[발췌] Money Market Mutual Funds: Are They Investments or Cash? (2013)

출처: Third Way, July 19, 2013


※ 발췌 (excerpt):

( ... ... ) Like a typical mutual fund, the sponsor of an MMF pools the savings of investors into a fund typically organized as a trust. But MMFs are restricted in the type of investments they may make and they calculate their assets and liabilities in a way that is distinct from other mutual funds. And unlike other mutual funds, MMF investors can redeem their shares on demand at the price they paid for them. In that sense, they share some similarities with bank accounts, in addition to the ability to write checks on some accounts.

A typical mutual fund invests people's savings in a wide variety of stocks, bonds, and other securities, each designed to meet investors needs and risk appetites. The mutual funds issues shares to investors representing their individual slice of the assets in the trust. Mutual funds have a variety of investment strategies, and their performance is typically tracked against a benchmark─such as the S&P 500─to allow investors to measure how well their mutual fund is doing against the broader market.

But unlike a typical mutual fund, an MMF is restricted under the Investment Company Act of 1940 to only investing in short-term, high quality securities. This means that the fund holdings must mature within a much narrower time period than other mutual funds.[*] The securites held must have a high credit rating and offer minimal credit risk.[n1]

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How Are MMFs and Money Market Deposit Accounts Different?

While these two types of produts sound the same, they aren't. Money Market Deposit Accounts (a.k.a. bank savings accounts) are offered by banks as a savings vehicle. They fall under commercial banking regulation and are not an investment product. There are limits on Money Market Deposit Accounts, like minimum balances and limits on withdrawals, and unlike MMFs, they are insured by the Federal Deposit Insurance Corporation (FDIC).[n6]


The NAV, the Floating NAV, and the Shadow NAV

As noted earlier, one difference between a typical mutual fund and an MMF is the type of assets in which they can invest. The second difference is the way MMFs report their value to investors. That brings us to somethng called the "NAV," "the floating NAV," and the "shadow NAV."

NAV stands for "Net Asset Value," and it is defined by the SEC as a mutual fund's total assets minus its total liabilities.[n7] If an MMF holds $50 million in assets and has $10 million liabilities, its NAV is $40 million. To determine the NAV per share of an MMF, you divide the NAV by the number of shares outstanding. If an MMF has a $40 million NAV and 40 million shares outstanding, it has a $1 per share NAV.

All mutual funds calculate their NAV every business day. Most mutual funds use mark-to-market accounting, which means mutual funds calculate the value of the assets in their portfolio based on their market value at the close of each day.  Because the value of the mutual funds's assets and liabilities changes daily, the NAV changes daily─that is known as a "floating NAV." Mutual funds publish their floating NAV every business day, and investors can redeem their shares at the floating NAV.[n8]

What makes an MMF unique is that its NAV does not float, it stays stable. MMFs maintain a $1 per share NAV daily, which is known as a $1 stable NAV. Because MMFs are restricted to investments in short-term, high quality assets, fluctuations in their NAV are typically tiny. Therefore, MMFs are allowed to use amortized cost accounting─which means they can value their securities at the price they bought them instead of using mark-to-market accounting, as long as these securities have less than 60 days to maturity.[n9]


OK─MMFs publish a $1 stable NAV daily, but we just noted that fluctuations in their NAVs occur. What's happening here?

Although MMFs use amortized cost accounting, if they instead used mark-to-market accounting their NAV would fluctuate, or float, just like a traditional mutual fund. It usually fluctuates a tiny amountㅡmaybe $1.001 to $0.999 per share. The tacking of these fluctuations is called the "shadow NAV." MMFs do not publish their shadow NAV for investors every day, but are required to report their shadow NAV to the SEC every month. The SEC publishes the shadow NAV 60 days later.[n10]


But what happens when an MMF's shadow NAV experiences an unusual drop in value?

When the shadow NAV drops below $0.995 per hsare (i.e. one half penny below a dollar per share), MMFs may no longer use amortized cost accounting to maintain a $1 per stable NAV. They are forced to switch to a floating NAV, publishing this value every day for investors.

Likewise, if the assets of an MMF are greater than its liabilities such that the shadow NAV is greater than$1.005, MMFs pay dividends to their shareholder to get the shadow NAV closer to $1 per share.[n11]


What is Breaking the Buck?

In its most simple explanation, it is the switch from a $1 stable NAV to a floating NAV. Historically, when the shadow NAV of an MMF has approached $0.995 per share, the financial institution that created the fund has contributed additional money to keep their assets above $0.995 per share so they can continue to publish a $1 stable NAV.[n12]  But on rare occasions, the management of the funds has been unable to do this.

On one such occurrence, in August 2008, the commercial paper offered by Lehman Brothers qualified under SEC rules as a liquid, short-term investment for MMFs. Yet on September 15, 2008, Lehman Brothers filed for bankruptcy. Virtually overnight, this liquid, short-term investment dropped precipitously in value. Investors in Lehman paper were left holding the bag.

One such investor was the Reserve Primary Fund─the oldest and one of the largest MMFs in the U.S. The $62 billion Reserve Primary Fund held $785 million of Lehman commercial paper, and losses on these assets dropped its shadow NAV to $0.97 per share. Three cents per share may not seem like a whole lot of money, but in the MMF world it is very significant.

In the case of the Reserve Primary Fund, in the midst of the financial crisis, the sponsor was unable to kick in cash to maintain the $1 stable NAV. The fund was forced to "break the buck" and go to a floating NAV.

The Reserve Primary Fund was the fist MMF open to the public to break the buck, and the second one ever.[*] Its failure to maintain a $1 stable NAV sparked a panic in the market, leading investors to withdraw their money from other prime MMFs for fear they held Lehman debt or the debt of other troubled companies. Since MMFs are not insured, people began to pull their money from these funds to avoid potential losses. In the period immediately following Lehman's bankruptcy, institutional investors redeemed $300 billion from many prime MMFs.  ( ... ... )


Why did the Reserve Primary Fund "breaking the buck" cause such volatility in the market?

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When market participants speak of markets “seizing up” this is one of the nightmare scenarios they discuss. Without these credit markets operating fully, businesses and governments struggle to get short-term loans. Without short-term loans, payrolls cannot be met. When payrolls cannot be met, the economy stops. This is what regulators mean when they say that MMFs pose systemic risk in times of crisis, despite their safety under most economic conditions.


MMFs After the Financial Crisis

2010 MMF reforms

( ... ... ) The Financial Stability and Oversight Council (FSOC) was created by the Dodd-Frank Act to protect against systemic risks—hazards that could cause vast damage to financial markets and the overall economy. In November 2012, FSOC identified MMFs as a potential source of systemic risk, and released recommendations to reform MMFs for public comment.

Proposals for reform can be broken down into three general categories:

1) requiring MMFs to switch to a floating NAV,
2) maintaining the $1 stable NAV with redemption restrictions, and
3) maintaining the $1 stable NAV with required capital buffers.

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