market funds. Why? Why are companies outsourcing the cash management to money market funds? High liquidity, and preservation of principal. Money markets also have very strong credit departments, and are able to do functions that in-house treasury departments can not. Also, corporate treasury departments can blame the outside guy (and not themselves) if something goes wrong.
Less competition after the Credit Crisis of '07
After the credit crunch, many of the innovative competitors to money market funds have fallen by the wayside. Investors have lost their appetite for more innovative funds such as auction-rate securities, ultra-short bond funds, and enhanced-cash funds.
Types of money Market funds to choose from:
1. Treasury- bill funds: invest in government debt - considered the least risky
2. "Prime" money funds: invest in corporate debt - slightly more risky
When these funds suffer:
- when short-term interest rates rise
- when volatility reduces
- If banks begin to fight for deposits again (which they were not doing during the securitization bull market prior to the credit crunch)
Sources:
Links from GloboTrends
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